The future of industry-leading companies is the value-based organization. Those companies will have an ongoing process of understanding customer needs, using that understanding throughout the organization, understanding competitors’ capabilities, and having a process to absorb that and know how to react to those things – and how to build and go to market relative to those changes, as the author explains. Jeet Mukherjee (jmukherjee@holdenadvisors.com) is Chief Strategy Officer and Head of Pricing at Holden Advisors. He has over two decades of global experience in management consulting, strategy, analytics, marketing, and pricing. He also co-authored “Pricing With Confidence: 10 Rules for Increasing Profits and Staying Ahead of Inflation” with Reed Holden.

The Journal of Professional Pricing, June 2024

Each year, I meet with almost 50 CXOs to learn about some of their biggest commercial challenges. In my most recent interviews, one theme stood out above any other topic.

They all wanted more pricing power. But none of them knew how to get it. When I asked them how to define it, they brought up things like channel partnerships, supply chain control, company size, quality, brand, sales effectiveness, competitor discipline, product margin, and product differentiation.

With all these different attributes, how do you properly define pricing power?

As a starting place, they mostly aligned with Warren Buffett’s famous quote: “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business.”

However, Buffett’s definition felt incomplete to me. I believe there is a theoretical maximum to that price ceiling, and it needs to be considered as companies gauge their pricing power. Think about it: if Apple decided to charge $100,000 for the next iPhone, they would absolutely lose customers.

That maximum threshold comes down to the differential value of the solution. All of the above attributes roll up into differential value to the customer in one way or another. If a product is priced over the differential value created, that company will lose those customers. Fundamentally, you are not providing them any value because you are taking it all through your price.

Creating differential value over time is essential to creating and sustaining pricing power.

If that’s the case, an updated definition could be: “If you’ve got the ability to create more differential value over time, then you will have the power to raise prices without losing business to a competitor.” This gives you the power to raise prices – and (to be proven in this paper) a substantial advantage for long-term profitability.

Measuring the ability to get more dollars through pricing power

How could we give these CXOs more clarity? What can we measure to help:

• Discern if a company has pricing power before making an increase?
• Prevent companies from losing customers unnecessarily?
• Elevate overall value delivered in the market and help CXOs to serve their customers better?

It’s clear that differential value over time is an important factor in pricing power. We also need to gauge a company’s ability to get paid for that differential value (e.g., how effectively the commercial team can execute and deliver). Even with a highly differentiated product, businesses must be able to bring their solutions to market effectively to gain and protect their pricing power. Without that, pricing power could not exist.

If you have a great idea and the market doesn’t pick it up, you can only go so far.

These are our two primary categories for measurement: the company’s differentiation and their ability to execute in the market. Since these two categories are difficult to quantify, we decided to use proxy variables to demonstrate the concept. For differentiation of offerings, a good indicator is the price level you’re able to achieve relative to competitors. If you’re in a market where you’re able to be the most expensive, it’s a sign that you’re likely to be highly differentiated.

For go-to-market excellence, our proxy measure is market share. If you’re able to:

• understand your customer’s needs
• meet those needs
• partner, execute, and transact well with your customers
• do customer service and tech support effectively
• align sales, product, marketing, and customer service teams together internally

… you should have a higher market share relative to your competitors. If you put those two categories together, and you measure high on both, you should have high pricing power relative to competitors.

To test the hypothesis, included are five verticals as examples:

Realized Price and Market Share Across Industries

Figure 1: Difference in profit dollars, gross margins, and market share between first and second market positions across five different verticals.

With the data studied, on average, companies in the first position were over 1.5x more profitable than the next closest competitor. Of course, if you have more pricing power than your competitor, you will have a greater ability to get more dollars. The benefits are clear – and after reviewing other verticals, the downside of not engaging in achieving pricing power was clear as well.

Take the data visualization segment as an example: when we were initially studying platforms, it looked like the competitor in second place behind Tableau was Qlik. But in the past year, Power BI has done a good job of gaining market share and overtaking Qlik for second position – even threatening to overtake Tableau as well.

