Avy Punwasee, Partner, Revenue Management Labs
What are the best practices when it comes to setting up your pricing model?
Isaac Hausman, principal at the Alexander Group, recently asked that question in an executive interview with Avy Punwasee, partner at Revenue Management Labs. Avy shared some great insights into that question for either cost-based, market-based or value-based models.
Isaac Hausman: Hi there. Isaac Hausman, principal of consulting services for the Alexander Group. I’m here to discuss all things pricing with Avy Punwasee, thought leader and founding partner of Revenue Management Labs and someone we’ve been collaborating with on project work for many years now. Hi Avy. Thanks so much for joining me.
Avy Punwasee: Hi Isaac. Thanks for having me.
Isaac Hausman: Of course. Great to have you. So pricing, Avy, let’s start with the basics. I imagine last year was a dynamic year in the world of pricing. There’s also a good bit of uncertainty going into this year. What are you seeing out there in the marketplace?
Avy Punwasee: Yeah so I think maybe we just start with the basics. There’s three ways that anyone’s pricing. The first is cost base. You’re looking at what your costs are, setting a margin on that, and you’re arriving at a price. There’s competitor or market based where you’re really looking at a benchmark that’s out there in the market, and you’re following that benchmark. And then there’s value-based pricing where you’re more so looking externally, you’re looking at the customers that you’re serving, what value you’re delivering to those customers and then pricing accordingly to that. I think really from 2020 to 2022, there was a lot of focus on cost. And just due to where the market was, we saw supply challenges, a lot of inflation that happened. So companies got very good at looking internally, forecasting their costs, hedging them, really thinking about how to restructure contracts and making sure pricing mechanisms were in there to maintain their margins. But that’s really been the focus, I think from 2020 to 2022. For 2023, I think there’s going to be a big shift. And we’re already seeing that companies, I mean, we’ve gone through three years of multiple rounds of price increases, companies are smarter out there. And coming in and just showing, hey, here’s what’s happening with inflation or here’s what’s happening to steel prices or here’s what’s happening to labor, it’s not going to cut it anymore. A lot of companies are getting much smarter, and they’re pushing back. So as I look forward to 2023 and where companies are going to go, I think it’s going to be much more value-based pricing. So starting again, to get back to fundamentals and thinking about what customer segments are we serving, who are the competitors that I’m running up against in each of these customer segments? What’s the value that we’re delivering to these customers? And where do we have leverage to price and where do we not have leverage to price? And do we need to change our offers to start accommodating that as well?
Isaac Hausman: Understood, Avy. Do you see any variation in that trend across different industries or verticals or pretty much universal going into 2023?
Avy Punwasee: In general, most businesses are going to, from 2020 to 2022, did focus on cost. I think there were some exceptions, and those exceptions would be businesses that were more IP-focused or labor-focused or expertise because they didn’t necessarily have hard inflation or commodity inputs that were driving their pricing. They were still forced to well, they should always be focused on value. But since they didn’t have these necessary hard inflation indicators that what we found in general most business services and whatnot lagged the pricing that happened in the last three years. And just to expand a little bit, and I know Isaac, we’ve done some research in this area. We found that over the last year, most companies in effect, and we went across a stream of verticals, I think we went across 10 to 12 verticals. We found that companies actually, when we looked at the price increase that they had taken last year and how they had changed their discounts and we got to a net price level, they had actually, and compared that to inflation, they were actually behind. So most companies that we surveyed were actually sacrificing margin. And which personally is scary to me because if you’re not getting above inflation, inflation is a lagging metric, like we’re looking 12 months after the fact at it. And what that tells me, especially within your same industry, hey, you’re not even taking pricing increases on par with what’s happening out there. You’re sacrificing margin. But if your competitors are ahead of you on this, they’re going to have more resources. And they can be more nimble within the marketplace and compete more ably with the increased resources.
Isaac Hausman: Got it. Yeah, I do remember looking at that data in our study. Not even keeping up with inflation, now we’re going into next year. Folks have been dealing with these inflation-based price increases for a few years now, so it’s only getting harder. And I know one of the study results we looked at as well was there’s a high degree of confidence in pricing, even though we’re not necessarily keeping up with inflation, even again, especially in some of the industries, at least more so than others. Any other areas of false confidence, I guess, come to mind maybe besides keeping up with inflation?
