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What is Pricing Transformation?
Pricing transformation refers to the strategic overhaul of an organization’s pricing approach. It involves adopting and integrating digital technologies to optimize pricing strategies. The key objective is to set prices that accurately reflect the perceived value of products or services, respond dynamically to market competition, and maximize profits.
Also referred to as “digital pricing transformation,” it leverages digital tools to gain precision and agility when setting and adjusting prices. With software, companies can ensure they are charging the right price for each transaction while accounting for factors like customer demand, market trends, and competitive landscapes.
The use of technology is what drives pricing transformation. It enables businesses to compile and analyze large volumes of data for better decision-making, automate pricing processes for efficiency, and customize pricing strategies for different customer segments and market conditions.
In essence, pricing transformation is about moving from a traditional, often static, pricing approach to a more dynamic, data-centric, and technology-driven model. This shift helps businesses to create and sustain value more effectively in a competitive marketplace.
- Digital pricing transformation
- Digital pricing
- Digital pricing strategy
- Pricing automation
Benefits of Pricing Transformation
Solve Pricing Complexity
Most of today’s companies use a hybrid pricing model. Depending on the nature of your business, this could include fixed-rate, value-based, subscription-based, usage-based, and/or freemium components.
Almost half of all SaaS companies, for instance, offer usage-based pricing alongside their regular subscriptions. And this doesn’t include additional pricing tactics like volume discounts or promotional offers.
The result is a complex web of pricing structures, which can be difficult to navigate and manage. This makes it impossible to find the optimal price of each component — e.g., how much to charge for a flat-rate subscription and how much to charge per user over a certain limit for access to a SaaS platform.
To make pricing decisions, modern companies don’t have a choice. They have to implement pricing technology to ensure they’re accurately reflecting customer value and maximizing their profit margins for every element of their pricing strategy.
Improve Customer Experience
When customers feel like they’re getting a fair deal, it boosts their confidence and trust in the company. With pricing transformation, companies gain real-time visibility into the market’s demand for their products or services. This is especially crucial if value-based pricing is part of your model.
By leveraging digital tools to process data on customer buying patterns, behaviors, and preferences, organizations can segment customers better and tailor pricing strategies that align with their customers, reflect the value their products and services deliver, and create a better experience overall.
It’s also worth mentioning your sales process is a huge component of the customer experience. When your sales team has an easy time relaying pricing information to their prospects, it’s a lot easier for them to convey that info to other decision-makers and eventually make purchase decisions. So, pricing transformation removes significant friction from your sales process.
Implement Hybrid and Dynamic Pricing
Pricing transformation technology, as mentioned above, enables companies to implement hybrid pricing.
- SaaS companies use it to find the ideal usage-based and fixed-rate subscription model
- Manufacturers and distributors use it to find the optimal balance between subscription pricing and volume discounts
- Retailers use it to combine regular and promotional pricing effectively
- Service providers use it to price based on service levels, time, and project costs
Some types of companies have to implement a dynamic pricing strategy to stay competitive. Airlines and hotels, for instance, have to adjust their prices constantly based on factors like demand, seasonality, availability, and the date/time of booking.
This is entirely technology-enabled. It’s impossible to adjust prices based on real-time market demand, competitor pricing, and factors that influence price sensitivity without modern, AI-powered pricing engines.
Provide Transparent Pricing
An estimated 91% of customers place incredible value on transparency in your pricing. If your pricing model is too confusing, your prospects will find a vendor who seems more trustworthy, and your current customers will leave for one that’s easier to understand.
Today, every company’s pricing process is remarkably complex. In the end, you need software to give you pricing guidance that enables you to keep written agreements and billing in line with actual transactions (and ensure your customers understand what they’re paying for).
McKinsey research finds that when a company (successfully) implements software-enabled pricing transformation, they typically improve their profit margins somewhere between 2% and 7% in just 3-6 months.
By becoming more agile and competitive, you’re making it easier to sell your product to your customers (read: higher sales efficiency and lower CAC). And, since pricing tools help you set prices that are closely aligned with your operating and delivery costs, you’re also raising your profit margin right off the bat.
8 Steps to Executing Pricing Transformation
1. Assess your current pricing strategy.
Your first step is to conduct a comprehensive pricing analysis.
- Examine your current pricing models.
- Look at your competitors’ pricing strategies.
