How to Use Digital Transformation in Pricing to Boost ROI
In this second part of our two-parter series
, we focus on the impact on companies of not future-proofing their businesses with digital transformation and smart pricing, and the very real risk of them not being around in 10 years! I am once again joined by two Partners from Bain Consulting who are digital transformation leaders and pricing experts: Chuck Davenport
and (Paco) Juan Francisco Jimenez
Listen to the podcast with the embedded player below, read along with the transcript, or on YouTube.
You can also listen on Spotify, Stitcher, or wherever else podcasts are streamed.
If you want to take the discussion offline, then tweet at me (@SwEvangelist) with the hashtag #pricingmatterscast.
Gabe Smith 0:48
Hi everyone, and welcome to episode five of Pricing Matters.
Last time, we spoke with Bain consulting partners, Chuck Davenport and Paco Jimenez, on the impact of digital transformation on pricing, we had so much great content that we actually went well over the allotted time. And we wanted to actually follow up with a secondary session here. Welcome again, Chuck and Paco, thank you very much for joining me again, let’s launch right into this.
Differences in Pricing Across Industries
Let’s talk about some of the kind of similarities and differences in pricing and quote, to order. You know, I started off my career at Cisco Systems and we always thought we were very much different than everyone else. And I think a lot of companies are like that, right? When you, especially good companies that people worked at for a long time and they have this impression like everything’s so different in any other company, or any other industry that I have to build something myself. I can’t have an outside expert come in and tell me anything because they don’t know my business. Obviously, there’s some truth to that, especially when you’re doing certain things that are fairly unique. Like at Cisco, we had far and away the most complex and sophisticated channel program in the world at that time. Right.
So it was really hard in certain areas but at the same time, there were basic things around pricing, and having visibility to a waterfall that would have been great to have. And we didn’t, and we just didn’t have a lot of investment or focus on pricing and price optimization. But when I moved into the software industry, and now I’ve been seeing, you know, so many different industries, companies of different sizes across different regions, you realize that there’s, yes, there’s uniqueness in every company, and there’s uniqueness in industries, but there’s a lot that’s the same across different industries as well. I was actually struck by the first time I started talking to the construction industry, one of our customers is called CertainTeed. And they do a ton of rebates, a ton of shipping debits, just like what we did at Cisco. Because of the go-to-market and the channels that they’re selling through were very similar in the way that they were managing pricing. So you get these parallels as well. So, I thought that’d just be an interesting area since you guys both also look across a lot of different industries and see the similarities and differences.
Chuck Davenport 2:54
I think there are some obvious differences. The biggest single difference is really speed. I’ll illustrate that with one thing. First of all, a long, long time ago, in my pricing career, I actually started writing down sticks and boxes of kind of a standardized pricing process. And I got in my head now an overall end to end process flow. And any industry that I go into, that same process flow can be applied. Now, it’s very generic, and there are customizations that have to go along with that.
And some of the things I think about are like if I’m in a yield management environment, which is very fast, I have to think about my process in terms of time horizons, because I might do different things, three months out, then I do one month out, then I do the day of, and so there’s going to be slightly different activities that I’m doing. And one of the unique aspects of that is that I have to forecast my inventory. And my unconstrained demand. And those are really my two probably unique things that I’m not necessarily taking into account when I’m in a manufacturing environment. As I look at that there are some certain aspects of that that are still applicable.
Like if I think about process industries, I’m still wanting to forecast my demand, because I’m highly motivated to keep my manufacturing facility running at high capacity, because that’s how I get efficiency. And that’s how process industries have run their business for a long time. But they only in the last decade to 15 years, have they started pulling that over to the commercial side of the business and saying, “Okay, how can the commercial side help me make sure that I’m running my business the right way?” So there’s an element of yield management, even in a manufacturing environment.
Another example is if I think about consumer packaged goods, one of the biggest concerns about consumer packaged goods is how do I manage my trade promotions? That’s my lubrication for the interface between the CPG company and the retailer, and ultimately the consumer. And so, as I think about that, yes, there’s a different timeline where I have to make that investment. But it’s still a customer investment that I’m making just like a front end or a back end rebate, or even a discount. All of those are customer investments that I make for a very specific time and for a very specific purpose. That’s to drive volume. Usually, that’s my primary purpose of that. And I still need to have a closed feedback loop that tells me, did I make a good investment or a bad investment?
