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What is Pricing Management?
Pricing management is the process businesses go through to set prices, create a pricing strategy, and optimize it over time. To manage pricing, companies consider market dynamics, competitor pricing, and operating costs to determine a price that reflects customers’ perceived value of the product. Ideally, this is also a profitable number.
From start to finish, pricing management involves a number of steps:
- Gather information from competitor pricing, customer data, price elasticity, purchasing power, and several other factors to learn about market trends and customer preferences.
- Compare the data to your product’s market positioning and differentiation to set basic prices for each item.
- Create a pricing structure based on the type of product, your company’s growth strategy, and how you want to market it.
- Develop a comprehensive pricing strategy, including plans for discounting, raising prices, or introducing new tiers for existing products.
- Monitor pricing performance in real-time using analytics tools and customer feedback mechanisms.
- Make ongoing changes as markets shift and more data becomes available.
There is no “correct” price a company can set for its product or service. In fact, the optimal price today probably won’t be six months from now. Setting and structuring prices is, therefore, an inexact science. That’s where pricing management comes in.
- Price management
- Pricing optimization and management
- Pricing management software
Importance of Pricing Management
Most companies use more than one pricing model.
SaaS companies, for instance, uses flat-rate pricing, tiered pricing, and usage-based pricing. To attract new customers, they often use a freemium model. To retain them, they usually offer some sort of discount for a long-term subscription.
Retailers and ecommerce brands use multiple types of competitive and differential pricing. Seasonally, they run promotions. Customers who buy in bulk pay less per unit. Larger retailers price match all their goods.
When a company fails to price its products effectively, there are countless implications:
- Setting prices too low either leads to missed revenue or customers perceiving your product as ‘less valuable.’
- Setting prices too high turns customers away when they can’t justify the cost for the value.
- A pricing structure that’s impossible to understand doesn’t convert new buyers.
- Missing price tiers severely limits your pool of potential customers.
Pricing management answers the ongoing questions of whether a business is setting the right numerical prices, structuring them in such a way that customers perceive them as fair, and leaving room for profitability. Since market conditions are continuously changing, these questions can only be answered in real-time.
In that sense, pricing management takes a lot of the guesswork out of setting and structuring product pricing. Since it’s an iterative process, it’s focused on chasing the best possible pricing outcome for the business and its customers.
Price Management Challenges
Competition and consumer behavior are constantly changing. The pricing landscape is dynamic, with multiple forces (customer preferences, market dynamics, competitors moving prices) impacting it at any given time.
Here’s a look at some of the most pressing challenges with pricing management:
Understanding Market Dynamics
Pricing management helps companies understand how to price their products in this ever-changing environment. But it’s also a challenge because making pricing decisions based on fast-moving data is inherently error-prone, especially if some of the data is inaccurate, siloed, or misaligned.
Pricing significantly impacts how a product is sold, how well it sells, and whether buyers think it’s valuable. Since sales, marketing, customer success, and product teams work with disparate systems, one small issue with integration or data management could result in companywide pricing discrepancies.
Data Management and Integration
Businesses often struggle to gather, integrate, and interpret the vast amount of data necessary for effective pricing management. Data governance is the biggest challenge here. Companies need to ensure that all data sources are correctly integrated and the right users have access to the right information at all times.
AI-powered analytics platforms might seem to be the answer here, but it’s deeper than that. Most executives (67%) say they aren’t comfortable accessing data from advanced analytics systems. Instead, they prefer to make decisions based on intuition.
Most execs still work off intuition for plenty of their high-level decisions. Pricing is one of the most common areas to receive this approach (just 6% of software companies say they’ve done sophisticated pricing research). It’s also one of the most error-prone.
Intuition, while clearly helpful in some scenarios, can be damaging when it comes to pricing. It’s difficult to accurately predict how changing market conditions and customer preferences will affect pricing decisions over time. Depending on the size of the company, one small pricing mistake could cost thousands (or millions) in monthly revenue.
Counteracting Price Discrimination
Pricing discrimination is when companies offer different prices for identical goods or services based on customers’ characteristics and preferences. It’s extremely helpful for penetrating new markets, adjusting to local purchasing power, and price matching competitors. Student discounts, first-time buyer discounts, and price breaks are all forms of pricing discrimination, for example.
