Defining a pricing strategy and the consequent need to undertake a price optimization project is a crucial process in growing a company’s commercial performance.
Activities of this level of complexity often involve multiple parties within a company and are likely to change a wide range of internal systems and processes. A price optimisation strategy that is based on a proper analysis of all relevant aspects and an accurate forecast of the impact of pricing choices on sales and market presence can be one of the most profitable activities a company can undertake. Even one of the leading strategy consultancies, McKinsey & Co., has shown that, when volumes are stable, a 1% increase in price generates an 8% increase in profits, with an impact almost 50% greater than a 1% reduction in variable costs and more than three times greater than the impact of a 1% increase in volume.
Generally speaking, some best practices can be adopted by companies that want to optimize their pricing, regardless of the goal they want to achieve by changing their pricing approach, whether it’s optimizing price for profit, increasing customer satisfaction or minimizing internal costs and inefficiencies.
Involve C-Levels
One of the starting points is undoubtedly the need for a pricing optimization project to start at the top and spread accordingly. CEOs and CFOs‘ main areas of focus include company revenue and profitability. Price leverage is the one that can impact these aspects most quickly and clearly. At the same time, the implementation of a price-optimized strategy is a source of great opportunity, but it also generates internal and external impacts that need to be considered and addressed.
Adopting a cascade structure
About this issue, it is always good practice to cascade responsibilities between the parties involved based on a shared framework. This becomes crucial in large companies where the areas involved can be numerous. Often an effective price optimization strategy needs to have a good balance between the business areas that play central roles in the project and the rest of the resources involved. This requires a hub, i.e. a pricing team that can define the project structure and manage it, and local teams that can help optimize the strategy based on their area of expertise.
Using dynamic tools
A third recurring aspect in the application of pricing optimisation strategies is the tendency to use calculation and analysis tools that are not adapted to the dynamic nature of this approach and of the market in general. Considering the complexity of selling on an international scale, where markets, the competitive scenario and business conditions are highly variable and dynamic, managing and optimising prices in a way that is responsive to the ecosystem in which one is embedded requires the use of advanced, customised and high-performance pricing systems.
Assessing the 360° impact
Another important aspect to consider is that price optimisation should be seen as a global change project, because like all projects involving innovation and evolution, different stakeholders may see these changes differently. Instead, it is crucial that key strategic issues related to the pricing optimization project are communicated and defined, and that every element and area involved in it, even indirectly, is aware of the impact on themselves and their role.
Do not underestimate the importance of communication
A piece of advice closely linked to the previous one is that communication is central to any price optimisation project. A good approach is to have two different levels of communication. One level relates to the project itself and the changes it produces, in terms of objectives, and operational management of the strategy. While the second level is related to the communication of the results achieved internally, to provide all stakeholders, especially those who interface directly with consumers, with the analytical tools needed to grasp the importance of the project and the impact of the strategy adopted.
Set SMART objectives
Another noteworthy aspect is that pricing strategy projects are often designed with an objective in mind, but at the same time, it is best to define the expected results very carefully. Generally speaking, the most successful pricing optimisation projects have been those that involve the definition of specific, measurable, accepted, realistic and timely objectives, but with a flexible vision of the path to achieving them.
Starting from a pilot project or POC
Among the most important tips, it is also worth mentioning that the way you decide to structure your project plays an important role. For example, an approach that generally gives good results is to define a pilot that can be easily evaluated, understood and implemented cross-market. The key to effectively defining a pilot is to implement and test it on a small scale. Once the stress test has been analysed and the approach verified, a launch can be planned and implemented.
