In Charles Duhigg’s “The Power of Habit: Why We Do What We Do in Life and Business,” he states: “There are no organizations without institutional habits. There are only places where they are deliberately designed, and places where they are created without forethought.”
Have you institutionalized habits that enable you to deliver differentiated value to your customers, time and time again? Your customers notice your distinctive capabilities and happily pay a premium price for your goods and services. That premium price enables you to reinvest in innovation and offer even more value to your customers.
In working with Fortune 50 companies to $100M organizations, we have seen that very few have designed the pricing habits that enable long-term growth and profitability. A surprising number are using “set it and forget it” pricing tactics combined with reactionary over-discounting that hampers the organization’s ability to grow profits. These reduced profits diminish their ability to reinvest in innovation that keeps them differentiated from the competition. Nevertheless, fighting the habits of reckless discounting is (sadly) an almost universal experience for price management teams.
Reactive Tactics: A Costly Game
According to Duhigg’s definition, habits consist of a three-step loop:
- Cue: A trigger that tells your brain to go into automatic mode, and which routine to use.
- Routine: Physical, mental, or emotional behavior that follows the cue.
- Reward: A positive stimulus that tells your brain that the routine works well and is worth remembering.
If we apply Duhigg’s model to the institutionalized pricing habits of typical organizations, the model often looks like this:
- Cue: Salesperson receives quote request.
- Routine: Salesperson employs price exception process to get a special discount because system-generated prices are too high. Salesperson pressures pricing team for a deep discount to lower his risk of losing and then takes this price back to the customer. Often, customer has learned that it is routine to ask for a better price and so the team cycles back through the price exception process again.
- Reward: Hopefully, salesperson wins deal and is compensated accordingly.
This routine is costly from both a human resource standpoint and from a revenue leakage standpoint. The salesperson is not concerned with market-rational pricing and not usually compensated on maximizing profitability. He or she is most concerned with the short-term objective of winning this deal sitting right before them.
Switching to Smarter Tactics
According to Duhigg, a habit can only be changed if the new routine can be inserted into the process with the same cue and the same reward. In Duhigg’s book, he tells the story of how American football coach Tony Dungy helped his team, the Tampa Bay Buccaneers, to replace their habit of hesitating and assessing each play with simpler, routine reactions to on-field cues. Previous coaches had directed the team to “outmatch” their opponents with complex plays that required thought, consideration, and coordination—all within a few milliseconds. Tony replaced the habit to hesitate with key routines that involved less complexity, fewer choices, and even subconscious reactions. Dungy explains, “Champions don’t do extraordinary things. They do ordinary things, but they do them without thinking, too fast for the other team to react. They follow the habits they’ve learned.”
Positive Pricing Habits: A Winning Strategy
If the cue and the reward need to remain consistent, how do we create a simpler routine that scales and helps every salesperson to receive a winning, optimized price for each quote, while still protecting profitability?
The first step is getting comprehensive visibility into pricing across the organization. A bit like the life-changing magic of the KonMari method, you need to see the totality of what’s going on before you can put order to it. You have likely been operating in a reactive, siloed manner, where you barely have time to process the quote requests coming in, and now you find yourself standing amidst the clutter of managing a unique price approach for every customer. Thankfully, as one of my favorite customers, likes to say, “Fixing new stupid is easier than fixing old stupid.”
Power up Your Pricing Performance with AI
Once you have pulled all your pricing information together, you can apply statistical analysis to better understand the trends of what’s really going on in the market. Previously, you may have relied on salespeople to provide their market view, but salespeople only have perspective on their own territory. Data scientists can run the statistical analysis to decipher customer trends in willingness-to-pay, but the fastest and most effective approach is to leverage artificial intelligence technologythat can continually and automatically incorporate new information into the model.
A technology-driven foundation for your price strategy will also be the fastest way to supply price recommendations back to your sales teams. With centralized price governance, you can leverage dynamic pricing science to deliver a winning, optimized price directly to sales people and shortcut the laborious effort that once went into delivering a personalized price. With a renewed process, you can begin institutionalizing habits that look like:
- Cue: Salesperson receives quote request.
- Routine: Salesperson creates quote leveraging self-serve, optimized price guidance and provides a personalized quote back to the customer.
- Reward: Customer expresses satisfaction with the fast quote response and rational price. Salesperson wins deal and is compensated accordingly.
The Results of a Well-Played Approach
Institutionalizing new habits like this certainly does not happen overnight, but it’s amazing to see the continual benefits that organizations begin to discover once they begin employing a strategic approach to pricing.
For McKesson Medical-Surgical, they had so much success with providing price guidance to their sales people that they expanded the use of their pricing science to deliver personalized prices directly to their customers through their eCommerce portal.
For Hologic, an innovative healthcare company with a strong position in women’s health, well-designed pricing habits are permeating the culture of the organization.With these new routines, they can now consider perceived customer value against cost in decisions across the organization—from product development to sales strategy.
Keep up with the Race
If you’re interested in learning more about how a new pricing routine could help you, join PROS and Hologic for the upcoming webinar “Pricing Intervention: Reversing the Pains of Decentralized Governance” on July 24 at 12pm EST.