Avy Punwasee: This was actually a very recent story. We’re dealing with a private label manufacturer for industrial heavy goods. And they were bragging to us and they were saying, hey, you know what, over the last three years, we’ve taken about 12 price increases. And we’ve gotten very good at taking price increases because just the pace of inflation that we’ve seen and we used to have these long-term contracts, we saw our margins getting very compressed. So we got very good at ramming in price increases very quickly. And in the discussion as we kind of stepped back and we were looking at what happened to their margins on kind of customer by customer and stripping it all away, we’re looking at some customers had gotten 12 price increases, some customers had gotten four price increases. But almost on a consistent basis, we found that they were actually sacrificing margin. And the confidence that they had, it was really kind of eye-opening to us because they had this confidence that they had this process, they were getting so good at taking it so often. But when we were looking at the dollars and cents and going customer by customer, job item by job item, they were actually giving away margin per transaction. And just because they hadn’t looked at it at that granularity, they were more so looking at, well, you know, iron has gone up this much. Our line time in terms of labor has gone up this much. We pass that on. They weren’t necessarily seeing the big picture. So what I get scared about is that I think there’s a real false sense of confidence that teams have gotten much better in pricing over the last two years. And for me, cost-based pricing is the easiest thing. It’s just math. You’re taking your markup, you’re applying something to it, and then you’re going and putting that out to the market and usually not getting a lot of pushback from your customers because they can’t argue with input cost. They know it’s fair. But, you know, as we start to see things like freight move back down, as we start to see commodities move back down, customers have a memory, and they’re going to push back and they’re going to be looking for their prices to go back down as well. And I don’t think a lot of companies have really thought through, well, how are we going to manage that on an ongoing basis and what does that mean in 2023? As I’ve counted on, I want to take X percentage of price. Those commodities aren’t there to take that price. How are you going to go at it?
Isaac Hausman: They definitely have memory and field sales or whatever it is you’re selling is going to experience some of that memory, I guess, when they’re actually going out to these customers and asking for these price increases this year. Any just thoughts on the dynamic between the strategic pricing decisions and the way that I guess, discounting actually plays out in the field?
Avy Punwasee: It’s interesting because I think there’s a lot of great work that gets done internally to figure out what that price should be, why we’re properly positioned in the market at that price. But you’re absolutely right in terms of all the execution gets done at the field and often times the pricing that’s executed in the manner in which we thought that pricing would be executed isn’t done in the right way. Or right might be the wrong word to use. I think it’s not necessarily executed how we would expect it to be executed.
And I’ll give you an example. We were dealing with a food service company, and food service they’ve got millions of SKUs, thousands of customers that you’re walking into. And such a multitude of customers. You’ve got a big hotels, small independent restaurants, convenience stores. Wide, wide ranging. So the salespeople have to go into an account. They have to be able to type the account. And you’re given that it costs so much to actually walk into account, you want to go ahead and be able to negotiate the contract while you’re there. So there’s a huge amount of leverage for the team to go in and negotiate and figure where that pricing needs to come out. And a lot of these reps have been in the field for a very long time. And it’s interesting because as we start to decompose their results and look at it, each rep was their own pricing manager, and they had their own way of cutting deals. They had their own discounting system that made sense. They had their own go-to-market. And I’ll give you an example. We had one rep who, when they would go into restaurants and bars, they would always sell the french fries at a loss because they said, If I can get them on the french fries sales, I can go and charge 800% markup on napkins. And it’s all going to kind of work its way through the system. But I think what’s really key and critical is 100% sometimes just due to the makeup of the business, the sales team is going to be the one that’s executing your pricing. But really helping enable them to giving them the proper tools and resources, providing them with the proper guidelines on where really red lights, where green lights. And also I think critical is that salespeople are always I mean, customers are always negotiating with them. So giving them options that, hey, here’s something if the customer pushes on you or gives you this objection, here’s something that you can offer to them. So, for example, if the customer is asking you to delay the price increase for another 90 days. Well, no, we can’t do that. But I can let you forward by this amount. Elements like that or you know what? I can go ahead and give you an extra 90 days, but I’m going to need an extension on our contract for this amount of time period. And helping them, provide them and arm them with trade-offs in executing that pricing.
Isaac Hausman: Makes perfect sense. I feel like we could even have a book title in there. Don’t start with the french fries or something like that. But that story so definitely makes sense. In terms of that enablement. So let’s talk a little bit about that. Whether it’s, I don’t know, I guess the actual escalation procedures of the discounting, maybe it’s tools. What comes to mind as, as good enablement constraints, I guess, let’s say in this case on the fields also. I guess not just constraint for the discounting piece, but also to help them optimize and maximize price at the same time.
