Dean Ciric, Senior Pricing Specialist
June 15, 2019
Every business that sells products and services requires a pricing model. If you can’t price products and services competitively in the marketplace, you will lose out to your competition. Every pricing model is based on something called “efficient pricing.” Efficient pricing takes intelligence, specifically business intelligence. The pricing is the most active part of what we call the 4Ps in marketing – Price, Product, Promotion, and Place. Companies must consider the 4Ps when developing a pricing model.
It is evident that the “price” in the 4Ps is a significant factor when it comes to consumers realizing value. Price also must meet the value proposition of a company – i.e. determining the optimal price consumers will pay for products and services to realize value. Price is an internal indicator of organizational efficiency. There has to be a delicate balance between the price charged to consumers, and the price to achieve internal organizational efficiency. The upper pricing limit is set by the customer’s willingness to pay – defined by perceived value for products and services, and the rate established by competitors for a similar benefit. The lower pricing limit is determined by the internal organizational efficiency of resource utilization. Thus, organizational effectiveness allows the company to move from CAPEX to OPEX more efficiently, so to speak.
The Price is Right
To get the right price sounds complicated, but there is business intelligence to this crazy process of pricing. Also, if you’re not familiar with “Business intelligence”, also known as BI, it is a technology-driven process for analyzing data and presenting actionable information to help executives, managers, and other corporate end users make informed business decisions. So, how does business intelligence come into this pricing model? And trust me, there is a whole lot of business intelligence in coming up with the “right” price. It involves a lot of business work, including the set up of KPIs, analysis of competitor pricing for similar product & service value, buyer needs & customer behaviour, market conditions, and regulatory trends. Thus, the procurement group in a company must define the business inputs for a pricing model based on the 4Ps. Furthermore, the company must develop a business process map, product maps, and product breakdown on activities (ABC model) that work collaboratively with the pricing model. In other words, the pricing model must be adaptable and responsive to this collaboration.
Requirements & Challenges in Developing a Pricing Model
This Business Intelligence model takes a lot of process and data understanding, and the ability to incorporate business inputs on demand. It is critical to map the business processes that support the analytic nature of the model we’re developing. Let’s say that we want to establish a pricing analytics model for pricing products. It is essential to define processes with measurable KPIs as valid inputs for a pricing model in order to optimize pricing for products as well as offers. Product managers and business analysts need to participate in the mapping of processes and identification of KPIs for products and services. This effort will establish the list of valid data required as inputs for decision-making and control. Some of the challenges companies face today are the following:
- Lack of process,
- No measurements with appropriate data: KPIs, SLAs, process durations, etc.
- No valid reports – without a consistent process, there is no KPI to support accurate reporting
- A lack of visibility into the decision-making process
Pricing skills are fundamental requirement to stay ahead of the competition. However, tools and pricing algorithms are not enough to capture and sustain a significant impact. Companies need to put equal focus on people and processes.
Coming Up with the Right Pricing Model
Traditional industries, especially retail, are investing in Artificial Intelligence (AI) and direct delivery. Many use drip pricing models, where the advertised price is just a starting point that is increased with additional costs: delivery, tax, and miscellaneous charges. A good example is the giant rental company known as Airbnb, which are using pricing transparency models that incorporate all costs but at the same time use a type of dynamic pricing model. These companies also leverage dynamic pricing models based on supply and demand. Uber is an example of a transportation network company that uses dynamic pricing models, where prices for the same route vary based on the supply and demand for rides at the time the trip is requested. You can bet its going to cost you more to get a lift during rush hour.
There is not a “one-size-fits-all” pricing model. The type of pricing model depends on the customer need and value – not to mention the technological and communication advancements that have enabled consumers to compare global offers quickly and conveniently via telecommunication and computer devices. Businesses can now compare vendor offers through comprehensive market research agencies or an Internet Marketing Merchant such as Alibaba – think of it as Amazon for North America but much bigger supporting the planet with its e-commerce, retail, internet, and technology infrastructure.
An Adaptable Efficient & Reliable Pricing Model for the Future
The advanced usage of agile and flexible pricing models combined with Artificial Intelligence (AI) will be further accelerated with The Internet of Things (IoT). IoT is transforming consumer demands and the way we do business. Thus, agile and flexible pricing is a critical component of marketing as a result of this internet revolution to accommodate business better and faster. The acceptance of AI and IoT will increase the need for efficient and reliable pricing, which will allow companies to stay ahead of their competitors. Dynamic pricing will empower companies in the following ways:
- Accommodate Shorter Buying Cycles. Businesses will need to come to terms with a shorter buying cycle and consumer expectations for immediate gratification provided by IoT.
- Learn from the data. The volumes of data generated from smart devices will help businesses learn how and what to innovate.
- Meet consumer demands. Consumers will embrace smart devices and expect “smart” behavior in all aspects of their lives, including the purchase of goods and services. Product companies will have a field day coming up with new gadgets, furniture, appliances, etc. that meet this new demand and offer a source of revenue for businesses.
Companies must leverage the potential of AI and IoT in their pricing models to be competitive and survive in the marketplace. Please refer to our articles on the ITA Blog: AI is the Future, always has Been and IoT is a Modern Way of Life. This article summarizes the importance of determining prices that offer value for products and services, and using business intelligence to make this determination. The speed and accuracy of coming up with the right price is a critical success factor in offering this value. Companies must take advantage of IoT and 5G (fifth generation cellular network technology) to challenge its competition on the basis of having the right price at the right time in the right market.
In Part II of this article , we will discuss how companies need to create the business processes to optimize offered value and adapt to real-time changing market demands.
Mr. Dean Ciric is a Senior Pricing Specialist with experience in diverse industries, including telecommunications, health, retail, and real estate. He has held both management and analytical pricing positions for multinational companies in both Europe and Canada. Dean now resides in Calgary, Alberta where he specializes in pricing process development and business intelligence.
IT Architects (www.itarchitects.ca) is an information consulting firm specializing in business process optimization, system evolution planning, and the deployment of leading-edge technologies. If you require further information, Dean can be reached at firstname.lastname@example.org or 403-400-6410.