How Pricing Science is Like Plinko

October 3, 2017 Jim Vaughn

In B2B, creating a sound price strategy is never as straightforward as it seems. There’s a complicated mix of issues to consider which include: strategy scalability, market agility, staleness of price, access to good market data, and gaining sales buy-in to price guidance. Of course, that list isn’t exhaustive, but no matter the mix of issues in your business there is always one universal truth to price strategy:

There is no single, right price – there are many “right” prices.

Sales, marketing and finance all know this. Each group acknowledges that some customers are more sensitive to price than others, dependent upon the circumstances. Intuitively it makes sense, even to the newest sales rep, that individual customers don’t have the same price sensitivity for each product. Circumstances for each unique transaction is what influences prices. For example, each unique deal can be very different in terms of deal size, time of year, urgency of needs, length of contract … the list goes on. So, to create a sound price strategy, each individual price must make sense in terms of these factors and be aligned to each customer’s price sensitivity dependent upon the situation.

On August 24, I presented a webinar, “Pricing Science Works!” to the Professional Pricing Society covering these complicated challenges. Yet, the issue of creating a sound pricing strategy isn’t limited to the concerns of a pricing analyst.

From a sales rep’s perspective, it’s critical to have prices available at the time of sale that meet these varying circumstances, but reps also need contextual information behind the price. I’ve been pricing in B2B for decades, yet one statement from a sales VP continues to resonate with me, “It becomes a game of chicken to close the deal because we don’t have good metrics that can guide us in negotiation.”

One of the biggest advantages of pricing science is not only having deal-specific prices, but also providing contextual analytics to sales. These contextual, visual analytics make it easier to close more business, and do so profitably, because the seller and buyer can more quickly get to an equal perception of value in terms of price.

How Pricing Science is Like Plinko

When executed well, the first step of pricing science is creating price-response segmentation. And believe it or not this can easily be imagined like the game Plinko on the game show “The Price is Right.” Hear me out.

Before market-aligned pricing is possible, segmentation must mirror the actual market complexity, nuance and granularity evident in your business: products, customers, locales and go-to-market approaches. Pricing science uses AI-driven techniques to continually analyze transactional data to determine the strongest factors of higher and lower prices. Next, in consultation with business leaders, these factors become the pegs in the Plinko game. Imagine each transaction as a ‘ball’; as it hits the bars on the way down, transactions are segmented into micro-segments of higher priced, lower priced, or somewhere in between groups, for example:

 If the following factors were identified as the strongest predictors of higher or lower prices, then as each ‘ball’ falls through, the next step is determined by the answer to the question (factor) before. Is this transaction:

 
  •        Sales Channel 1 or 2?
  •        Brand/Product A or B?
  •        High or Low Revenue SKU?
  •        Region X or Y?
  •        High or Low Cost Group?

 

 

As each transaction ‘ball’ passes through the Plinko system, the transactions become segmented based on real-world price sensitivity. Even after this exercise, there is still no one single “right” price, but rather, a range of prices in each micro-segment. We could illustrate and label these as Segment 1 to Segment 1001, where each image illustrates a different market-driven price spread across example micro-segments.

Pricing science ensures that every time sales reps quote customers, both the sales rep and the pricing analyst are confident that the price is aligned with market conditions and customers’ expectation in terms of price – less negotiation and haggling to close the deal quickly, without leaving money on the table.

Ready to jump head-first into Pricing Science? Watch Jim’s Professional Pricing Society webinar, “Pricing Science Works!”

Are you wearing a pricing blindfold? Stay tuned; Jim’s next post might make you think differently about how pricing can maximize company profitability. 

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