Four Tips for Measuring the Effectiveness of Pricing | Strategic Pricing Solutions (2024)

I originally wrote this post in 2016 with a reminder that one of the New Years Pricing Resolutions is to monitor, evaluate and report on the effectiveness of pricing. Since then data analysis tools have been improved with more robust capabilities. Unfortunately, too often firms become enamored with creating cool charts and miss the point of turning data into actionable insight. It is worth revisiting some tips to make your pricing analytics more helpful. To be useful to your organization, it is important to have a thoughtful, comprehensive approach to your measurement process. At a minimum, your approach should include the following concepts.

1. Use charts, not tables

When you only have a few numbers to show, tables work well, but when there are many data points, tables make it difficult to digest the information. As an example, let’s look at a simple comparison of sales, margin, and growth. It is not easy to see the comparisons, and there are very few rows of data. New data visualization tools make charts easier if you focus on what is insightful.

Now let’s look at it in two charts. It is much easier to pick out which areas are growing the fastest and have increasing margins by looking at simple charts

2. Get granular

The tables above are averages spread over a group of products, but there is significant variability within. Looking at the comparisons of growth rates and margins below, within the same family we can see huge variation. Just looking at family averages would miss that variation. By the same token, this chart is not an answer in and of itself but would lead to more drill-downs. In particular, it is important to understand those items that had substantially lower or higher results than other items or than expected. Similarly, the chart is only two-dimensional, and insight would be improved by creating this chart for each customer segment.

3. Focus on the real indicators of price effectiveness

Many organizations measure changes in margin dollars, changes in margin rates and average selling prices (ASPs), but none of these metrics really tell you whether your pricing is effective. To determine the effectiveness of pricing, you need to measure your actual results for each variable that might be a factor in determining whether or not a customer buys. That means you should analyze results for:

• • Each different customer segment
  • Each different size of customer
  • Incumbent customers versus new customers
  • Customers who purchase a wide variety of your products versus those who only buy a few
  • Bid/ RFP business versus repetitive buying
  • High-price customers versus low-price customers
  • Situations where the price was increased versus those decreased or kept the same
  • Situations where you made order-specific concessions (like free freight) versus those where you made no concessions
  • Large orders versus small orders
  • Growth of new product bundles versus non-bundles

You get the idea. These are all factors that could cause prices to vary or could affect a customer’s decision to buy. A well-crafted pricing strategy considers all of these elements and may provide different prices depending on the answer. You want to learn if your pricing strategy is winning where expected and delivering the results expected for each variable. Simply looking at things like margin and ASP will not tell you which parts of your pricing strategy are successful.

4. Share it widely in your organization

Your entire organization is part of the team that delivers value to your customers. The prices you charge help you turn that customer value into shareholder value, which in turn affects your entire organization. Your sales and marketing teams must communicate to your customers how your company adds value. Your sales team must sell the prices, and often defend those prices in the face of criticism. Customer service should understand why the prices may be different from customer to customer or segment to segment and avoid suggesting to the customer they can obtain a better price. The pricing team or whoever is responsible for developing pricing strategies and prices needs to be able to adjust based on results. And senior management needs to learn why you are accomplishing your goals or not, and potentially adjust the allocation of resources.

What that means is your pricing measurements should not be something simply created by the pricing organization and shared with the management team once a month or quarter. All the people who can impact the prices you ultimately charge need to understand how well it is working. And they need to understand it in detail. That detailed understanding can help them in continuing to sell or defend prices, and it can also enable them to provide more specific small adjustments that could be made. And specific feedback will be much more useful than generalizations.

Stick to your pricing resolutions and measure, monitor and report on pricing effectiveness. And remember to use charts, get granular, focus on the real indicators, and share it widely.