So that next time around, maybe I reallocate those investments, even though we call them different things, we call the levers different things. And even though if I put two waterfalls from two different industries side by side, they would look very different. Largely, I can map those buckets or at least big sets of buckets together, and they look exactly the same. And so down to the fundamental level, really, the biggest difference among all the industries is the speed with which I have to process information and make decisions. So, if I think about yield management environments where I am making near real-time pricing decisions, and I’m managing by fare class and things like that, in the case of an airline, same set of decisions, different timeline than I’m operating on in a process manufacturing environment.
If I think about volatility of demand, if I operate largely on long term contracts, my volatility of demand does matter. But it’s only going to matter for a certain customer at the point of contract. Whereas if I think about retail fuels, my inputs are going to change, you know, every day and if I had a process that could manage it, I would like to change my price three or four times a day, perhaps. So that volatility of demand, the speed with which I need to change pricing, perishability of inventory. All of those things are about the timeline on which I operate. Not really the process through which that operation happens.
Gabe Smith 7:20
Paco, anything you want to add?
Paco Jiminez 7:21
The only thing I see as a commonality is every single business, one way or the other, is being disrupted digitally. That imposes the need to become faster and digitize processes that you maybe didn’t think you need. One of those is price.
Gabe Smith 7:38
Yeah, I agree. So the speed to Chuck’s point is the speed varies, but all industries need to get faster, right, and more dynamic. So the definition I remember Chuck, you were talking about at PPS when you were talking about dynamic pricing, right, and I actually referred to it in my speech as well because the definition of dynamic pricing is going to vary by industry. So that’s kind of the same point that you’re making right? So what’s dynamic in process is different than what’s dynamic in retail or discrete manufacturing, even per se. And there’s factors that influenced that. There’s also different challenges. And you see a lot of those challenges firsthand and get a lot of interaction with senior leaders. So what are some of the biggest challenges that you’ve seen Paco, maybe maybe you can take that one in terms of the digital transformation and pricing specifically.
“Speed varies, but all industries need to get faster and more dynamic”
Challenges in Digital Transformation and Pricing
Paco Jiminez 8:23
Surprisingly, every day that passes it is not a challenge anymore. We traditionally talked about it as being the major challenge in digital transformation. And that is gonna get easier and easier with time. What is really hard, and still will remain to be hard, is changing people behavior. And we see this in three levels.
One is at the C level, even when I think all CEOs understand the challenge and want to tackle the opportunity, they need a very clear vision and a very clear strategy to feel comfortable, right. So one of the first things is how you can articulate for any specific company what is the full potential of a digital transformation and how you can take that a level below and actually articulate what does that mean in terms of growth, in terms of the overall value of the company. So, they can go and have a good discussion with the board to actually get approval on the vision and on the execution, right, to get to that point is everybody will claim that they want to do this, but in fact, there is no commitment right. So that is one of the key challenges.
Of course, the second becomes, now that you have a business case, a vision for, you know, how this company should transform in the next 10 years, what makes sense to change and what is the value for these organizations that this is the way to go, and this requires a fair amount of careful showing them what is the potential disruption that is happening in their market, showing them examples of how other companies are taking advantage of technology and new ways of working to become better and faster, but also to acknowledge where they are – what is the point of departure of the company? What are the strengths and weaknesses? And therefore, create a plan that accurately identifies those gaps and has a very credible way to fill them that everybody understands and articulates, and then it becomes a matter of changing the processes under the technology. Right. But the important point is, this is a challenge in terms of a decision of the company to transform rather than just a technology challenge.
Gabe Smith 10:49
Yeah, so that kind of gets towards the process that you take companies through and how you enable this transformation. So, can you maybe talk a little bit more about how you approach this and how you lead companies through this change and help them prioritize and these kind of things?