But it’s a double-edged sword. Price discrimination can lead to inconsistencies in pricing, unequal access to products or services, and most importantly, customer alienation. Businesses have to use insights and data gathered from customers responsibly instead of exploiting their preferences.
Balancing customer expectations and profitability can be tough. Data from Latka indicates that businesses spend anywhere from $0.28 to $0.94 on average to earn $1 in net new ARR.
There are plenty more costs to running a busienss than customer acquisition. While early-stage companies often forgo profits in the name of growth, established companies need to be aware of their margins.
This gets tricky when setting prices, especially in competitive markets. The only way to offset the costs of selling at a lower price to meet demand is operating more efficiently. Some companies will be pushed out of their space solely due to their inability to function more sustainably.
For businesses with an international customer base, deciding on price adjustments to account for differences in purchasing power parity between countries poses a challenge.
B2C companies are especially vulnerable. Since it’s impossible to control the markets in which they operate, international pricing has to be carefully calculated. Companies that don’t localize their prices may find themselves unable to compete with regional players or attract new customers.
Because of their lack of formal pricing research, businesses often struggle with relying too heavily on a competitive pricing strategy. They don’t truly understand the true market value of their product, so they change their pricing frequently in response to competitor actions. This is a slippery slope that confuses customers, erodes brand value, and misses the point of creating and selling a unique product altogether.
In reality, pricing is closely tied to a company’s value proposition and product differentiation. Competitor prices are a good starting point, but they were at least somewhat determined by different market conditions, customer needs, product features, and internal operations. Every company will have its own reasons for pricing products a certain way, and that’s research they need to take up on their own.
Benefits of Implementing Pricing Management Software
The right pricing software can solve the problems of efficiency, silos, data accuracy, and access to information by centralizing all pricing and product information.
Optimized Pricing to Reflect Customer Value
Profitability is the number one benefit of implementing a pricing management software. Done correctly, businesses can refine their pricing to accurately reflect customer value. Doing so improves conversion rates and reduces the cost of customer acquisition. They’ll also have access to sophisticated analytics tools that would otherwise be too costly or labor-intensive to implement on their own.
Operational Efficiency to Improve Margins
One of the biggest challenges with price optimization arises when the optimal price for customers isn’t profitable for the business. Process automation — a central characteristic of pricing management software — helps pricing teams assess data and make pricing decisions faster and more accurately.
As a result, the business spends fewer resources on pricing. Even if the ideal price is less than what the busienss can afford long-term, becoming more efficient in this regard offsets some (or all) of that loss.
Streamlined List Price Management Across Channels
Consistency is equally essential when it comes to pricing. It’s particularly important for ecommerce brands selling on multiple retail sites and B2B vendors working with channel sales partners.
More immediately, pricing discrepancies across different channels result in lost revenue from each purchase from platforms with those inaccuracies. Longer-term, for customers that notice the difference (and there will be some), it will impact the value they see from your product.
Data Synchronization Across Revenue Operations
RevOps teams consistently rank data silos as their #1 challenge. Data that informs pricing decisions comes from sales and revenue numbers, customer success metrics, marketing success, and customer insights for each product.
Even if every team communicates with each other, system integration is the only way to ensure the pricing team is looking at everything they need. Price management software integrates with CRM, CPQ, and other systems to make sure the revenue team can look at market responses to pricing from all angles.
Manage Complex Pricing Strategies
Companies with complex pricing models and product configurations — like B2B manufacturing and SaaS companies — benefit from a pricing management software’s ability to store and manage complex pricing and discounting rules.
This also helps with compliance — the last thing they need is an audit due to an internal oversight. With pricing automation, it’s easy for them to set up parameters for different organizational roles (like sales reps) who have access to specific types of discounts and/or pricing tiers. This way, everyone is aware of the product structure and follows the necessary rules.
It’s also useful for companies with subscription services, multi-tiered pricing, or volume discounts as they can better understand which types of customers need what type of prices to ensure customer loyalty.
Implement Multiple Price Levels and Currencies
Software makes things easy for companies with tiered pricing and international customers. With pricing automation, they don’t have to adjust prices manually for each customer or currency. It’s all built into the software interface.
