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end up using all three lenses of pricing.
The three lenses being the economic lens, the customer lens, and
the competitive lens.
The economic lens is exactly what it sounds like, right?
It's talking about the economics of a particular pricing decision
which is to say it is the cost plus side of things.
And we all know that cost plus is better than cost minus.
And many companies treat cost differently.
And some are more advanced when it comes to cost than others.
So some companies use activity based costing.
Some companies end up using driver based costing.
But at the end of the day,
understanding what the true cost is in a pricing decision.
And then understanding how you put that as a floor is really, really important.
Wonder if you've had any experiences on the economic lens with your clients?
>> I have, those certainly resonate.
The other thing, I've really seen people really push it forward on the economics
lens is putting in place price floors.
So how do you put a minimum by product by a certain customer type.
That way you're able to add market discipline,
able to give some direction to your sales force to make sure you maintain a at
least minimum acceptable margin out there in the market.
So the economics certainly an important lens.
Then, as I've seen companies get more sophisticated,
they started moving from the economic lens which is all about an internal view.
More towards the customer value lens starting to look outside to the customers
that actually purchase your products.
So an important part there is around customer segmentation.
How do you think about the different groups of customers?
What do they value and how do you then price and
even line up your products towards that?
A great example is, in the retailer space, the customer that shops at a dollar store,
versus shops at Walmart, versus goes to the grocery store.
May be very different customers, different needs,
different view of what price do you need?
what products are they specifically looking for, and then how do you really
line up both that price and product to their willingness to pay?
Anything similar you've seen on the business to business side around
the customers?
>> Yeah, definitely.
I mean the customer lens,
which is understanding the different customer segments is really really key
because embedded in that is the notion that one size does not fit all.
And it is really key to understand each of these customer segments because you have
the opportunity to price deferentially for each of these different segments.
Which a lot of companies again, don't necessarily look at.
One thing for example, a great example is in the B2B industrial goods space,
where you could price directly to an end consumer, or
you could price to a distributor, or you could price to an installer.
And all of these different segments have different willingnesses to pay,
different expectations of quality and services, and you can price deferentially.
The third lens that oftentimes many companies that we work with don't look at,
is the competitive lens.
Which is to say, who is my competition?
And by the way this is not just for a pricing decision.
It's also for decisions around products, around customer service.
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it changes, and competitors aren't static.
They may make changes in the marketplace, they do moves you need to understand and
be able to adapt to.
The same point, you may see new competitors in the market.
Things constantly change, and so really being able to track competition,
be aware of it and reset your pricing strategy as they do different things is
a critical thing to get that lens the full value out of that lens.
So as we think about all three lenses, there's an awful lot that goes into it.
A lot of complexity to get all three of these right.
What are some of the mistakes and
the common stumbles you've seen people do in making this journey?
>> There are some themes of mistakes that I've seen in my pricing experiences.
There's two that I really want to point out.
The first one is about companies not really doing the level of testing and
learning that they should do before they roll out a pricing strategy into
the marketplace.
Oftentimes, company would inform their pricing decisions with a lot of
quantitative analysis, a lot of qualitative analysis.
But at the end of the day, if you're not really experimenting and
trying to figure out what the market will bear before you roll out,
maybe once you roll it out, that strategy could backfire.
So having a culture of experimentation, of conducting pilots,
where you have a pilot and you have a control.
And learning from that is really really critical which often times many
companies lack.
The second one is really about an overestimation of elasticity.
And what do I mean by that?
Companies generally tend to say that if I increase my price slightly,
I'm going to have a massive, massive impact in volume.
Now that may or may not be true.
But often times companies have a predisposition of going and saying,
you know what, I think the volume implication is going to be much more.
So again, this ties back to the testing and learning.
We're doing the test and learn to better understand what the implication volume is.
And not to put to much of an emphasis on the overall elasticity part would be
an important one.
>> Those two certainly resonates when they speak maybe to a broader theme I've seen,
there's a lot of analytics obviously involved in pricing.
A lot of math, but it's not just math, I have seen people get very anchored to
their numbers and what calculations are telling them.
That's a helpful, very helpful part and, but as you say, it's both an art and
science, you need to understand what's happening in the market?
How will people react?
Test things out there to really get the true value out of the pricing.
Another common mistake I've seen is on the customer side.
People will talk to customers whether it's customer surveys,
focus groups to understand what customers are saying they want.
Now that's certainly a valuable thing that you need to do, but
it's not the whole story.
The value in what customers say is minor compared what do customers actually do.
And so being able to observe, how do they shop in store, how do they make
the decisions at the point of purchase is a critical thing to make sure you watch,
you monitor for, and you're able to shape your pricing strategy around.
>> So, it sounds like, in summary, the most mature pricing companies
end up using all the three different lenses of economics.
Where they look at the cost, they understand which cost is more relevant for
that pricing decision.
They're setting the right pricing floors, and
they're setting a margin based on that expectation.
They're also using the customer lens which is, how do you define the different
customer segments and what is your pricing strategy based on each of those segments?
And then finally understanding what is the right competitive set for
that particular pricing strategies.
Most successful companies end up using
all these three lenses holistically in order to inform their pricing decisions.
>> Agree, it's a lot of work to do all of that right,
but I think there's tremendous value and competitive edge in
the companies that are able to do that and really put that in the market place.
Jean Manuel IzaretSenior Partner and Managing Director, Leader of BCG’s Global Pricing Practice
Ronald T. WilcoxNewMarket Corporation Professor of Business Administration & Senior Associate Dean for Degree Programs
Thomas KohlerAssociate Director, Pricing