Avy Punwasee: Yeah. And in terms of tools, there’s really the main tools that companies are looking at right now is configure price quote software or pricing software at the end of the day. And, these are, in terms of looking at different scales of businesses like businesses are undertaking thousands of transactions sometimes within an hour, and costs are so volatile and there’s different types of customers, you just can’t manage it in Excel anymore. And you need some type of tool in place. I think where we get really hung up on tools is, in a lot of these bigger companies, a sales rep will have a tool that pops up hey, you’re walking into this customer, here’s the recommended price that you should have. And I can’t tell you how many times that we’ve gone into organizations and the salesperson just kind of laughs at the recommendation that comes up on the screen because they’re like, yep, system doesn’t work right? Or yeah, we have this system here, but we go back to this Excel sheet over here, and we populate it in this way, and this is how it gets done, which really gives us pause because a lot of times we find organizations putting in systems or tools which are absolutely necessary to get rid of all the manual work. But the systems are sometimes so rigid or weren’t properly implemented in the first place. And when I say weren’t properly implemented in the first place, they didn’t necessarily understand how to arrive at that price strategically and make sure that you can continually adjust your pricing strategy within these systems as they’re are just so rigid that they become antiquated very quickly. And your sales team, they’re going to adapt because obviously they’re living and dying over the top line. They’ll adapt and they’ll adjust. So it’s really critical as you’re putting in whatever these tools are that they need to be flexible. And you can’t be seeing the tool as your insurance. And now that I have it, now everything’s okay. It’s kind of set it and forget it. It’s almost something that you’re constantly evaluating. And as the market shifts, as your customer shifts, as your competitors shift, it’s always necessitating a change or a relook at your price strategy.
Isaac Hausman: Gotcha. So that’s the tool side. Anything else on the enablement front, be it org structure or other processes, maybe non-quantitative tools. Anything else you want to add into the enablement bucket?
Avy Punwasee: Yeah, I think and this was great too, in the piece of research that we did just the other day, we were looking at how teams were actually constructed and where pricing lived within the organization. And we what we found was some people had pricing under sales, some people had pricing under marketing, some people had it under finance. And what we did was we looked at where the pricing teams were actually located within the organization, and we looked at how much price they, actually net price they achieved last year. And when we talk about net price, it’s the price increase that they took less any discounts that were spent back in the market. And we correlated that to where the pricing team was actually sitting. What we found was that actually the team where we saw the best returns or the companies that were driving the highest pricing improvements. That was where pricing was really sitting under kind of this revenue operations group, not necessarily pigeonholed under marketing, sales or finance, but with much more of a cross-functional view being in that rev ops function.
Isaac Hausman: More of a nice middle ground. Got it. Neutral territory. All right. Well, that’s something a company maybe could shift without too much pain or investment. In terms of investments, though, maybe where folks are looking to place bets this year, is there anything top of mind, you know, things that you’re seeing companies out there do from an investment standpoint? I’m just going to throw out the keywords, buzzwords, however you want to look at it, of AI and blockchain as well seems to be top of mind this year. And I don’t know if you have any insights around investments in those areas.
Avy Punwasee: You know, 100% of the pricing conferences I’ve gone to, they’re always leading with a blockchain or AI section or sections.
Isaac Hausman: It’s the hook this year. Yeah.
Avy Punwasee: It is the hook. I think we’re a little bit of the outlier here in that. Okay. I think companies are… They’re really great, they’re exciting words. But as we look at companies that have really been able to leverage AI or blockchain, it’s a minority and it’s an outlier. What I get back to is first looking at what business are we in and what’s the actual pace of change, that customers will even accept price changes. And what’s our ability to implement those price changes and support that? And what I often find is you can build the most complicated models in the world to try and assess volume with price and continually adjust those two things and anticipate customer movements. But, as I go back to the basics around what are the customer segments we’re serving. And when I say customer segments, it’s not size of customers, it’s not their end industries. I’m much more thinking about behavioral, their behavioral aspects. So how deeply do they purchase with us? How loyal are they to us? How price elastic are they as a customer? How many competitors do they shop with versus us? As we start to understand those elements, what different segments of customers do we have, what’s their price elasticity? What is the value that we’re driving through? I still see a lot of companies that don’t have these basic understandings, and those are the key basic understandings that, one, should drive your price strategy, and your sales team will understand why you’re putting out that certain pricing into the market.
