Pricing for Growth in 2023
The correct pricing model can be the difference between revenue growth and stagnation. But with continuing uncertainty in the business environment, companies must quickly adjust, reviewing their pricing models to meet business objectives.
High-performers differentiate themselves by adapting their pricing practices and targeting their investments to ensure they distinguish themselves from the competition while optimizing internal operations.
Looking Back: The 2022 Pricing Landscape
Inflation and supply challenges clouded 2022 market conditions, forcing companies to adopt a cost-focused pricing mentality, review forecasting models to hedge costs and restructure contracts to maintain margins. Companies and industry sectors with commodity inputs were most likely to use this approach as they focused on increasing cost inputs.
While external pressures provided the impetus for reviewing pricing models, many companies remained confident in their pricing capabilities. Despite these efforts, companies across industries battled inflation and sacrificed margins. In 2022, average B2B prices lagged inflation by 2.6% (4.8% increase vs. 7.4% inflation). Inconsistent execution resulted in a misalignment between strategic price setting and pricing realization, as the actual price sold by sales reps lagged behind target objectives.
Achieving margin and staying ahead of inflation now requires companies to take a holistic and balanced approach, incorporating cost-plus and value-based pricing models supported by frequent monitoring to ensure their success.
The Road Ahead: 2023 Pricing Initiatives and Investments
Revenue growth will depend on adapting to continued market uncertainty while incorporating new pricing models. Leading companies understand that price is not just based on cost but on the value provided to customers. They are balancing solution-based and brand improvement factors in addition to cost factors, including inflation, as inputs to their pricing models.
Leading companies are taking critical steps to enhance their pricing model by:
- Reevaluating pricing inputs to address ongoing inflation dynamics.
- Exploring value-based pricing and messaging to support customer retention and expansion.
- Centralizing price execution and realization capabilities, often achieved through a Revenue Operations function.
- Engaging in annual – or more frequent – pricing reviews.
80% of high-performing companies engage in an annual pricing review, but only 56% of their low-performing peers do. In addition, 73% of high-performing companies use pricing to manage supply and demand, as opposed to 44% of low-performing companies.
New pricing strategies and practices require new initiatives and investments. For example, 76% of high-performing companies now invest in pricing management tools as opposed to 52% of low-performing companies. In addition, 53% of high-performers now invest in AI and machine learning, while only 22% of lower performers plan investments in these technologies.
Despite what the data indicates, take caution in expecting AI to be a miracle cure. Companies must be able to align these advanced technologies with their pricing processes. They must also be able to communicate the value and validity of AI-generated pricing to ensure sales reps and others in the sales organization understand the rationale behind any pricing recommendations. Unrealistic expectations can lead to low ROI and an increased gap in sales performance.
Calibrating Your Pricing Model
Whether a company uses cost-based, value-based or a combination of pricing approaches, it must still be able to generate, understand and execute its pricing strategy. Proven practices include the following:
Know the basics for each customer segment. What are the unique characteristics of your customer segments? What value do you offer? Who are your competitors, and how do you differentiate your company’s offerings? What is the pricing elasticity of the segment? Understanding customers, demand and market offerings is essential to determining to price for each segment.
Evaluate pricing responsiveness. How does the company’s pricing adjust to a competitor, market and customer behavior shift? What monitoring tactics are in place to capture the impact of a shift? What processes are in place to update pricing? Given ongoing market volatility, monitoring pricing strategies and their effectiveness remain important.
Optimize tool investments. What are the data inputs and methodologies? Who will own the data and pricing process? What are the workflows associated with price changes? What is the anticipated ROI? Investments in advanced pricing tools are essential but must be carefully evaluated to optimize their value.
Centralize oversight and review. How to coordinate pricing decisions across functional areas? What is the communication strategy to ensure proper execution and sales team acceptance? How frequently will they review the results? Our research indicates that when Revenue Operations owns price realization, it excels at keeping a cap on discounts while driving revenue growth.
Optimize your pricing strategy
Evaluating the critical inputs to your pricing model will help improve the accuracy, responsiveness and execution of your pricing strategy while supporting revenue growth. For more information on your pricing model, contact our experts.