It’s business planning season! Right now, many companies are working hard to develop new price lists that will be effective early in January. These firms are analyzing their data to understand their competitive positioning, determine the differences in value between their own products and services vs. competitors, segment their customers, categorize their products, estimate changes in their cost structures, and confirm or revise their pricing strategies. To ensure all that work pays off in the form of improved pricing, it is important to demonstrate the courage to execute those well-developed plans and avoid the hubris that can sometimes cause firms to stick with ineffective pricing strategies.
Sometimes it helps to think about concepts in different contexts to clarify how the concepts apply broadly. Sports teams are like corporations, universities, hospitals, non-profits, or any other type of entity that has competitors. Football coaches are like executives who analyze the specific strengths of their teams such as their ability to throw long passes or short, run the ball inside or outside the tackles, defend against a read-option quarterback or a pocket quarterback, etc. In preparing for each game, the coaches don’t simply say we need to run half the time and pass half the time. Instead, they look at the specific plays available in their book, their team’s ability to execute those plays, the types of offensive and defensive schemes their opponents like to run the most, which players are healthy versus injured, their own predictability in play selection, and even the expected weather conditions. With those inputs and more, the coaches formulate a game plan. “If we see eight defenders in the box, we may throw deep, but with two-deep zone coverage and deep linebackers we run off tackle.”
Those game plans require accurate, honest assessments of each factor, not just hope; and they require a much deeper understanding of the game than I just demonstrated with the previous sentence. Equally important, the plans require execution. At every football game, we can see coaches on the sidelines with laminated scripts of offensive and defensive game plans; and the coaches and players trust those plans and follow them. As circumstances in the games change, the teams may alter the plays they are going to call, but they trust their plans and select plays from their game plans that are designed for the specific situations. Usually the team that does the best job of executing the game plans to their abilities wins.
We have worked with a number of clients over the years who started their planning with preconceived notions that they could raise prices 2% or 3% across the board. However, after leading the clients through a process to be more rigorous and identify specific products and customers where they have more pricing power versus those where they are at risk, we often find opportunities to do much better than the across-the-board ideas. Unfortunately, we also find the clients sometimes get cold feet. “You want us to raise our prices 6.5% on those items?” “We’ll lose the business!” When we hear that, we find it helps to revisit the process and the factors that led to specific price recommendations, so the team can restore their confidence and stick to the plan.
If the team has identified certain products as being superior to competing alternatives, and has quantified how that superiority creates value for customers versus the alternatives, those products should have higher prices than the competitors’. If that means raising some prices more than expected, so be it. If the team is afraid to execute the plan and raise prices accordingly, it either means they did not do a good job of identifying the value differences and price sensitivity of the products, or perhaps they just lack courage. When it is the latter, the team needs to be like the football teams. It inevitably means taking some chances, like throwing deep. If they have planned properly, it will work.
One last point – hubris is dangerous. It is not uncommon for someone who developed a pricing strategy to be so confident in it, they ignore evidence it is not working. Vietnam War is a series by Ken Burns and Lynn Novick running on PBS right now. I have only seen four episodes, but one thing is clear. Too many generals, the Secretary of Defense, and the Presidents all ignored evidence that the war was not winnable and their strategies were certainly not winning. Their pride and certainty that they would win dragged the war on for far too long. Just like the war, if the evidence demonstrates that your pricing strategies are ineffective, don’t carry them into next year.
When your team has done the work to evaluate your current strategies, identified the situations and circumstances with the highest probability of success on a larger than average price increase, and they know how to execute, they should have confidence. Have faith in the work that created the plan, recognize it will not be perfect, trust in your competitive advantages, and focus on executing to the best of your abilities.