What I get really scared about is companies that are building these incredibly sophisticated models, and they’ve got all these buzzwords around them, but at the end of the day, this price gets spit out from this black box. No one can kind of rationalize it. And it’s very hard to understand, well, why is it spit out these two separate answers? And are we sure it’s very much trust in the machine when at the end of the day it is very much a customer and company business and there’s a lot of negotiation that happens back and forth. So I think getting the basics is essential. And a lot of companies in the last few years got away from the basics. And I think 2023, getting back to the basics and value based pricing is going to be critical.
Isaac Hausman: Also fair to say you shouldn’t consider some of the more dynamic AI-based pricing unless you have some of that data in place that you mentioned?
Avy Punwasee: Yeah, exactly. Like for sure, if you’re in the hotel business and you’ve got the data readily available and we can change prices on a dime. I’m all for it. But if you’re in business services and we’re cutting, you know, a contract with a customer annually, AI, you know, it might not be the first place you look for improvements.
Isaac Hausman: Right. Got it. Very helpful. And I probably led you down the AI blockchain path a little bit there with the buzzwords. But anything else just in the arena of investments going into next year, maybe along the lines of going back to basics, as you mentioned?
Avy Punwasee: Yeah, I think the number one area too, that we see people putting investment in is often people think that, hey, executives look at pricing investments. So the number one thing that floats up when we talked about this is software. And software can, I mean, there’s seven figure expenditures for organizations. They’re a great project that you can put to the top of the list. The problem is and you know, I’d probably say 80 to 90% of the software implementations that we’ve seen, it’s been very challenging for companies to see results. And where we found that companies typically fall is that they’ve seen the software as a solution. When the software is just a tool and the software is an enabler. So if a company knows what their pricing process is, all the inputs that should be going into it, how the outputs should be coming out, and they understand that they’re optimizing their price, they’re ready for software. In a lot of cases, the roof’s on fire. We know we need something to help us. Let’s throw $5 million at a software package. And it consumes an incredible amount of the organization’s time and energy cleaning up all this data and trying to struggle to figure out all these different process steps that need to be put in place. And what’s kind of crazy is that after all that time and effort, we’ve seen so many systems just kind of put to the wayside because people just don’t trust the output or the output doesn’t make sense. And the majority of the time, while that output doesn’t make sense, is because the organization didn’t really understand what pricing process they should have had in place in the first place and then just automate that.
Isaac Hausman: So something you need to stay organized probably at some degree of size to your point, but not necessarily a huge lever for growth. More of, again, background enablement than allowing you to capture price just because you have the software in place. Understood. All right. Well, we’ve covered a lot of ground, some basics, inflation, concerns going into next year, tools. Some of the newer areas. AI, Blockchain. Anything we haven’t covered. Things you think leaders are thinking about around pricing going into next year.
Avy Punwasee: I think we talked a fair about on cost and we talked cost-based pricing. We talked on value-based pricing. One thing I’d leave the team with or the group with is, you know, competitor or market-based pricing. And often there’s a sense of confidence around that as well, because if we’re getting good competitive data and we’re following it, sometimes there’s a belief that we were up-to-date with what we’re doing in the market. We’re not big supporters on that as well. And there’s a couple reasons behind that. One, if you know even the word, hey, we’re following the market you’re following, right? So inherently you’re always behind. What I’m also concerned about is if you’re following the market or a competitor, I mean, the competitors executing their strategy and they’re trying to do something. They’re moving there first, but they’re doing what’s right for their portfolio and their customers with their pricing strategy, which you’ve probably got a unique strategy within your organization. You’ve got a unique customer base, you’ve got a unique value proposition. So often following the competition and if you’re hearing that within your organizations that, hey, we’re priced on par with that competition, that’s often not the answer as well. So I think what I’d like to leave the group with today is, you know, 2023, if there’s one thing you can focus on, getting back to the basics around value-based pricing and really understanding your offer and where you need to position that price to be successful.
Isaac Hausman: Gotcha. And fair to say it should always be in the mix somewhere, just not the thing you anchor to, right?
Avy Punwasee: Exactly. There should always be three things that you’re constantly looking at what’s going on with your competitors, what’s going on with your customers/consumers and what’s going on with your financials. Triangulating between those three things. But none of those things can be the be all and end all of pricing.
Isaac Hausman: And we’ve come full circle back to those basics we started with. So good place to end it there. Thank you again, Avy, for sharing all your insights today. Really appreciate it.
Avy Punwasee: Thank you.