Paco Jiminez 11:07
That’s a very important point, Gabe, because we discussed that this is this is hard for most companies because they’ve been operating in a certain way. So we follow a two-pronged approach, one that tries to be what we call the future-back vision, which is basically if you think in any kind of business in any kind of industry, and you think of how this industry is going to evolve in the next 10 years. You may not know when things are going to happen. But you have another catalyst today to develop a vision that is good enough in terms of where the main trends are, right? So for example, for this kind of home appliances company, the future says something like, you know, in the future, many people don’t need the washing machine or the refrigerator, they need to eat and they need clean clothes, right? And there might be different ways of actually buying these appliances. So, with big appliances are going to be needed in the future and we think that they are going to be needed, but do how we envsion that appliance? For example, for this company, it ends up being an ecosystem mission. The people will want something together with their appliance. Plus, other electronics and appliances in their house, plus an ecosystem of applications to help them to fulfill that need. So we need to develop a clear enough vision so the company can imagine the future. Then you have what we call the present-forward, which is what is your position in the market? Where are your trends? And basically, I do have to say that we can use to build on that vision, or what do not have today that we really need to fix and focus on in the next three to five years to accelerate your projects we saw was that vision, right? And when you put those two visions together with a very clear digital strategy that tells you in a very prescriptive way, what you need to focus on in the short term, but also what are the key trends that you need to pursue and follow in order to remain relevant or become a leader in that kind of distant future that they just imagined, right? And after that, as you can imagine, it’s very easy to identify the needs of process, propriety and technology that they need to have.
“…put those two visions together with a very clear digital strategy that tells you in a very prescriptive way, what you need to focus on in the short term, but also what are the key trends that you need to pursue…”
Staying on Track with the North Star
Chuck Davenport 13:36
I would add a couple of things to that because I think Paco articulated very well exactly how we guide our clients to think about it. I think the important thing through the journey of the transformation, though, as we start to really execute against that are, number one, taking that future back vision and distilling that down to what I call the North Star. You know, what is what thing that we’re really shooting for, and it’s kind of that acid test for every decision that we’re going to make on this transformation journey. Does it move us toward that North Star? So, that’s number one. And then number two, as we start laying that journey out, let’s think about how do we shortened down the wins? How do we get, I won’t call them quick wins, because people think about very tactical things. But how do we get down to whether it’s 90 or 120 day wins, so that the organization wins? Yeah, that can start to feel the difference that this transformation is making. And by the way as we start to think about executives, how do we start to make the executives happy that this transformation journey, I don’t have to wait to the end to get value out of it? My time to value is actually in the 90-day window and I can start to see real tangible results in a short period of time. Let’s take that in sprints, just like in it development, let’s steal that methodology and really build those sprints so that they have compartmentalized value that all build to being able to deliver that North Star.
“It’s kind of that acid test for every decision that we’re going to make on this transformation journey. Does it move us toward that North Star?”
Gabe Smith 15:12
The Agile methodology can be used across different parts of the organization just like we do in IT projects. And it’s, you know, it’s all about starting small, showing value and iterating. And I think that’s where a lot of IT projects with digital transformation projects also probably go off the rails a little bit, you know, there’s a tremendous amount of money being spent, you look at the numbers, they always come back to 70% or so don’t hit the mark. Right? And I think a lot of them that don’t hit the mark is because they try to take on too much. I’ve been part of some of those initiatives, and I won’t talk about them specifically to protect the fallen soldiers, but especially today where analysts and the results are on such short timeframes and there’s almost you want to think strategically and go to the that North Star, but you always have to be showing value and proving your worth, right. So if you’re trying to take on too much, we call it the organizational attention span. It’s just it’s not more than a quarter, right? You need to show value that quarter. So speaking of the kind of senior executives, I want to talk about that because you guys both have the opportunity to interface a lot with senior executives and understand what kind of pain points they see around pricing and quote to order and digital transformation. So can you talk about that a little bit? What are the common kind of things that you hear there that keeps the C suite up at night with regards to pricing and digital transformation?
Chuck Davenport 16:29
One thing I want to point out is, as we were talking about the growing tide of focus on pricing, one of the trends there, and I think one of the things that will continue to drive some progress there is that there is more attention on pricing issues in the C suite. And the most significant and the most successful transformations around pricing that I see are ones where there’s actually a C-level executive, a true C-level executive that is responsible for and owns pricing. So, having somebody who’s really accountable for that in the C suite that can be in that CEO staff meeting and really report out on progress and be held accountable for transaction profitability, not only net profit, which has all kinds of accounting games that can be played, but how to like hold my organization accountable for economic profit at the transaction level. And that makes a huge difference. Whether sometimes that’s the CFO, certain types of CFOs will never ever get there because they are in the accounting mindset instead of the economic mindset. But finding that C-level executives to focus on it, number one, is a key success factor.
