This year’s top-management focus group took place at Schloss Marbach close to Lake Constance on January 18-19, and emphasized the topic of „Active Price Management“. Prof. Sven Reinecke from the University of St. Gallen provided valuable scientific input on several aspects of managing prices, supplemented by interesting inputs from business practice: We heard from Dr. Karsten Sausen and Bettina Kallenbach-Schiess (both LafargeHolcim), Dr. Philipp Biermann (Simon-Kucher & Partners), Andrzej Widz (Hilti Corporation), as well as Jürg Balsiger (Stanserhorn-Bahn). The subsequent theses represent the key insights we gained throughout the 2-day seminar.
1. Bear the Strategic Power of Pricing in Mind!
As Prof. Reinecke and several guest speakers emphasized, pricing is a powerful marketing instrument when it comes to its impact on a company’s economic performance. The majority of instruments serves the ultimate goal of creating value (promotion, place, product, etc.), whereas pricing tries to captures that value. Already a slight price increase can induce substantial improvements in absolute profits. Maximizing customer value alone is not a proper business goal. Instead, companies should also strive to exploit the created customer value.
2. Ensure Internal Data Transparency!
The prerequisite for implementing a successful price management process is reliable data to base strategic decisions on. Dr. Biermann from Simon-Kucher & Partners mentioned that in many consulting projects, more than half of time and work is talking to finance departments in order to make the data transparent. Also, the business example from LafargeHolcim revealed how sensitive accurate commercial data is for fact-based decision making in managing prices.
Data Transparency as a Basis for Margin Optimization and Strategic Pricing at LafargeHolcim
3. Set Clear Targets and Pursue them Consequently!
When running price increase programs, firms should precisely set overall targets to be achieved and break them down into (1) product-specific as well as (2) customer-specific goals. Example (1): Many surcharges and value added services are outside the customers‘ radar. Shifting parts of the general rate increase to those elements might already improve success. Example (2): Many companies try to predominantly burden low-margin customers with price increases. As project experience of Simon-Kucher & Partners shows, this procedure does not turn out to be effective. The current margin should not be considered when determining customer targets, since the highest price increases usually can be realized with customers who already generated a high margin beforehand.
4. Follow the Principles of a Value-based Pricing Strategy!
According to Shapiro (1998), the 5 core principles of a premium pricing strategy are:
1. Create customer value!
2. Focus on customers who reward value!
3. Be different!
4. Align your prices to the customer’s benefit!
5. Be reliable and consistent!
A best practice example that proves the truth of all of these principles is Stanserhorn-Bahn in Switzerland. Jürg Balsiger vividly described how a friendly and empowering corporate culture can lead to extraordinary customer experiences. The tourism company recently demonstrated what it means to be different: The newly built „CarbiO“, riding to the top of the 1,900-meter Mount Stanserhorn, is the world’s first cable car with a roofless upper deck. The endurance to realize this technical innovation has been wortwhile: Customers perceive additional value (1), reward the exceptional offering (3) with higher prices (2/4), and appreciate consistent processes such as old style card board tickets at Stanserhorn-Bahn (5).
Astonishing View from the World’s First „CabriO“ Cable Car in Stans, Switzerland
5. Don’t Underestimate the Importance of Sales Commitment!
Salespeople usually maintain the most intensive contacts to customers. They are key to the implementation of price increases and are sometimes hard to convince that their customers will have to pay more in the future. Reasons behind this are the fear of deteriorating relationships and losing customers. Hence, the sales force should be trained in mastering difficult negotiation situations, equipped with support material (e.g. battlecards), and incentivized for achieving their targets. Otherwise, the enforcement of the new pricing scheme can be hampered or might even fail. But keep in mind: Pricing is a strategic marketing instrument, not just operational. So do not delegate pricing to your sales agent.
6. Segmentation is Key to Address Market Opportunities!
Without useful customer segmentation, existing pricing optimization potential might remain untapped. Andrzej Widz explained how Hilti differentiates between trade categories and potential classes based on monetary thresholds. In order to concentrate their efforts on the biggest potential, their sales force is, to a large extent, segmented as well. Depending on the customer’s pricing potential currently left on the table, Hilti uses different „fair pricing“-elements (agreements for top customers, price engines, overwrites) in order to exploit this potential.
7. Optimize Consistency of Intended Pricing Model!
In order to implement effective pricing models in business practice, consistency is a key factor. Simon-Kucher & Partners, for instance, applies a 9-step bullet proof approach from configuring the levels, getting prepared to rolling-out the initiative. It’s a long and ambitious way from initial target to measuring the results (plus even countersteering and starting the process new), but a systematic approach will help to finally improve profitability.
Simon-Kucher’s Approach to Price Increase Programs