- Evaluate the effectiveness of your pricing structures in terms of revenue and customer satisfaction.
- Analyze customer perceptions, preferences, and price sensitivity.
To carry out these tasks, you’ll need to look at data from your CRM, sales team, customer surveys, and market research. It helps to align a cross-functional team that includes marketing, sales, finance, and operations specifically for this purpose.
2. Examine your current systems and processes.
Every organization has different requirements when it comes to setting prices and processing payments. So, you need to audit your current systems and processes to understand where the gaps and inefficiencies lie (i.e., where to implement new tools).
- What are your current billing, invoicing, and collections processes?
- How do you currently track customer orders and payment history?
- Do you have a centralized database that stores all your pricing-related data?
It’s also important to look at how ready your current tools are to support changes in pricing. You should evaluate your CPQ and other pricing systems against criteria and benchmarks for your industry.
- Document types and (its ability to generate them)
- Deal types and configurations
- Visual configuration
- Rules- and analytics-driven guided selling
- Approval workflows
- E-signature, quote delivery, and collaboration on the cloud
- CRM, ERP, and data management integrations
Note: Pricing transformation isn’t just about the software you use. Ultimately, your ability to achieve it depends on your team’s competence when it comes to leveraging the tools available to them. A huge part of this assessment needs to be centered around internal alignment, culture, and how streamlined your processes are from a human standpoint.
3. Define your pricing goals.
Your pricing goals should be specific, measurable, achievable, relevant, and time-bound (SMART). Some examples of pricing goals could be to:
- Increase revenue by 10% in the next quarter”
- Improve customer satisfaction ratings by 20%”
- “Decrease overall lead time for generating a quote from 2 days to 1 hour”
Of course, you’ll base these on what you found when evaluating your systems, processes, and current tech stack. With a clear set of objectives, you know which KPIs to look at in order to measure and track your progress toward achieving your pricing transformation.
4. Create a pricing strategy roadmap.
Once you have defined your goals, it’s important to create a roadmap that outlines the steps and timelines for implementing your pricing strategy. This should include:
- Prioritization of initiatives based on impact and urgency
- Identification of key stakeholders and their roles in the transformation process
- Detailed timeline with milestones for each initiative
- Budget allocation for tools, training, and other resources
This is where alignment between your finance, marketing, sales, and operations teams really becomes crucial.
- Finance will provide insights into the financial impact of different pricing strategies and tools. And they’ll help with budget allocation.
- Marketing has a big part to play in creating messaging that aligns with your new pricing structure. During this step, they’ll help you understand customer needs and market trends.
- Sales is the main team that’s using your pricing software to set and sell prices. You’ll need to ask them for insights into what they need from it to be able to do their jobs efficiently.
- Operations support the overall pricing process, so you’ll need them to provide insights into how tools can best integrate with your existing systems and workflows.
5. Choose the right pricing tools.
Based on your audit and analysis, you will likely need to invest in new pricing tools or update existing ones to support your transformation goals. When choosing these tools, consider factors such as:
- Ease of use and implementation
- Scalability and customization options
- Integration capabilities with your current systems
- User training and support options
- Cost and ROI analysis
Pricing tools can range from simple CPQ software for small businesses to advanced manufacturing pricing solutions with 3D visualization and AI-driven pricing optimization or SaaS pricing tools that handle complex subscription models. Choose the tools that will best support your goals and fit into your overall pricing strategy.
6. Train your team.
Your new pricing software will only be as effective as the team using it. Make sure to set aside time and resources for training on how to use the tools, what they’re meant to achieve, and how they integrate with existing systems and workflows.
To drive user adoption more quickly, it helps to start testing in the evaluation phase (when you’re selecting vendors). This gives your team an early heads-up on the changes ahead, helping them adapt more easily.
Keep in mind that different teams will require different levels and types of training. So have a plan in place for ongoing education and support.
7. Develop a pricing strategy once you reach full autonomy.
Once you’ve implemented your system, reached multiple onboarding and value achievement milestones, and your team is fully trained and on board, you can build on the foundation of pricing transformation.
In other words, you can start to shape your pricing strategy based on what the software tells you about market trends, customer demand, and your own performance.
8. Test, iterate, and optimize.
Perhaps this goes without saying, but pricing transformation is an ongoing process (like digital transformation as a whole, we’re living through it in real-time). So, it requires constant monitoring and adjustment.