Number two, I think we’ll talk about this a little bit later, too. But being successful at the C level, there’s a tension there, right. There’s is always going to be the tension on how do I drive profitability, versus, how do I make sure I get the volume that’s gonna, at least in perception, keep my company healthy and happy and keep my analysts happy, and all those types of things. And different industries have analysts that focus on different things. It might be, you know, in the CPG industry, it might be shelf price realization, it might be pure volume in a distribution environment, it might be gross profit in some sense, or, in the case of process industries, it’s often some measure of operating profit that matters. All of those are slightly different measures that are going to have different considerations and pricing is going to affect those differently. And so, as a senior executive, if I’m truly going to transform my organization and open up my profit-generation capability, I have to learn to reconcile my communication with all of those stakeholders. I mean, even if it’s not a public company, maybe it’s privately held or private-equity held, I still have to communicate to those stakeholders what I’m doing and how that action that I’m taking is going to affect the metrics and the measures that you’re using to compare me against other companies and to compare my performance against my historical performance. That’s attention that’s really difficult to manage. And oftentimes through the course of an economic cycle, say, you mentioned a quarter, oftentimes the quarter public company, they live and die by the quarterly earnings, and revenues expected and all those things.
I had one client that pretty hilariously called the transformation from the focus on pricing and profit taking to volume, they called that we transform into burn-the-furniture pricing. Three weeks left in the quarter they’re lagging on volume. I don’t care what the price is just get the volume in the door because we got to hit our volume number. And it wrenches the organization around the sales organization, the pricing organization. They don’t know what to do because, you know, ‘hey, you’ve told me discipline, discipline, discipline, we’ve been telling customers and maybe even walking away from some deals because we’re maintaining pricing discipline, and then all of a sudden, you want all that volume back’ and you don’t care about pricing anymore. That kills the credibility inside the organization, but it also hurts the credibility outside the organization. I mean, when’s the last time you bought a car that wasn’t at the end of a financial period? Because we all know that salespeople are highly motivated to get those sales through the door last week of the period. And it’s silly as a consumer to buy any other time. The same thing is true in b2b pricing.
“The most significant and the most successful transformations around pricing that I see are ones where there’s actually a C-level executive, a true C-level executive that is responsible for and owns pricing.”
Gabe Smith 20:56
Yeah, absolutely. So you train your customers to wait. It’s the same thing with promotions that you can get into trouble. That’s great advice. Anything you want to add to that Paco?
Paco Jiminez 21:06
Our current client, the CEO, the thing that keeps him up at night is: “I know we have a lot of data in all the transactions we do with clients that we’re not using. And I know that that data, it’s money, right. That’s the first thing. And the second thing is, I know that we can do a better job with all the outside data we can have to have a better base price. So, I know that we can have another base price, but I just don’t know how.” So the thing that a platform that allows them to articulate how to answer those two questions in an organized way is very important. And then this other client in a CPG company, basically what is happening with COVID is, I know the price is gonna be pushed, right, so, there are two questions there. One is, how much can I protect the base price and how can I become more effective with promotions? This is a category that is doesn’t have a lot of promotions. But we see that it’s going to be a pressure for categories that were very stable to have to work with promotions in a more active way in this post crisis with COVID. And then the other thing is: If I have to keep up with price, how, where and when? Those are the two questions that a lot of companies are having because they know that the downturn is going to put a lot of pressure on price.
“They don’t know what to do because, you know, ‘hey, you’ve told me discipline, discipline, discipline, we’ve been telling customers and maybe even walking away from some deals because we’re maintaining pricing discipline, and then all of a sudden, you want all that volume back’ and you don’t care about pricing anymore. That kills the credibility inside the organization, but it also hurts the credibility outside the organization.”
Chuck Davenport 22:32
I have to say, though, that the first CEO that Paco was talking about there is particularly enlightened from a pricing and commercial focus standpoint. And I wish every CEO I dealt with had his perspective on the commercial organization because I think companies, my clients, would be much much better off for that level of focus on it.
