Digital transformation is a broad term used to refer to significant technological changes across human resource, supply chain, customer service, marketing, and finance systems. As a company digitizes, they can increase their capability to monetize assets and optimize their existing data to better inform pricing decisions (and value capture). This in turn makes pricing a prospective part of the transformation journey, as the author explains. Kevin McCabe, Director of Pricing Strategy for Iris Pricing Solutions, leads the pricing strategy practice and is responsible for overall Project Management and Strategy Development. He has over 20 years of pricing experience helping build value and pricing capabilities in Fortune 500 Companies. He can be reached at kmccabe@pricingsolutions.com.

The Journal of Professional Pricing, December 2021

Pricing transformations are implemented by businesses in order to capture value more quickly and effectively. It goes without saying that pricing excellence is dependent on accuracy, attention to detail, and velocity – which are all made possible by Digital Pricing Transformations.

Companies are increasingly employing price optimization and management strategies throughout the entire value chain. Businesses may underestimate the relevance of digital tools, overemphasize them, or design ad hoc solutions that don’t work well together as a result of their inexperience and bias. Subsequently, even companies keen to engage in technology struggle to adopt their pricing strategies into something that is value-based and reflective of value to their customers.

Digital transformation is a broad term used to refer to significant technological changes across human resource, supply chain, customer service, marketing, and finance systems. A digital transformation can take many forms, from adding e-commerce options to providing new digital offerings to moving internal systems to the cloud. It should also be an opportunity for innovation and better pricing. As a company digitizes, they can increase their capability to monetize assets and optimize their existing data to better inform pricing decisions (and value capture). This in turn makes pricing a prospective part of the transformation journey.

This paper will focus on how to combine digitization, transaction-level data and smart pricing. The potential impact of doing so is immense. In fact, companies who do so consistently enhance EBITDA by 3-5%. We will explain how. Specifically, we’ll look at how pricing, marketing, and sales can benefit from better data capabilities and use that data to increase customer segmentation, simplify the current pricing environment, reduce noise in the pricing/sales process and better understand consumer behavior.

Monetization

Too often businesses take a digital innovation to the marketplace without changing their traditional pricing models. In fact, because the innovation is digital, there is a significant opportunity to identify the crucial data which could improve segmentation and pricing models in the future. The profits captured through innovation when pricing is properly considered are significant. Mulling over the digital data elements that can be captured as part of an innovative product or service offering enables the organization to change pricing much more frequently, with less administrative effort, and this more dynamic pricing capability will quickly optimize profits.

For businesses with a long successful history of manufacturing and selling components or machines, the monetization of data can be missed. In 2017, a software company that sold both hardware and software was faced with a daunting question – why was there no increase in ROS despite the annual investment in making devices sold to the building and airport security operations smarter? The sales team and dealer network were designed to make money installing many small components; the smart software was just a plug-in for monitoring. In fact, these components with the right intelligence formed a smart network capturing critical security data. After a 3- month pricing strategy assessment and design, and feeling the weight of change and opportunity, the business in a short period of time shifted their focus, purchased a smaller firm with the requisite data focus, and quickly entered the SaaS marketplace.

More Data!

Dynamic pricing is often a long-term vision, especially for B2C companies. To begin that pricing journey, you’ll need access to more data. Both consumer and industrial companies are investing in innovations that are dependent on increasing their digital capability – the collection, consumption, and analysis of the data. When IoT or cloud-based solutions are included as part of a company’s value creation, capturing that new value they are bringing to the market will require changes in the existing pricing environment. Ideally, these innovations prompt changes throughout the organization as well as the customer’s experience and buying behavior.

A successful transformation requires auditing internal data and systems, considering what external data is needed, and identifying new capabilities that can better meet the organization’s needs. When doing so, consider each aspect of change through the many lenses of your organization. When the right infrastructure elements are in place to enable the collection of data that’s required to inform pricing decisions, the process will provide measurably improved profits with sustainable performance improvement.

While the exact data fields required will vary by industry and organization, it generally requires the identification of fields that will signal relative differences between customers and products to inform pricing strategy and tactical pricing decisions. Highly skilled teams will generally put their attention on transaction-level details including customer and product attributes, net margin details, customer profile, and cost-to-serve elements.

Client Example

There’s no reason to wait. There is much more data available to organizations than ever before; that is if you have the systems in place to collect that information. You also need to collect the right data and act and react to that data appropriately. In some cases, the data may already exist in other parts of the company but may be neglected where pricing decisions are made.

Why wait? Start collecting and using that data now. One SaaS company had collected a lot of data around software subscriptions as part of their digital transformation, but there was a data gap when it came to actual software usage. That client is now working on building capabilities to understand how their customers use their software, which will further inform their pricing optimization decisions and ensure a sustainable pricing capability moving forward.

Even before you expand your data-capture capabilities, there are some analytical and visualization tools you can use immediately for the discovery of pricing opportunities (like Tableau and Power BI). Focus on key data analytics, customer value drivers, pricing transparency, and pricing controls as a place to start.

You don’t know what you don’t know. Of course, you don’t know what you don’t know! That’s one of the reasons these transformations are so tough. Most businesses don’t know what information they have or need that could improve their pricing practices. Consider the types of data previously mentioned and ask these four questions as part of your journey:

What should you do if you don’t have the data you need to address pricing?

In our experience, some data usually does exist, it just hasn’t been applied to pricing. To supplement whatever data you have, there is also the opportunity to conduct market and value research. Doing so can provide insights like how price-sensitive customers react to your most expensive and least expensive products or services.

What should you do with the data that you already have (or will eventually have)?

