How should we organize pricing challenges?
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
Pricing challenges come in many forms. Some are reported by sales, others by finance and some by the product or customer success functions. Pricing issues are often symptoms for other problems. They are the sharp end of the stick. Your customer may or may not believe your value propositions, and may not care what segment you think they are in or how you understand the buying process. But at the end of the day, you and your customer have to agree on a price.
Ibbaka is working to document the different ‘pricing symptoms’ and to develop diagnostic tools to uncover the root causes. It turns out there are a lot of different pricing challenges (see the list below) and this means we need some way to organize these problems. In this post we look at a general list of pricing challenges and consider some different approaches to organizing them.
We hope you will add to this list with us and suggest ways of making sense of it.
We have sourced this list by looking at the problems people are bringing to Ibbaka and other pricing advisors that we have regular conversations with, by looking at Google searches about pricing and by combing through various online forums to see what questions are being asked.
Email us at info@ibbaka.com with your suggestions on pricing challenges and how to organize them.
There is a close connection between pricing and revenue model so we are looking at challenges people have with revenue models as part of this work.
Unsorted list of pricing questions and pricing challenges
So to begin, here is our current, unsorted, list of pricing challenges (this is what we invite you to add to).
Price objections from buyers
Don't know how to price
Don't know if pricing is correct
Current pricing does not enable reaching of growth targets
Current pricing does not enable reaching of revenue targets
Current pricing does not enable reaching of profit targets
Current pricing is not generating high enough Customer Lifetime Value (LTV)
With the current pricing the Value to Customer (V2C) is lower than the LTV
Current pricing makes it difficult to combine different offers into a solution
Need to respond to competitor pricing actions
Need to respond to regulatory pressure on pricing
Price elasticity of demand is highly variable and we need to be able to adapt
We want to avoid a price war
We want to win a price war
A large incumbent has bundled similar functionality and is offering it for 'free'
A competitor with a multi sided market business model has entered our market and is undermining our positioning
There is a free alternative
Discounting is out of control
Our pricing is out of line with our brand positioning
We need to migrate our existing customers to our new pricing
We need to introduce our new pricing to the market
How do I price a disruptive innovation?
How do I price a sustaining innovation?
How do I price for category creation?
Sales can't defend our pricing
We need to move to a tiered pricing architecture
Picking becomes an issue at renewal
Should we publish pricing on our website?
How do we manage 'most favored nation' pricing clauses in out contracts?
Need to capture increase in input costs (inflation)
Technology adoption cycle questions (from Moore)
The product is being positioned for innovators. How do I price it?
The product is being positioned to early adopters. How do I price it?
The product is crossing the chasm. How do I price it?
The product is entering the tornado phase. How do I price it?
The product is exiting the tornado phase for main street. How do I price it?
The product is near the end of its life cycle and needs to be phased out. How do I price it
Innovation adoption pricing questions (from Christensen)
How do I price a sustaining innovation?
How do I price a disruptive innovation?
Ways to organize pricing challenges
That is a long list of challenges and it is only scratching the surface. How can we organize these questions so that we can better look for patterns?
We are currently looking at a number of complementary approaches. We will take a faceted approach to this rather than a hierarchical approach (in other words, the same challenge can be classified in several different ways). We have generally found that faceted classification provides better support for both search and for pattern recognition. Wikipedia has a good introduction to faceted classification, including a reference to the great library scientist S.R. Ranganathan.
Here are some of the approaches we are exploring (we will not end up using all of these, and we are open to your suggestions on this):
Who has the challenge?
Where in the customer journey does the challenge occur?
What business models are most likely to see the challenge?
Where in the technology adoption lifecycle does the pricing challenge occur?
Where in the value cycle does the challenge occur?
Pricing in sustaining versus disruptive innovation
Who has the pricing challenge?
A simple way to organize pricing challenges is to ask ‘Who encounters this challenge directly?’ This is a functional approach, and when there are several different interlocking challenges (which is often the case) it is a very helpful way to untangle the emotions involved. The functions we are looking at here are those that directly touch the customer:
Sales
Implementation
Customer Success
And those that are one step removed:
Product Management
Product Marketing
Pricing (for those companies with an explicit pricing function)
Finance
Operations (in some industries price determines volumes, in capital intensive industries it can be important to operate near capacity)
Hopefully, the executives and board members will also be concerned about pricing.
Where in the customer journey does the pricing challenge occur?
The ‘who’ framing above is internally focused. One can turn this around and ask about pricing from the customer’s perspective, layering the pricing challenges across the customer journey map.
Awareness of pain
Awareness of solution
Consideration
Evaluation
Trial
Contracting
Implementation
Adoption
Engagement
Growth
Recommendation
Renewal
Exit
What business models are most likely to see the pricing challenge?
Different types of business have different pricing problems. At a basic level, B2B pricing is different from B2C pricing. Multi-sided market pricing raises different challenges than conventional business models. Companies whose products or services are embedded deep inside a third party solution think about pricing differently from the whole solution provider selling to the end customer.
Business model classification is its own discipline, and if we go down this path we would like to use a well established approach. It can be hard to know what the best option is here. One area we are looking at is academic research, for example, A Systematic Approach for Business Model Taxonomy – How to Operationalize and Compare large Quantities of Business Models by Martin Kamprath and Bastian Halecker.
Let us know if you have a way of classifying business models you find exceptionally effective.
Where in the technology adoption lifecycle does the pricing challenge occur?
Experience has shown that pricing strategy has to change as a product moves across the technology adoption lifecycle (see Pricing strategy changes across the technology adoption lifecycle). This suggests that the most common pricing challenges will also change and that knowing where a product is in the lifecycle will help to diagnose and address pricing challenges.
In the Geoffrey Moore approach there are five stages in the technology adoption cycle.
Innovator
Early adopter
Early majority (bowling alley)
Majority (tornado)
Mainstreet
Laggards (end of life)
Where in the value cycle does the pricing challenge occur?
A different approach is to ask where in the value cycle the pricing challenge shows up.
The standard value cycle has five stages:
Create value (through innovation)
Communicate value
Deliver value
Document value
Capture value (in price)
It is no accident that value capture or ‘price’ comes as the last step in the cycle. That said, pricing challenges do show up all across the value cycle.
Pricing for sustaining versus disruptive innovation
Ibbaka works a lot with innovation driven companies, so we tend to see a lot of pricing challenges around creating innovative new solutions and taking them to market.
Clayton Christensen’s classic work on innovation showed that the dynamics of sustaining innovations and disruptive innovations are quite different. From a value-based pricing perspective, sustaining innovations tend to improve on existing value drivers for existing markets. Disruptive innovations either add new value drivers or deliver existing value drivers to new markets, often both. This can be a productive way of thinking about pricing challenges and looking for solutions.
Implement Customer Value Management with the Ibbaka Value Pricing Dashboard
How would you organize pricing challenges? (this post)