Gabe Smith 22:54
I remember talking to you, Chuck, about why that client selected us and you said it came down to speed and flexibility, right. And I think those messages tie this whole thing together with digital transformation of being agile, being able to be flexible with your pricing strategy and tactics, being able to change as you see the market changing. So, having that data in the system, and then really having that speed and flexibility. So, you know, business agility, avoiding margin compression, reducing risk, those are some of the messages that, as I talked to people, are the ones that I hear a lot. We think we can jointly help a lot of clients do all of those things. So that’s all great advice. I’d like to maybe round it out with a couple of final questions here. One would be, do you think that I mean, we talked a little bit about what’s going to happen to those companies that aren’t changing that say, oh, everything’s fine, my business is good, my profits are good, I don’t need to change. Do you think those companies are going to be around in 10 years?
The Crystal Ball of Transformation: Where Will Companies Be in Ten Years?
Paco Jiminez 23:49
I don’t know if they’re gonna have been around or not. Of course, it would be very adventurous to say that they will not but what we see, there will be less money to get from if they don’t change. The appropriate tools will reduce, they will travel to other places. And, of course, some of them, the ones that don’t change will have a harder time, right? Overall, I think there is a compelling reason to change but not only because they will be threatened but also because there are a lot of opportunities, right now a lot of this has not been written. Companies that really transform themselves up can have a bigger pie and actually make the pipe even bigger, right? So what’s your opinion there?
Chuck Davenport 24:38
I’ll be bolder and say, I believe they will not be around. And that’s not talking about small business and things like that. But in major industries, if they don’t get this right, they’re really, really going to struggle. And one of my favorite examples is in the PC industry. This was way, way back. But when there were two large computer makers based in Texas, one of them was quite Agile and the other one was not from a pricing standpoint. And the the Agile one knew that the less Agile one would change prices on a Thursday, and they would put their promotions out on Thursday and price their laptops at such and such, whatever, $100 off, $200 off, whatever it was, for the week, whatever laptop they were putting on sale. So this company would wait for that, and then set their competing products just below that price. I mean, it’s a simple illustration. This happened way before anybody was really thinking about dynamic pricing in that industry and those types of things. But the less Agile company doesn’t exist anymore, let’s just put it that way. And the more Agile company is doing quite well. So I think that’s a microcosm of what will continue to be the case. Because, I mean, one of the great things, and this is a bit of a Machiavellian perspective, but if you have all of the information, think about the things you can do to your competitors in terms of how you compete in the marketplace, and that’s not saying “let’s be predatory” or anything like that. It’s just saying, “hey, if I am operating with greater information, who’s gonna win more often?”
“I’ll be bolder and say, I believe they will not be around.”
Gabe Smith 26:32
Right, greater information and greater speed, right? It’s like algo trading, like, “do you want to try to compete against that?” No, right?
Chuck Davenport 26:39
No, there’s no way to do it. Right? And so I believe it’s going to be such the norm. I would go as far to say is even five years from now, I think, that’s going to be such the norm. That, and it’s going to make such a dominant difference in the way that people compete on price in the marketplace that without that, it’s gonna be a hard struggle.
Getting Smart About Pricing Strategy and Management
Gabe Smith 27:06
Yeah, indeed. So I had prepared a question here just to ask about your favorite business blogs or articles or books. Could you maybe talk a little bit about a couple, one or two of those that you want to share with the audience?
Chuck Davenport 27:18
Maybe you have a real answer to this Paco. But I spent so much of my life thinking about pricing and everything. Oftentimes, my greatest inspiration doesn’t come from pricing blogs and things like that, although, I do read them. I read tons of them out there, always reading something. But my greatest inspiration really comes from learning how people think in other disciplines, back to my double E background, but I’m always reading geeky books about how did scientific thought evolve? I don’t know if you’ve ever read A Clockwork Universe, which is a fascinating book about the development of scientific thought and the development of The Royal Society and those types of things. Or things like Fabric of the Cosmos, which is an older book now, but it helped me, even though I’d had a bunch of physics classes in college, it really helped me more viscerally understand relativity and things like, and again, I’m not taking any view of universal origin or anything like that, but understanding the theories of that and how those came to be and how do people think about problems? And how do people think about breaking those pieces of scientific thought down? It really helps me to really take that into my world. And think about how do I break down problems and how do I do things differently than anybody else has ever done them because if we do things the same way all the time, we’ll never get better? And so we have to push the envelope and I believe we’re still in a developing professional discipline, probably developing more rapidly than a lot of the other ones that we cover as Bain. And I think it’s important for us to think outside the box. So I like to push myself from that perspective.