They were able to take advantage of a market opportunity. Tableau is still busy trying to integrate themselves with Salesforce, and Qlik doesn’t have the full stack of tech suite like Microsoft does with Azure, Power BI, and Dynamics360. That broader set of offerings helps to incentivize customers to come on board with Microsoft, keep customers within their environment, and ultimately experience switching costs in the case that a customer wanted to switch products.

Microsoft has leveraged their strength against these competitors to gain pricing power, and we see them potentially overtaking Tableau some point soon.

*Proxy measure note: In some environments, companies that are highly differentiated may have low prices, relative to differential value, because of poor go-to-market execution – not because they aren’t differentiated. Since their prices are low while value is high, they dominate the market. Those situations where high differentiation leads to high market share are largely outliers – but will become clear through a customized assessment.

Turning concept into practicality

To make this operational, companies need to understand where they fall on the two measures. This determines what they need to do to get better – and to protect what they have.

On either measure, companies will land on a spectrum. If you split up price between low and high, and split up market share as low and high relative to the overall market, you’re looking at a 2×2 that can drive recommended actions. Companies fall into one of four quadrants, each with a primary focus area and associated strategies for how to build and protect pricing power.

Pricing Power Categories

Figure 2: Matrix for understanding pricing power through the lens of
go to market execution and level of differentiation (with market share and price as proxy measures)

As part of building and protecting pricing power, there are capabilities that any company should have related to value, execution, and organizational processes. These things can be measured and tracked over time through a series of factors (Pricing Power Index^TM).

Each item has different weights depending on the type of industry you’re in, and will answer questions like: When implementing a strategy, does the sales force understand value? Can they communicate that value and use it to protect and defend price? Are they receiving information about your value and moving it to be used in product support, product development, marketing, and R&D departments? Specific to your industry, what is the ceiling for “excellent”? In some industries, you won’t be able to go 100%. There is a theoretical max to your achievement of that capability. Where you are relative to that max becomes the index.

At the beginning of this process, the Pricing Power Index^TM provides a heat map of where things are strong and where the needs are – with clear levers for what you need to do in order to get to the top right quadrant.

How to get pricing power if you don’t have it

In the cases of (relatively) low differentiation, the overall focus should be on building and expanding value as a capability within the organization. The more value created and effectively communicated, the better differentiation, and the stronger the capacity for long-term pricing power.

Figure 3: Matrix for understanding pricing power through the lens of
go to market execution and level of differentiation

If you have neither market share nor differentiation, ask yourself if you are making a play for a commodity product. If you are making a strategic play to gain market share through low price and be a mass market player, this framework may not be for you. If you want to be a differentiated, high market share player, then value generation should be your first priority. This will make execution smoother, better, and faster.

Quantifying differential value

For modern commercial teams, most leaders know what value-based pricing means – but many still do not track how their products and services differentiate them from their competitors and use that differential value to price. Leaders also forget to look at all the other services and activities they do for their customers to create value. As an example, a last second rush order can help a customer save one of their customers. Companies do a lot for their customers to add incremental value that sometimes doesn’t get captured in the quantification but should.

Some teams do a good job of quantifying differential value and using it for their pricing, but they don’t communicate to and train their sales organization so they can be effective in getting the price that was set. A key component of this is the customer’s ability to experience the value used to set the price. Simply put, when customers can experience the value, they are more likely to believe sales, be less price sensitive, and pay the asking price. Just think about the buying process as a consumer: it’s one thing for a car salesperson to say that a Ferrari is fast, and a very different thing to experience that speed firsthand.

Understanding buyer types

In order to build and protect pricing power, the sales force needs to understand their customers, the individuals in the buying process, and how they make decisions. Identifying those nuances will change how businesses present their quantified value – and teams must build this capability on an individual and enterprise level.

To grow these capabilities on a practical level, companies may start with training the product team who are having ongoing conversations with customers. We’ve seen teams use a simple approach like:

• Learn how to ask value questions
• Conduct conversations and share documented findings
• Check with a peer group each other on how they could have done a better job on asking questions and digging deeper
• Incorporate this in the core process of customer conversations

Processes must change across the board. Commercial teams must understand that talking about your value cannot happen just at the time of negotiation. At that time, buyers only care about terms of the contract. Value communication needs to be a drip marketing type of approach that happens in every interaction – and every interaction is a golden opportunity and needs to be taken advantage of for communicating what’s important for that buyer type.