The data that will factor into your pricing decisions and how you use that data will change depending on the product or service that is being sold. For example, if you’re selling custom manufactured versus highly standardized widgets, then the data points you should collect and use to inform your pricing strategy will be different. That’s why there’s no one-size-fits-all approach to pricing. Each pricing transformation companies undertake is unique and requires a customized approach.

What additional pricing-related data should you consider?

There are likely data points that you may not have even considered that could increase your pricing power. These include:

• Volatility of market,
• Site location,
• Demographics,
• Buyer behavior type, and
• Velocity by product (how frequently a customer orders).

Like many companies, you may realize through this journey that you need a lot more information about how customers use your products or services. We identify the data needed to conduct the level of analysis that will best guide the pricing transformation. The result is a new trajectory for pricing’s contribution to profit performance with an opportunity to manage price not once a year, but every minute of every day should you choose. With a pricing transformation in place, you’ll be able to identify pricing power, drive smarter promotions, and increase the frequency with which you can make pricing changes, amongst other benefits.

What can you do now, while you gather the needed data?

In the meantime, there are other areas to analyze that will drive revenue and recoup costs, like reducing price leakages, managing cost-to-serve, and establishing greater pricing controls across the organization.

Getting your data in shape

For many organizations, a lack of data isn’t the problem, the bigger challenge is the inability of different internal systems to communicate with each other. This is especially the case between enterprise resource planning systems (ERPs) which govern transactions, orders, invoices, etc., and customer relationship management systems (CRMs). When these two systems don’t communicate with each other it becomes difficult to map transactions to customer data (which can inform your pricing decisions).

Consider this scenario of pricing flexibility that comes from marrying different systems across your organization: With systems that include direct feeds from your ERP, your salespeople can access real-time information and correctly forecast year-end performance against goals under discount scenarios for your customer base. You can accurately identify the discount range to work with.

Attach a customer ID to individual transactions

Having a customer ID attached to individual transactions, especially for those in e-commerce or the restaurant industry through loyalty programs or food delivery services, is very valuable for price optimization. With purchases being made online, it is possible to know each individual customer and what they purchase, data that is a gold mine for pricing and other elements. There are so many things you can do to drive revenue when you know who is behind each ticket.

The challenge is collecting, managing, and making sense of this data, and companies that do this well have a huge advantage. Starbucks, for example, has had a loyalty program in place for many years which has given them a lot of valuable information about their clients. As of 2019, their rewards program had 16 million active users, and the company attributed 40% of its total sales to the program (source: Digital Initiative). Available on mobile devices as the Starbucks app, the investment the company made in creating a mobile app added value for consumers and ultimately increased their frequency and spend (source: Digital Initiative).

We are seeing value creation initiatives in manufacturing through the Industrial Internet of Things (IoT) necessitating this level of end-user activity tracking. One example is monitoring sensors that are now commonly placed on hardware assets so that a company can access more operational and telemetry data. This is a new area of value creation that is only optimized when there’s a corresponding change in value capture. In this example, it’s important that the company also set up processes to collect and build offerings on the value of the data that’s being produced by monitoring devices.

Collect real-time data

Organizations will ideally run their pricing through digital platforms, which will enable them to make informed pricing solutions very rapidly. For example, with greater pricing precision a company knows exactly when and how to run a promotion (day, time, length, and geographical locations). On the other hand, companies that lack pricing precision won’t know how effective their promotions are because their data isn’t returned until after the promotion is over. Including value capture as part of your value creation can enable you to have real-time insights that will inform future pricing strategies.

Monetize digital offerings

Innovation often spurs an increase or change in digital offerings. Many companies believe that commercial and monetization models are changing; it’s not so much that the model itself is shifting, but more that the transactions (and details!) across direct, distributor, e-commerce, and omni-channels are changing.

Businesses have traditionally worked with distributors or manufacturers and are now looking to get into Software as a Service (SaaS). Their challenge is that they need to know more and understand the end-user better to make subscriptions and SaaS work, yet the legacy customer relationship, still active today, was not built to collect the data needed to inform them about the customer at the level now needed.

The solution is to look at pricing in tandem with digital offerings. For example, the medical devices industry is moving rapidly into the IoT space, which requires a digital capability. The usage data that comes from IoT is good information for value-based pricing, which many companies in the industry are missing. So, although these companies are exploring IoT to improve products and create value, they haven’t necessarily thought of these shifts in terms of the change in type of value delivered to the customer and how to optimize value-based pricing. They are either missing out on monetizing their investments in new products and services or are looking to monetize at a point that’s rather late in the customer journey.

Using Data Science

When pricing considerations are included in your value creation, you can build a roadmap to improve your pricing year over year so that when you are fully digitized, it’s not an expensive process to gather the pricing-related data you need. We name this activity value capture or design-to-price. Of course, this long-term strategy requires you to harness the power of data science while increasing your data capabilities. When you strategically use the data you’ve collected, you’ll uncover deeper insights that drive more precise pricing. When data science is optimized, your company can spend more time on the analytics of predictive performance while reducing the number of hours spent administering pricing.

Considering value capture in your digital transformation initiative will reduce the confusion and complexity of pricing within your business itself while increasing pricing precision and sophistication.

The Key Take Away

According to the International Data Corporation (IDC), worldwide spending on digital transformation will reach $2.3 trillion in 2023. Those companies who have already invested in a digital transformation journey may feel concerned about having the available resources –people, time, and budget–to improve pricing strategies, too. Although there’s an investment involved, when you increase your overall pricing capabilities you will ultimately see higher profit margins at lower operating costs.

Pricing is an essential consideration no matter where you are in your journey because that is where you will see the greatest returns and profitability. Looking at value capture now means that your transformation will increase your EBITDA immediately. In fact, a business that addresses the pricing decision-making legacy to focus on value capture will often improve revenue capture by 3-5%…which can increase 20% or more. The time to begin is now.