Paco Jiminez 29:13
That’s a good question, right? We’ve been consulting for Bain with exposure to a lot of different experiences. And as we speak in this crisis, we’re helping with their financial services, CPG manufacturers all the time. And but one of the things that I’ve learned, I would say, in the last, maybe four years, is the C levels of the future really need to understand what the new ways of working mean for their companies and how they can leverage those, right, And one of those is Agile, right? So anything that has to do with how you can apply Agile ways of working all the way from changing the behavior of the C suite today to an integrated, fully functional, purpose-driven team rather than a silo-based, bonus-incentive-based team. It’s very interesting to me, right. And actually, we just now have a new book called, Doing Agile in the Right Way, that is launched today, that talks about that, right? And you will find a lot of references in that book about why these matters, right. And in this crisis, what we have found is companies have become more Agile, right? They have actually because they have to work remotely, they have to make bad decisions late in the game. And, some sales are saying, “I don’t want to lose that. I don’t want to come to your company as I was. I just want to continue making this decision your fast paced way and orchestrate in a team-oriented way with a purpose in mind. So, that’s how I’ve got to stay, right. So any book that can teach you about how to apply Agile ways of working or how to create a sense of ownership, a team-based sense of ownership, in an organization. It’s very valuable. Right. So the one that which we have launched is one. There is another one called Extreme Ownership that has been around, they’re talking about how to actually empower teams to get that next level of ownership. It’s also a very good one.
Getting Across the Finish Line
Gabe Smith 31:26
Excellent, cool when we’ll put some links on the site for those folks so people can can check them out. All right. Well, I think it’s about time to wrap up. Thanks so much for joining me Chuck and Paco. It’s been great, really insightful. I hope that the listeners find it as interesting as I do, but I am a bit of a pricing geek. So you know, there’s some of us out there, right? Just wanted to give you guys the opportunity to add anything that you’d like, just in closing here.
Chuck Davenport 31:51
First of all, if you are listening to this, there’s probably at least some element of pricing geek in you. You know, you at least know how important pricing is to the production of profit, and how powerful it can be. And that’s a pretty easy concept to get. And we talk about that a lot. But the hard part is, how do I go and get it? How do I actually do it? And sometimes it can be a pretty scary topic, as we talked about earlier, because you’re messing with really the engine of the company, what is it that drives the company, ultimately, that’s how we bring value back into the company based on the value that we produce for our customers. And first of all, I would encourage you to make sure that you are communicating with your organization about how we can take this on as a journey and as a digital journey, because the digital tools that are out there, and the experiences of others can greatly accelerate that. But secondly, there are ways that we can reduce that risk, and ultimately providing this science that we’ve been talking about to your commercial organization, and your commercial operation, can offer ultimately a reduction in risk because we can start to see what are the effects of what we do in the marketplace. And thirdly, of course, once you start to see that and you have real levers that you can play with, it’s almost impossible that that is not going to drive significant benefit for your organization.
Gabe Smith 33:28
Great insight. Thank you. Paco, anything you’d like to add?
Paco Jiminez 33:31
First of all, thank you for the opportunity, it’s been a great chat. I work with Chuck a lot and it’s a pleasure to be able to chat with you, Gabe. Thank you. And then I guess that the final thought here is, this can be done, right? It can be done in the right way. It will generate results in a short period of time. And there is a way to do it. This is no longer magic. It is very close to your capabilities, and it can be something that you would be reaping the benefits in a short period of time. The technology is there, the processes are there, the way to convene C sea level is there, just just grab it!
Gabe Smith 34:08
Excellent. Now’s the time! All right. Well, great stuff. Thanks again, guys. And thank you to our audience for knowing that pricing matters.
Chuck Davenport 34:15
Gabe Smith 34:16
All right, thank you.
Paco Jiminez 34:19
Thank you, Gabe!
Chuck’s Book Recommendations:
Paco’s Book Recommendations: