Daring Caution

Ever found yourself holding back from taking an action that could have a wonderful outcome, worried about what could go wrong?

Sure you have.  You’ve no doubt avoided many mistakes – even disasters – when you did so.

Along the way, though, have you not tried something that you actually could have done, misperceiving it as riskier than it really was?

Me too.  But as a young alpinist, I learned a lesson about what is possible when you think it’s possible.

Baxter’s Pinnacle stands apart from a mountain wall in Grand Teton National Park, Wyoming.  It’s one of the classic technical rock climbs in the park.  My buddies wanted to do it, and its difficulty rating in our climbing guidebook placed it just within my ability level.  So off we went.

The first 400 feet up the cliff went easily enough, but then came a section of rock more difficult than the guidebook indicated.  Worse, falling at that spot would result in a 20 foot drop before the rope would stop me, whereupon I’d be dangling well away from the cliff in thin air.  While not catastrophic, that would have its drawbacks.  I hesitated, trying different handholds and footholds, but couldn’t find the moves to confidently attack the problem.

Having done many routes with the same rating helped me resolve to just get going.  Delicately clinging to the small holds, I made it past the crux without falling and soon ascended to a safe ledge.  I whooped, breathed easier, and anchored to belay the others as they ascended.  What a great day in the mountains!

Two years later came a call from one of those friends. “Have you seen the new climbing guide to the Teton Range?” he asked, audibly amused.  “Remember that climb on Baxter’s that you thought was much harder than the rating?  It’s been re-rated – two levels of difficulty higher than in the old guidebook!”

I had to laugh at myself.  The lower rating in the old guidebook had strongly affected my sense of the possible – made me believe the climb was doable.  And that belief made all the difference in attempting the route and overcoming its challenges.

Business Implications

As the pinnacle climb showed, great outcomes may be out there if we stretch beyond what we reflexively feel is doable.  I don’t want to over-extend the lesson, though.  How do we know the difference between an achievable stretch, and a disastrous gap between aspiration and reality?

This all came to mind as we recently got to know a new client.  The company did analysis last year which led them to believe they could selectively raise prices to improve profitability.  Slow economy notwithstanding, they implemented the increases – with very good results.

Credit them with daring to look for profits through price adjustments, at a time when concern about losing orders on price keeps so many other companies from correcting even their least profitable prices and terms of sale.

Couldn’t more companies do something similar?  After all, pricing improvement can be a powerful source of revenue and profit growth.  A 1% improvement in price yield often delivers 10% or more in operating profit improvement.  And there’s a downside to assuming that the right price for every transaction, on every product/service, to every customer, must be at or below the current price.  There’s enterprise-threatening risk in assuming powerlessness – accepting a buyer’s premise that the only way you can make their company better off is with a lower price.  Such assumptions about price may be costing your company, or one that you know, funds that are urgently needed for surviving and reinvesting in growth.

Yet not all companies are well-positioned to take this path.  How can companies assess whether selective increases would be a canny business decision, or a blunder?  Charge too little, and the company will generate too little profit to thrive.  Charge so much that customers have better value alternatives, and they will shift their purchases elsewhere.  What can be done to get a truer sense of what’s possible with pricing, and get the commercial team ready to take a calculated chance on a better outcome?

To find and act on lower-risk opportunities to address pricing, we suggest:

Convert transactional data into information.
Deep analysis is a great antidote to subjective assumptions and apprehension.  For example: In companies selling to more than a handful of customers, a visual scatter diagram showing prices paid By Product, By Cumulative Volume, By Customer, is great for highlighting variations in actual prices paid.  There’s usually more variation than companies expect.  You can see an example here.  In a scatter diagram, the outliers become visible.  After seeing the prices that various accounts are paying, the team often gains confidence that they can make commercially appropriate judgments on selective corrective actions.

Price exception reports; margin trend reports; and estimates of the economic value of the company’s products/services to customers are also useful in identifying where to take action.

Regularly reviewing these reports and analysis at the senior management level facilitates discussion of where to “set the bar” for pricing products/service by customer type and by account.  It can also spotlight where to value-engineer an offering to hit a lower price point.  And reviews reinforce that company leadership believes that pricing improvement is important.

Assess the company’s power position.
Few companies in B2B and consumer markets are pure Price Takers (where products are true commodities and prices are set in exchange trading) or pure Price Makers (able to set prices with little concern for competitive levels).  We’ve been putting together some considerations for assessing if a company is in a position to make upward pricing moves in the short term.  If you or someone you know would like a copy, please let me know.

Help the sales team with the story.
Share the logic with the team to build belief, then help Sales to prepare the story behind any price increases and changes in terms of sale.

Align recognition and rewards with what’s being asked of the team.
The sales team may undermine the effort if left to see themselves as bearing all the risk of pricing moves, while receiving none of the rewards.  Whether it’s done with compensation plan changes, Management Awards, or other financial / non-financial recognition, senior leadership must ensure that a better pricing outcome for the company will mean good things for the people who help make it happen.

Even in a tough economy, companies can’t afford to assume that their current prices are the best they can do.  Pricing has a significant upside that makes it worth taking careful, manageable risks.

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The foregoing thoughts, originally posted in August of 2010, have been expanded into Robert F. Sherlock’s book Daring Caution: The Executive’s Guide to Pricing Improvement.