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Thursday, October 10, 2013

Value-based pricing: Still worth the trouble?

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In the face of rising commodity prices, it’s tempting to make the break from value-based pricing in favor of a simpler approach. But is that really the most effective response?

There’s no way around it: the prices of commodities are rising, seemingly with no end in sight. The result is that many companies are feeling the pinch when it comes to pricing. Raising prices may stir up a backlash that can leave the business hobbled. But standing by and hoping for a desired outcome while prices continue to rise can chip away at margins until nothing’s left. Are indexing, surcharges and fees an effective response to the rising cost of commodities?

Here’s the debate:

Value pricing is too complex for us to deal with now. Just tie it to an index and let’s move on.
Even if we could master a value approach to pricing, it would take more time than we have. There’s also value in clarity, which is what indexes, surcharges and fees can deliver.Indexing is just going to move the complexity somewhere else – like sales.
Indexing is easy enough on paper, but think of the impact it may have on other parts of the business. Is your sales force ready to handle it?Indexes, surcharges and fees only put more focus on cost.
Focusing on cost comes at the expense of our ability to sell value. If we give that up now, it may be gone forever.We already sell on cost. What does value have to do with anything?
Hello? Cost is already the subtext for every sales conversation we have. Value pricing doesn’t apply to us.Switching to surcharges and indexes is only a short-term strategy.
Plus, it can hinder your ability to grow, even as it introduces new risks (such as price volatility). That’s not worth it, no matter what the short-term benefits are.If we don’t figure this out in the short term, the long term won’t matter.
We need to solve our pricing issues now – particularly rapid increases in commodity materials – so that we can move on to other issues.Indexes and surcharges result in too much transparency.
Do we really want to give customers and competitors a clear window into how we price? We shouldn’t give up that control.Since when is transparency a bad thing?
Does linking prices to an index or adding surcharges and fees really leave us that exposed?We don’t have the brainpower to make value pricing work.
We can’t all be Olympic gold medalists. Let’s stick to what we’re good at.Nobody is great at this today – so value pricing can give us a leg up against our competitors.
That doesn’t mean we should just wave the white flag and move to indexing, surcharges and fees. Our competitors certainly aren’t. And when they get great at value pricing, they’ll eat our lunch.

Julie Meehan, Principal, Deloitte Consulting, LLP

First things first. This isn’t necessarily an either/or proposition. Indexes, surcharges and fees have their place – often right alongside value pricing strategies. There are probably some products in your portfolio where index-based pricing makes a lot of sense.

But…

I’ve seen companies take an overly enthusiastic leap to indexing, only to find that they’ve given up options along the way. Don’t get me wrong, the relative simplicity of indexing can be refreshing. But relying too heavily on indexing, surcharges and fees can result in a significant loss of control. Suddenly your customers are able to see the elements of your pricing strategy much more clearly – which means they’ll likely start maneuvering to take advantage of it quickly. And what happens when commodity prices slip? Customer expectations may shift just as quickly, possibly leaving you in a less desirable spot than before. There’s just some inherent risk that comes with the territory in indexing.

A key to leveraging value pricing is having a clear understanding of the differences between the cost and value components of your price. From there, you may be able to find some components of your price that you can tie to an index, or cover with surcharges and fees. But what’s left is a real competitive advantage for you – if you manage it correctly. Value pricing is still one of the most powerful ways for companies to keep their edge, even in the face of rising commodity prices. And despite many reports to the contrary, it’s not rocket science.

Don’t give up on value pricing when the going gets tough. Dig in.

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Overview: Strategy & Operations, Pricing and Profitability Management

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Is user empowerment worth the disruption?

Employees are expecting access to ever-more-sophisticated technologies in the workplace. Empowering users with such tools can generate value, but is there a point where CIOs should put the brakes on continual technology disruption?

Not too long ago, employees began asking CIOs to make business systems user-friendly. Shortly thereafter, these same employees began expecting CIOs to provide the kind of simple, innovative technologies they became accustomed to in their personal lives. Today, they want personal and contextual functionality and an IT environment in which everyone can use effective apps to accomplish their tasks – regardless of being internal or third party. Some claim that empowering users in the workplace with leading-edge technologies can spur productivity and efficiency. Yet, others may wonder if the ongoing disruption caused by largely unproven innovations may be too high a price to pay for such gains. Should going “all in” with user empowerment be a business imperative?

Explore all sides below by clicking on each button:

We’re stretched too thin as it is.
Even if we could create things like contextual and personal functionality, IT groups don’t have the capacity to support and maintain them on an ongoing basis.Empowering users with leading-edge technologies may be easier than you think.
Not every new solution requires a reinvention of the IT wheel. In some cases, persona-based layers can be added on top of existing systems.Introducing a host of new technologies could degrade system integrity.
Maintaining the integrity of enterprise systems and data is already challenging. Now you want me to introduce unproven technologies to this environment? The net result will likely be bad systems and bad data.The longer-term benefit may justify the short-term pain.
Yes, unproven technologies can increase certain IT risks. But by embracing innovation and experimentation now, you can gain a wealth of experience with leading-edge technologies that late adopters are unlikely to have.We’ve already done enough to meet employee requests.
The company has invested considerable resources to make our systems more user-friendly, and at some point we have to draw the line between supporting our core business model and becoming an in-house application development shop.Creating user-friendly systems and actually empowering users are two different things.
The idea that business systems should be easy to use is yesterday’s news. The future lies in harnessing leading-edge innovations to meet each user’s particular business needs. You need to do both.Most employees at my company are not ready to use leading edge tools.
Why introduce so much disruption just to please a handful of “power users”?The theory that “if you build it, nobody will come” is unfounded.
Many business users are likely to follow the “power user” lead and use the technology that can help them work more effectively to achieve their goals.

Nelson Kunkel, National Creative Director, Deloitte Consulting LLP

What may separate great companies from merely good ones is their ability to identify and take bold steps towards promising opportunities on the horizon, rather than waiting for a sure thing. These pioneers understand that even with the risks involved, early experimentation and successes with new innovations can lead to lasting competitive advantage.

Such can be the case with user empowerment. We are shifting quickly from an Internet of Web pages to an Internet of things – of connected objects. Organizations should leverage innovations to interact with entire systems in new ways, absorb and analyze vast amounts of data, and socialize with others. It’s true that some of the innovations that more advanced users want their CIOs to provide today are unproven and may carry some risk. What’s more, not all users are likely to embrace leading-edge solutions immediately.

But consider this: In today’s economy, it can be far riskier to trail your user base than to be ahead of it. At an enterprise level, it is important that CIOs consider empowering more demanding users; viewing them as an indicator of the desires of the rest. To do the opposite – or to take a careful, measured approach – could frustrate the leading edge and contribute to losing critical talent.

Today, user empowerment is a significant business opportunity on the horizon. CIOs and other leaders can seize it by thinking beyond content-centric architectures and systems that match the company’s organizational structure, to context-sensitive design systems organized around the specific needs and circumstances of each individual. They should consider abandoning the persona-driven and compartmentalized view of what it means to be merely user-friendly, and consider instead architectures and experiences that can adapt to the unanticipated aspirations of individuals.

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Overview: Technology

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