- Collect data on your pricing strategy performance
- Evaluate sales performance and operational efficiency against the KPIs you set in step #3.
- Track customer feedback
- Collect feedback about software performance from team members
- Evaluate the ROI of different pricing initiatives
Based on these insights, make tweaks to your pricing strategy and tools wher or types of content that may be more effective in certain situations. And never underestimate the importance of alignment and consistent communication between departments.
Software Required for Digital Pricing Transformation
Of course, the main enabler of digital pricing transformation is software. You will absolutely need to invest in the right pricing tools if you want to succeed.
The most important tools to consider to for digital pricing transformation include:
Configure, Price, Quote (CPQ)
Configure, price, quote (CPQ) is the backbone of modern pricing. Your sales team will use it to configure complex products, services, and bundles for your customers. Or, if it’s integrated into your website, your customers will work through a product configurator themselves.
Since it’s directly responsible for how your sales team and customers interface with your products and their pricing, CPQ is a core element of the buying and selling experience. So, it’s the most crucial tool of the bunch.
Look for a CPQ system that…
- Integrates with your CRM, ERP, and billing software
- Includes all the features you need, and very few (if any) that you don’t
- Is easy for your team to use and learn
- Uses low-code or no-code automation
- Offers detailed sales and pricing analytics
Depending on the nature of your busienss, you might need a tool that offers subscription management (e.g., if you’re a SaaS company) or one that includes 3D visualization and supplier portal/WMS integration (e.g., if you’re a contract manufacturer).
Business Intelligence (BI)
Business intelligence tools help you collect, organize, and analyze data from various sources across your business. This includes sales data, marketing metrics, customer feedback, internal processes, and market trends.
Your data team will use BI to generate insights that inform your overall pricing strategy, help identify opportunities for growth, and forecast future trends.
Competitive intelligence is all about understanding what other companies in your industry are doing when it comes to their products, services, and pricing. The goal is to identify market trends, best practices, and areas where you can stand out from the competition.
To support your pricing transformation, competitive intelligence tools can help you:
- Track competitor prices and changes over time
- Identify which products or services are performing well for competitors
- Analyze how customers are reacting to their pricing (e.g., through reviews and online chatter)
A good competitive intelligence tool will also help you keep track of market share, brand awareness, and other factors that indirectly impact your own pricing.
Pricing analytics tools are similar to business intelligence but focus specifically on pricing-related data. They help you analyze sales performance and trends, customer behavior, competitor prices, discounting activity, and more.
Pricing analytics can provide insights into:
- Which products or services are selling well and which aren’t
- Where you’re losing deals due to pricing
- How discounts impact the bottom line
- Pricing trends and market demand for your offerings
This data can then inform future pricing decisions and help identify areas where further optimization is needed. Some CPQ systems come with built-in pricing analytics (as do some BI tools and billing software), but there are also standalone tools available.
The Future of AI in Pricing Transformation
The momentum is already there for digital pricing transformation. And, as AI continues to evolve, its impact on the business world will only grow.
Here’s a quick look at some of the ways AI is being used to improve pricing strategies:
- Real-time pricing optimization (using machine learning algorithms to track demand in real-time and adjust prices accordingly, common in airlines, hospitality, and ecommerce)
- Dynamic pricing (analyzing customer behavior patterns and price sensitivity to optimize prices in the moment)
- Predictive pricing (using historical data and AI to forecast demand, sales performance, and competitive activity)
- Contextual pricing (leveraging multivariate data to personalize offers and quotes)
- Profitability calculations (i.e., for profit maximization when quoting complex products)
Modern pricing software also enables you, as a business, to be more transparent with your customers when it comes to product pricing.
If customers can’t understand what they’re paying for, they’re less likely to think they’re getting a good deal. Today’s pricing tools also make it easier to reflect product value in your pricing. Since there’s a close relationship between product value and price, this leads to a better customer experience and long-term retention.
People Also Ask
What are the advantages of digital pricing?
The most significant advantage of digital pricing is automation. Without technology, pricing would be too time-consuming and error-prone to manage. Digital pricing also allows for more precise pricing strategies and greater adaptability to changes in the market and customer demand, many of which happen instantaneously.
What factors influence pricing strategy?
A variety of factors, including market demand, customer behavior, competitive activity, product costs and value, and business goals, influence your pricing strategy. A successful pricing strategy considers all these factors and relies on data to make informed decisions.