How to Hire a Pricing Consultant
Editor’s Note: This article first appeared on the Ibbaka blog here.
Pricing is the most powerful of the four Ps (product, price, place, promotion) but it is also one of the least understood. In many companies pricing is a frozen accident. Someone came up with a pricing model ‘once upon a time’ and set prices, and people have been living with it ever since. In new product development, pricing is ‘often ‘cost plus’ (a sure way to limit profits) or ‘me too’ (not the best way to demonstrate differentiation). Or you can just throw out a number and see if it sticks. This is the throw spaghetti at the wall school of pricing.
CEOs and their boards are increasingly aware of this, and have been reaching out to pricing consulting companies to jolt their organizations into action. Sometimes this does not go much beyond ‘we have to do something about pricing’ or ‘figure out how to raise our prices.’ The direction often falls on the head of sales, marketing or product. Sometimes the CFO is held accountable. In most cases, these people need help to move pricing to the next step and the accepted place to look for help is consultants.
What help? Which consultants?
Many people reach out to us with pricing problems. When we peel these back, we find that pricing is often the symptom of some other problem. Pricing is easy for people to complain about. ‘It is too expensive.’ ‘I can get it cheaper.’ ‘That is not how I want to pay.’ Pricing is where challenges with value delivery, value communication, customer success and customer targeting come to the surface. The first step in any pricing engagement is to understand the root causes of the pricing challenge and then to test that challenge for alignment with the organization’s goals.
Pricing Consulting Patterns
A number of different types of projects fall out of this root cause analysis. Here are the types of engagement we most often get involved in.
- Research what economic, emotional and social (community) value buyers and users care about
- Discover the market structure and target customers
- Map value drivers, value metrics and pricing metrics
All of the above are generally in service of the following
- Design a pricing model for a new offer
- Design a pricing process for a new innovation
- Design a pricing intervention in a value chain when the solution is embedded in existing markets
This can lead to some important follow-up work
- Develop value models and the data collectors and analytical tools that inform them
- Build value calculators and pricing calculators that connect sales to customer success
- Create pricing playbooks that connect strategy to execution
- Train marketing and sales on how to position price in the context of value
This requires a deep understanding of business models, not a customer’s business models but the customer’s customers business models. It is based on research and design rather than optimization and technology. You should use some pretty advanced technology of course, finding hidden market structures, collecting and analyzing data, building value and pricing calculators all require coding.
Other Pricing Consulting Models
There are a number of other pricing consulting models and there are some companies that are very good at these other approaches.
- Determine willingness to pay (WTP). This is the old school approach to pricing work. It assumes that WTP is somehow given and that prices can be optimized to the given level of WTP. If your pricing vendor is using techniques like Gabor Granger or conjoint they are likely taking this approach.
- Optimize pricing. The customer wants to know what the ‘right price’ is. Increasingly this is merging with dynamic pricing where the price is adjusted using complex algorithms that use customer and market data.
- Systems implementation. There are some fairly complex pricing systems available. They generally need a lot of configuration and work best when they pull data from other systems. This is specialist work that only a few companies are good at. They will have close connections to the pricing systems vendors.
There is one other form of pricing consulting that can be transformational to companies willing to commit to it. This is the triangle of pricing governance, capability building and culture change. This requires very different skill sets from other pricing work.
How Do You Choose a Pricing Consultant?
Look at Roger Martin’s cascading choices model and see where you need help.
Which of these five cascading choices will have the biggest impact on your business?
First, understand the problem you are trying to solve for. Ask the following questions …
- Did the consultant help me understand the possible causes of my pricing challenge?
- Did the consultant ask about my customers and how they do business?
- Did the consultant probe on our pricing goals and how they support our larger business objectives?
Then imagine what a solution will look like.
- Are you creating value for your target customers? Look into value-based market segmentation and customer targeting.
- Do you have a fundamentally new innovation or are you creating a new category? You need a set of patterns and a process to put them together to create pricing in a dynamic, emergent environment.
- Does your solution have clear differentiation and create great value? Have your consultant develop a pricing model that connects value metrics to pricing metrics.
- Are you working in an established market with well-defined pricing? Work with your consultant to identify pricing actions and how to execute on them.
- Does willingness to pay change depending on market conditions and buyer characteristics? Investigate dynamic pricing (you will also most certainly need software to execute on this).
- Do you need to implement pricing software, CPQ (configure price quote) software, configure your CRM, marketing automation or customer success software? Use one consultant to help specify and choose systems then a different consultant to implement.
- Do you need to know how to price? Work with your consultant to implement pricing competencies in your organization and provide training if needed.
- Do you have a large, complex organization where different stakeholders clash on pricing? Work with an organizational design and change management consultant that understands pricing competencies and processes.
Pricing consulting is not one size fits all. A good consultant will tell you if they have the skills, tools and relationships needed to solve your problem. A weak consultant will tell you they can do everything. Even the large firms cannot do everything. The more they try to do so, the weaker they get. Scale does not equal capability. Differentiation is as important for a consulting firm as it is for a product firm. If your consultant does not know its own differentiation, how will they help you to discover yours?
We all get those terrible sales messages on LinkedIn that sound like they were written by a bot. Well, turns out that’s exactly what’s happening.