If the customer experiences value, and you communicate it effectively, they will be less price sensitive, with greater willingness to pay. Anybody who touches the customer needs to have the capabilities to understand value, diagnose buyer types, and communicate their value in different scenarios.

This training happens over time and with constant application, where commercial leaders and sellers learn the nuances, apply them to real time situations, try the conversations, fail, and improve on these capabilities over time. We know we lose up to 90% of information within one week of learning. Successful implementation of value-based capabilities takes concentrated effort and implementation into ongoing processes – not just a one-time event.

Effective use of value throughout the organization

This practice can change things across an enterprise quickly. When surrounding teams are trained and listening for value drivers, they can impact the overall product or service in new and unexpected ways (therefore improving overall differentiation). Think of teams like product development, tech support, customer service, and sales: when they know what each customer derives value from, they can better focus on those areas.

Holistically, decisions should also be made from the lens of creating sustainable differentiation. Some examples include R&D, marketing, product releases, resources, or internal training and capability focus areas. This is where disruptors are often born if the incumbent organization does not evolve to become a true value-based organization. When features, benefits, or offerings fail to meet customer needs or innovate effectively or quickly enough, some buyer types find their priorities can be met with an ankle-biter competitor, and a new market leader is born.

Use of dynamic and long-term value drivers

Markets change, customers’ needs change, suppliers change, and competitors and their products/features change: so why do we look at pricing as a one-time event? Companies need to stay on top of all these moving pieces and have a pricing process that can keep up with the dynamic nature of value drivers in order to lead the market.

We must understand how customers evaluate and purchase today and how they will make purchasing decisions tomorrow. Long term value drivers are things that we know will influence purchase decisions in the future but may not be so quantifiable today. A perfect example is sustainability: we see companies advertise their sustainable practices knowing that purchase decisions of consumers today may not depend on this, but they’re betting that in the future a portion of the purchase decisions will be based on their sustainable practices.

Think about a fast-food company like Wendy’s. The other day, I saw a plaque showcasing their sustainable practices. Do today’s customers make their choice based on that? Unlikely. But Wendy’s is smart to think ahead to the future, betting that consumers will make decisions based on these criteria. We want to start informing customers today, so they know that we are at the forefront of these measures thus creating an advantage in the future relative to competitors.

From a B2B perspective, a non-monetary value driver like sustainability can be a lever for jumping position in the market. The key is how to position it in a way that your customers can grow revenue as a result. The balance is to invest and build at the right pace to be able to get paid for the value you’re delivering; if you build too early and the customers are not using it as a purchase criterion, then you have diluted that value and it will be difficult to make up for this later when the customer is using it as a purchase criterion.

One company is currently in this predicament. They invested early in renewable supplies to build their products to reduce their cost, but they didn’t communicate this value to their customers. Now, those customers want the sustainable products because of their purchase criteria, but they want them at the same price because they have been anchored to that price since there is no change in product.

Did this company invest in sustainable practices too early? Or did they not go-to-market correctly with this advantage? I don’t think they were too early since they were able to get a cost advantage. I think they could have done better in how they trained their customers to believe in this value in order to get a better price-value alignment today.

When differentiation is high

In the case of high price but low market share, enterprises need to focus on their go-to-market. Should you invest in product development to become the Ferrari of your market since you have the dollars? Do you intentionally want to be a niche segment? When market share is low, and you decide you want to increase it, this is a time for improving the enterprise’s ability to influence and execute.

Figure 4: Matrix for understanding pricing power through the lens of
go to market execution and level of differentiation

Go-to-market effectiveness and customer advocacy. How do we set our pricing and sales processes to build transactional customers into loyal customers and advocates? How do we identify them? Most strong companies will have a high percentage of loyal customers, but companies with strong pricing power will have a significant portion who are true advocates. This is what creates a cult-like following, which then drives more sales, sustained growth, and overall company value.

