Pricing: The Third Business Skill E-Book: Principles of Price Management by Bouter Ernst-Jan

Author:Bouter, Ernst-Jan [Bouter, Ernst-Jan]
Language: eng
Format: epub
Published: 2019-08-19T16:00:00+00:00

CHAPTER 9

EXPERT JUDGMENT (LAYER 1)

9.1 Making beliefs explicit

Beliefs about price sensitivity have a great impact on pricing decisions. They are the product of experience in the trade or acquired doctrines. Not only the price level, but also the selection of price drivers and revenue model draws on these beliefs, which are often not 100% conscious beliefs.

When commercial managers depart from the idea that “customers want the lowest price”, they will base their decisions on the market price principle and pass over the price driver of customer value (C3). And when a financial director has learnt in university that a “fair” selling price is made up of the average cost price plus a “healthy” profit mark-up, his preferred principle is that of cost price. He will not be aware of customer value (C3).

The first layer of the pricing funnel converts beliefs into quantitative statements about prices, making the beliefs explicit and quantifiable. This conversion produces the possibility of testing out the expected effects of a pricing policy. This exercise lets managers at a company share the principles on which they base their pricing decisions. An explicit discussion about assumptions is a good starting point for the development of a better revenue model.

The most important changes in pricing and strategy are propelled by newly acquired awareness. Imagine a situation where an entrepreneur provides added value to a specific customer group in the market. The entrepreneur, however, will only change his (pricing) policy when he really becomes convinced that the value he adds en-franchises him to charge a higher price in this niche market.

The first layer of the FPF is the one that is least driven by data. Internal experts’ judgment arises from informal working methods. Introducing structure into these methods will bring overview and transparency, which will, in turn, improve price evaluations. That would, for example, enable structural recording of price sensitivity estimations. The commercial team will then make a formal estimation of the number of items sold at a price that is 10% higher. The expected effects of a price cut and price rise on profits, sales, and market share will subsequently be easy to deduce. Discussing the issued prognoses will make beliefs and price drivers transparent.

Concrete and explicit estimations of changes in sales following a price change serve two goals. Team members will first experience how certain or uncertain they are about the effects of price changes. This will lay the basis from which further efforts can be launched in gathering data and measuring price sensitivity in layers 2 and 3 of the FPF. Secondly, these estimations enable us to better assess the expected possibilities offered by better prices. The team members will then soon become aware of the power of price on their own estimations. That will make it easier to gain broad support both for day-to-day pricing decisions and for initiatives aimed at strengthening the pricing function.

9.2 Example of a team exercise

9.2.1 Input

This example will revolve around a pricing manager who applies the first layer of the FPF for the attractively priced eMove base smartphone (€159).

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