For example, with software, companies can quickly add an automated discount for customers who buy in bulk or charge $X per additional account member on top of a base price. If that customer is located in Europe, the price automatically updates to euros. When they pay, it automatically converts to the local currency.
Better Pricing Decision-Making
When RevOps leaders don’t trust the data in front of them, they might not make decisions at all. At best, they’ll make misinformed ones.
Integrated software that consolidates customer, market, sales/marketing, and product data for pricing analysis reinstills that trust. Doing so allows them to make informed decisions that help them reach their business goals. This is especially beneficial in highly competitive markets (like ecommerce) where customer data changes quickly and microtrends emerge every day.
Features of Pricing Management Software
Integration with Other Revenue Platforms
Integrating pricing management software with existing platforms is essential for accurate analytics and decision-making. The most essential integrations for accurate pricing decisions are:
- Enterprise resource planning (ERP)
- Customer relationship management (CRM)
- Configure, price, quote (CPQ)
- Revenue operations software
Sometimes, these platforms will have price optimization built in. CPQ software, for example, usually has a pricing engine, which makes it easy to update prices as needed and automatically adjust them based on customer data or market trends.
Dynamic pricing is usually a feature built into pricing software. Businesses use varying levels of dynamic pricing to adjust prices as needed. Basic dynamic pricing may include discounts for quantity or time-based deals, while advanced strategies like personalized pricing and real-time pricing use algorithms to adjust prices based on customer data and engagement.
Pricing management software should be able to take into account a variety of factors, such as:
- Customer lifetime value
- Product availability
- Cost of goods sold
Using these data points, software can automatically adjust prices to reflect customer value and maximize profits.
Real-Time Data and Reports
The best pricing management software systems offer comprehensive analytics capabilities that allow a business to keep up with market changes in real-time. This data can show them how customers respond to different prices, what competitors are doing with their pricing, and where they might need to adjust their own strategy.
In addition, automated analytics reports provide insights into the performance of each product, customer segment, or sales territory so they can make better decisions about their overall pricing strategy. Reports should be easy to filter, customize, and share.
RevOps teams should be able to use pricing management software to run predictions based on historical and real-time data and competitive analyses. The ability to create hypothetical scenarios (e.g., “What if we raised our price by 10%?”) and see results before actually changing the price in reality.
Automated Pricing Alerts
RevOps leaders need to be aware of market changes and customer responses in order to make sure their products remain competitively priced. The best pricing management systems send automated alerts for triggers like a competitor changing its price or customer feedback indicating a change in value perception about your product.
Price Adjustment Rules
Automated price adjustment rules enable companies to set up parameters for different sales reps or organizational roles that are associated with specific types of discounts or tiers. This way, they can ensure that everyone is adhering to the necessary rules about pricing and discounts.
It also helps with compliance as customers cannot be offered prices beyond what you’ve set up for them in your system. Price adjustments don’t have to be manual — when a customer qualifies for a certain discount or tier, the software automatically adjusts the price accordingly.
For all the integrations that aren’t either native (like a CPQ) or built-in (like an ERP software from the same vendor), API connections are a must. They allow you to quickly connect your pricing software to third-party platforms, keeping all the data is synced in real-time.
People Also Ask
What are the four main pricing strategies?
The four most common pricing strategies are value-based pricing, cost-plus pricing, competitor-based pricing, and dynamic pricing. Value-based pricing is based on customer perceived value, cost-plus pricing considers the costs of making and selling a product, competitor-based pricing looks at what competitors charge, and dynamic pricing changes prices according to market demand.
What are the five key elements of pricing strategy?
The five Cs of pricing are cost of doing business (fixed and variable), customers, channels, competition, and compatibility (i.e., timeliness and consistency).
‘Cost’ is the most obvious one, and it considers both fixed and variable expenses associated with the product or service. ‘Customers’ concerns the company’s target market. ‘Channels’ are the intermediaries between the product and its customers customers. ‘Competition’ focuses on how pricing strategies compare to those of rival companies. ‘Compatibility’ refers to the appropriateness of the price and whether it makes sense given the other key elements.