Relationships within the channel. Not every business is able to deliver solutions in the way customers need. Partnerships with non-competitors in your ecosystem are a great way to create unique value and stickiness with customers. Think about laptop manufacturing – HP’s relationship with Microsoft and with distributors and resellers is a prime example of this. Companies like these can partner on co-marketing and share in the inherent risks with new product launches.

Effective and disciplined negotiations. The impact of price leakage can never be underestimated – especially when it comes to rampant discounting, which we see across many industries. Nothing dilutes your value like undisciplined discounting. Commercial teams often need to learn how to understand the buying center, diagnosing buyer behavior and preparing negotiation strategies for specific selling scenarios.

Skills and confidence can be taught, but often need to be called out as a focus area for sales teams to move the needle on profit margins. Sellers need to grow the capabilities to train customers on value throughout their partnership – not just at renewals or annual reviews.

For many, this does not exist in the organization – especially when the offerings are highly differentiated. Renewals can almost be on autopilot, and variability between logic and conversations can be extremely high. Each customer must have a clear buyer type and negotiation strategy defined, and when negotiating, teams must be able to do so in a value-based context. That context helps drive the logic and tactics of conversations depending on the type of buyer, which includes a walk-away plan so the value-based organization doesn’t fall apart. Once unnecessary discounting gains momentum, it takes a concerted effort to reverse and resolve.

If you want to be a value-based company, and you have a value-based price, you need to make sure you’re communicating that through your go-to-market teams. If teams are discounting haphazardly without taking value away, they’re communicating that the solution doesn’t have value (or, much value).

If you want a Mercedes, you want that buyer to have the experience of buying a Mercedes. Your negotiation style should match the value of your solution and customer buyer types.

Learning to spot poker players

Effective negotiations always start with understanding your customer types. Many sales teams are well-versed in positioning for price buyers, value buyers, or relationship buyers – but we often see teams overestimate the number of price buyers they actually deal with.

Many companies tell us that the majority of their customers are price buyers. In reality, less than 20% of your customer base are true price buyers. These are Poker Players, typically value or relationship buyers, pretending to be price buyers. Being able to identify them, call their bluff, and properly navigate a fair price is a key factor in modern negotiations.

A typical negotiation goes through a very predictable cycle:

1. Current agreements approach expiration / renewal dates.
2. Both sides realize they’re entering a negotiation period.
3. Customer begins to posture: “There’s no way we can pay you what we’ve been paying you the last contract period. We’re looking for a loyalty discount.”
4. Sellers respond: “Due to materials and cost to serve inflationary pressure, prices must adjust above last year’s pricing.”
5. Customer communication is routed through supply chain or procurement teams, cutting you off from direct channels with business leaders, and applying price pressure.

These fear tactics are predictable, and at this stage it’s important to be ready to negotiate with backbone. You need to be able to stick to your value throughout those conversations.

In this instance, your customer is playing poker with you. They’re trying to posture as a price buyer without compromising on their demands for premium solutions. They send you through this barrage of tactics because they want you to lower your price. Understanding your value and your walkaway price is critical to be able to negotiate properly.

Sellers must prepare targeted strategies based on their customers’:

• Needs and what they value
• True buyer type
• Role in the buying center

And ensure they’ve planned:

• What pricing is commensurate with value delivered
• Key walkaway criteria
• Give-Gets tradeoffs for when discounts are requested, based on the value provided to the buyer

These tactics all serve the purpose of keeping your price and value aligned. If your customer requests a discount, you must take away something of value.

In this negotiation process, if your customer is truly saying “cost minus 30% or we’re done,” and they refuse to accept a lower-level product or service (which a price buyer would accept), then they’re probably a customer you don’t want to have. Knowing your walkaway price is important but sticking to it is critical. Eliminating bad customers from your environment means you’ll be more profitable. Also, in the case of price buyers, if you ever want the customer back, you can always lower your price and they’ll return.

During the pandemic, the CEO of a large IT reseller downsized from 600 customers to 230 customers – on purpose. While the business saw less revenue in the short term, they were able to become more profitable in the long run, increase their customer service for the more valuable accounts, and maybe best of all, they retained all employees, leading to a happier and more engaged staff. We’ve been told that the customer is always right, and we need to do whatever it takes to gain and keep a customer. But in many cases, our teams and profits suffer by putting up with these tough relationships that don’t ultimately serve the business.

