Author: Pete Morelli
Every commercial leader understands the effort that goes into setting the right price, so it’s important not to overlook some basic actions to mitigate the risk of falling short of your goals. In this article, the author outlines three critical steps for determining the effectiveness of your pricing initiatives. Pete is a Senior Director at Holden Advisors. He is a curious and pragmatic B2B commercial leader who partners with clients to identify and monetize high-impact top-line and EBITDA growth opportunities by leveraging pricing strategy/psychology, sales/negotiation best practices, and technology. He can be reached at pmorelli@holdenadvisors.com.
The Pricing Advisor, January 2023
Increasing revenue. Growing market share. Maximizing profitability. These are typically the objectives companies have in mind when making a price change (increase OR decrease!), but when it comes to implementation, what’s the best way to tell how successful the effort was? Every commercial leader understands the effort that goes into setting the right price, so it’s important not to overlook some basic actions to mitigate the risk of falling short of your goals.
If this sounds like a lot of work, fear not – following three easy steps will guide you through answering the question of whether your pricing initiative was successful (or not).
Step 1: What gets measured gets managed
Without a watch, it’s tough to know if you’re early, on time, or late. Measuring commercial effectiveness is no exception. Monitoring a handful of Key Performance Indicators (KPIs) will help indicate if your pricing initiative is on track. While the right KPIs will depend on your situation and goals, here are some standbys to get you started.
Step 2: Choose your methodology
With any measurement effort, it’s critical to compare post-initiative performance against some other baseline to see if the outcome meets, exceeds, or falls short of expectations. The less obvious question is exactly how to go about this. Should we compare against ourselves in a prior period? Or should we pilot a price change with a select group of customers or sellers before a broader rollout? There’s more than one way to think about this, so let’s look at some options so you can assess with confidence.
It’s critical to measure post-initiative performance against some other baseline to see if the outcome meets, exceeds, or falls short of expectations
The Lazy Path
Just measure overall revenue performance following implementation, and cross your fingers that performance improves.
- Pro: Very simple
×Con: There’s no way to tell if your initiative is the reason why things improved. Your business could be seasonal, or it could be impacted by macro trends outside of your control.
Figure 1: This is the least sophisticated performance measurement. It’s better than nothing, but we can do better.
The Better Path
Anyone remember high school science class experiments to test if the heavier marble rolls down the ramp faster than the standard marble? We can do the same thing here, testing if the “new pricing marble” rolls faster. There are a few ways to conduct this experiment, which we’ll call a Good, Better, and Best.
…remember high school science experiments to test if the heavier marble rolls down the ramp faster?
We can do the same thing here.
Good option: Create a pilot group of sellers or customers who will implement the new pricing first. Then, measure their KPI performance against themselves before and after the change. This is a step up from simply measuring overall company performance be- cause you’re focusing on a specific group where the initiative has been rolled out.
- Pro: More focused measurement of results
- Pro: Still easy to measure
×Con: Again, without measuring the pilot group against another group, it could be that the pilot performance improves overall but actually at a slower rate than the rest of the company!
Figure 2: Moving towards more relevant “like for like” measurement
Better option: The twist here is to slightly change our perspective of what we compare the pilot group against. Instead of measuring the pilot group against their own pre- initiative performance, the non-pilot group (i.e., the rest of your company) effectively becomes a large control group. This is a step up from the Good option because we’re able to track the performance of each group simultaneously. In this case, both groups will face the same economic conditions, the same exposure to seasonal effects, and even the same internal company dynamics.
- More focused measurement of results
- Still easy to measure
- Requires separate measurement of the control group, so there is some additional effort
- It’s possible that the pilot group of sellers/customers doesn’t accurately reflect the composition of the broader base, so full implementation could be more or less effective than the experiment
Figure 3: Transition your measurement benchmark from a hindsight to real time comparison.
The gold standard in experiments, whether we’re talking science class or price updates, is when we assign a pilot group AND a control group
Best option: The gold standard in experiments is assigning a pilot group and a control group with similar compositions. For example, we could divide sellers into segments by region and account size. In that case, both the pilot and control groups contain Region A large accounts. The pilot group would use new pricing, and the control group continues with current pricing. The “Best” option provides the clearest insight because we’re able to compare two very similar groups over the same time period. I would be less confident in the “Better” option results because the pilot group is compared to a catch-all group with different compositions.
- The best part about this method is that it minimizes any effects of market differences or seasonality
- Results can be attributed with high confidence to the price change made
- This is a preferred method if price changes are innovative or potentially risky if they will impact a large book of business and there’s a desire to mitigate issues before a broader rollout
- This method requires careful tracking of both groups, so is certainly the most effort intensive
Figure 4: The gold standard measures two similar groups against each other to determine the impact of your pricing initiative with the highest confidence.
Step 3: Run your experiment!
Now that you’ve got your KPIs established along with your pilot group, take the final step and build yourself a quick dashboard to check progress each week. This is a key part of the process because, on average, companies achieve less than half of their planned price increases. Without monitoring this in real-time, you won’t know if you need to make adjustments.
Figure 5: Tracking the success using common metrics should be a straightforward dashboard to monitor and discuss your initiative
What else is in it for me?
Not only does this process work for measuring price changes, but it works equally well to measure the effectiveness of other projects, whether that’s sales training, new product innovation launches, packaging changes, comp plan updates, or even product launches. Once you develop the organizational muscle to measure and tweak performance, you’ll quickly discover other untapped opportunities to flex on.