When teams are freed from those dynamics, they’re able to focus resources and time in more useful places to grow larger and more profitable accounts for the enterprise.

How to protect your pricing power

Once you’ve created pricing power, the focus should be on systems and processes that will allow you to keep up with the rate of change in markets, customer needs, and new competitors. This is your opportunity to build an enterprise based in value to maintain the lead over time. When ongoing improvement is not properly sustained, leading companies get taken out by disruptors and lose their position in the market.

 

Figure 5: Matrix for understanding pricing power through the lens of
go to market execution and level of differentiation

Focus on customer lifetime value (CLTV). For many, this looks like creating a monetization path for customers over time, incenting higher use and an upgrade path up and across products and services. This often also includes a mindset shift in looking at customers as long-term relationships in which you will help them solve their problems instead of selling services to them as a transaction. Those are the companies who learn how to monetize customers in more than one way.

Awareness of competitive actions and new entrants. Typically, we see companies get competitor information from public sites and ex-employees who have moved over. These methods tend to be one-off and only harvested because of a specific need, often providing stale information. Very few companies have this as a process to monitor competitive capability development, M&A activities, feature rollouts, new product development (or new product introduction), and pricing over time. It’s important to note that all information about competitors should be obtained legally and based on available public information.

Monitor customers and markets. Market drivers and value drivers should be monitored on a specified and regular cadence, typically through either a survey-based methodology and/or in-depth customer interviews. The more fragmented your industry is, the more likely you will need to use a survey methodology. The cadence is determined by how often your industry or vertical changes. Most companies we work with are in verticals that change annually, but here are a few indicators for cadence:

• 1. How often products and features are typically released to your market
  2. Significant change in typical negotiation rates (e.g., greater than 10%)
  3. Higher than typical change in market share
  4. New entrants gaining market share at a rapid rate (e.g., more than 5% change)

Keep in mind, value typically changes faster than price. When making heavy investments in product development, companies often do not make the same investments in training people to capture the commercial value. Equally as important, when they don’t know what their differential value is, they have trouble allocating resources in the right places.

Differential value increases faster than price

Figure 6: Innovation grows more quickly than most companies adjust their pricing,
leading to misalignment between price and value

This also presents as misalignment with the market. Two things could be happening:

1. You could be misaligned because your value is growing, and your price hasn’t. You become undervalued in the market,OR
2. You could be misaligned because your competitors are coming up with new features, your customer needs are changing, and your differentiation is dwindling fast. You’re not changing price, and you’re probably bleeding market share.

Those who can stay on top of these changes, and see ahead of them, will drive more frequent (and potentially smaller scale) changes in their innovation and packaging to best serve customer needs.

Defending your enterprise against disruptors and ankle biters

Businesses fail to continuously build pricing power when they don’t see a pricing problem. It’s often masked by high prices or general brand recognition in the industry. The business appears to be winning and often has decades of momentum behind it – particularly in longstanding industries.

These are the industries where we see adjacent tech companies come in and start taking share because the incumbent did not know how to maintain their pricing power. It requires continuous work and is not a mountain that is conquered through one project or activity. Companies that treat these measures as one-time events are the ones that are primed to be taken over.

We’ve all seen large companies fall asleep at the wheel thinking no one can catch them. Think about Zenith, the dominant TV manufacturer in the 1950s and 60s who couldn’t keep up with the new entrants of the 70s and 80s. Zenith’s market share began to decline in the 1970s as Japanese and South Korean companies began to manufacture high-quality televisions at lower prices. Zenith’s stock price also began to decline, and by the early 1990s, the company was in financial trouble.

The company went from $1.5B enterprise value ($10B equivalent in today’s dollars) to being sold for $200M, a loss of 87%. That’s the cost of complacency and not striving for continuous pricing power in your industry.

The key: Ongoing measurement

The biggest change for most commercial teams will be focusing on the long-term and dynamic nature of their value drivers. We’re trained to deliver for shareholders this quarter, this year, the immediate results. Many businesses treat pricing and value measurement as a one-time project. But as technology evolves (e.g., generative AI), the rate of change across industries is exponentially increasing. Companies must be able to change with (and ahead of) customer needs.

This requires continuous monitoring – especially in the context of market forces like interest rates, currency fluctuations, or other dynamics that could impact the industry.

Things to monitor that could lead to a change in value:

1. Market: economic indicators, Producer Price Index (PPI)
2. Competitors: new product, feature release, acquisition, partnership
3. Internal: product roadmap, what you’re doing badly, what services are failing, customer impact as negative differentials, churn, price realization
4. Customer needs: dynamic and long-term value drivers

All need to be based off one platform/thesis so they can lead to actions that drive competitive positioning and value communications, feeding back to product team and innovation priorities. Having one without the context of the others can give misinformation (e.g., “my product team is good at understanding customer needs” but doesn’t know what competitor is doing). A sign of a good company is understanding customer needs and building solutions against that need.

How do you meet that need relative to your competitors? That is the definition of differential value. How do you use that info to build value for customers? Have you set price in a way that shows value? Have you created packaging and offering tiers that effectively fence that value? Does your sales team know what messaging to communicate to sell properly so you don’t erode value?

A common pitfall in innovation is when a sales rep request, e.g., “we lost a deal because of X feature,” drives the product team to build that new feature. It moves up in priority, especially when it’s a senior leader. Then there’s no market assessment, there’s no plan to monetize the feature, and companies don’t realize the benefit of the feature. It’s just a siloed workstream without knowing the broader market need. Have you talked to other customers about this? How does it compare to competitors? How are you going to make money off of this?

There isn’t one single answer, and multiple things must be addressed all together: strong product, differentiation against competitors, and ability to drive price realization through the sales organization.

Designing sales governance

If the company is measuring sellers via performance dashboards, those sellers need to have tools to support building and protecting the organization’s pricing power over time. This could include battle cards, access to coaching, access to economic value modeling, and value messaging per buyer type / selling scenario. It also includes capability-building activities like one-off training, ongoing application, and new learning modules.

Drip value messaging must be incorporated with customers. When left to the time of deal structure, value can often take a second seat to price and other contract elements, leading to significant loss in deal size. Companies need a process to create and refine their value messaging, measure themselves against it, ensure sellers get feedback from the customer, and use the feedback to update pricing/product/marketing teams.

Considerations for governance:

• Customer performance: establish KPIs on customer churn, buying behavior, how the customer is transacting with us and how it’s the same or different from last year or quarter
• Sales performance by activity: talking about value, asking value-driven questions, using the tools given, taking the training and using the coaching available
• Sales performance by seller price to their customer base: escalation of price exceptions, discounting (behavior by person-driven), upsell/cross sell
• Use of value throughout the organization: Where are we doing this? How often? Are we using it well? Are we getting in front of our customers to get their feedback often enough?
• Overall price performance: discounting, escalation of exceptions, market KPIs that could affect demand, competitive capabilities to understand that effects price, value drivers, customer research

Remember, markets are always changing. Your competitors are always coming out with new features and benefits for their solutions. Customers’ needs will continue to evolve. It’s essential that you set up processes for tracking the right metrics, monitoring value drivers, and aligning the go-to-market teams around them so you can change to best meet customer needs.

A rising tide lifts all boats

The companies that lead the future in their industry are taking continuous steps and micro-steps for sustaining innovation. They understand the changing/future needs of their customers – where they’re happy, where they’re not happy – and make improvements on an ongoing basis. That intimate alignment with customer needs will drive and elevate the industry beyond just profits. Following this framework will allow companies to have continuous success and to build an enterprise that will last the test of time—and a precedent for others to follow.

The future of industry-leading companies is the value-based organization. Those companies will have an ongoing process of understanding customer needs, using that understanding throughout the organization, understanding competitors’ capabilities, and having a process to absorb that and know how to react to those things – and how to build and go to market relative to those changes.

Those who can identify those future needs and prioritize dynamic value drivers, address them faster and more effectively than competitors, will see a competitive advantage that will drive the entire industry forward for years to come.