From concept to implementation, experts Nikolas Spatz from Horvath and Tim Geyer from MARKT-PILOT discuss modern pricing strategies. (Part 1)
In this interview, Tim Geyer from MARKT-PILOT and Nikolas Spatz from Horváth discuss the significance of innovative pricing strategies in today’s market. They will explore how implementing advanced pricing software enhances decision-making processes and drives ROI. Additionally, they will address stakeholder involvement in pricing decisions and share insights on successful implementation strategies and future trends in the industry.
Tablet of Content (Part 1):
Tim, Nikolas - how does an innovative pricing strategy differ from conventional methods such as cost-plus pricing?
Nikolas Spatz: "The crucial factor when discussing innovative pricing strategies, especially in comparison to more classical approaches like cost-plus pricing, is the shift in focus. With traditional cost-plus pricing, companies primarily concentrate on their internal interests and databases, aligning them with their objectives. In contrast, innovative pricing strategies allow us to develop tailored approaches that consider both customer needs and market dynamics.
This customer-centric and market-oriented approach enables us to combine our interests with those of our customers, adjusting our strategies to meet market demands. This flexibility to focus on customer and market needs is the most crucial factor in differentiating innovative pricing from conventional methods.
Another key characteristic of innovative pricing is the ability to create a logical price structure that incentivizes our sales team. Unlike cost-plus pricing, where the broader benefits to the company are often overlooked, innovative strategies allow us to expand our perspective. We can integrate our pricing strategy into the entire price architecture and optimize incentives for our sales force.
In summary, the two main differentiators of innovative pricing strategies are: First, the ability to tailor pricing to customer and market needs, rather than focusing solely on internal company interests.
Secondly, the creation of a comprehensive pricing structure that aligns with overall company strategy and motivates the sales team effectively."
Tim Geyer: "I completely agree. The overarching theme of a more innovative pricing strategy should be to maintain control and price deliberately, rather than allowing external factors to dictate your pricing strategy. In a traditional cost-plus pricing environment, companies primarily rely on their suppliers for cost information and apply a certain markup to these costs. This approach relinquishes control of the pricing structure, allowing others who may not be pricing experts to indirectly determine prices.
In contrast, a more innovative pricing strategy involves taking control of pricing through several key factors. This approach emphasizes customer-centricity by conducting thorough research to understand customers' willingness to pay. It encourages proactivity, taking the initiative in pricing decisions rather than waiting for suppliers to adjust their prices before adding a margin. A deep comprehension of the value products or services bring to customers directly informs the pricing strategy. Market awareness is crucial, staying informed about trends and competitive pricing to position offerings effectively. Finally, a data-driven approach utilizes analytics and market data to make informed pricing decisions. This comprehensive strategy puts the company in control of its pricing, leading to more strategic and potentially profitable outcomes.
By focusing on these elements, you can develop a pricing strategy that reflects your products' true value, aligns with market realities, and meets customer expectations. This approach allows you to be in control of your pricing, rather than being at the mercy of external factors or outdated methodologies.
Ultimately, an innovative pricing strategy empowers you to make deliberate, informed decisions that benefit both your business and your customers."
What makes innovative pricing strategies essential for companies in the current market?
Tim Geyer: “Innovative pricing strategies have become essential for companies in the current market due to three main factors: increased competition, savvy customers, and price sensitivity and volatility.
In the B2B and industrial sectors, we have witnessed a significant surge in competitors and purchasing options for customers. Traditional pricing strategies risk pricing companies out of the market, as competitors with better data and customer understanding can offer more competitive prices. Modern customers are more informed and empowered than ever before. They utilize digital tools to compare prices and alternatives, having easy access to pricing information. If a company's pricing is not competitive, customers will quickly find alternative solutions.
The economic climate has drastically changed in recent years, leading to increased price sensitivity and volatility. Factors such as supply chain shortages, COVID-19, rising inflation, and increased household costs have made pricing a sensitive topic in both personal and B2B contexts.
These factors necessitate a more deliberate and innovative approach to pricing. Simply raising prices as was common in the past is no longer acceptable to businesses. Companies need to be smarter and more strategic about their pricing decisions to remain competitive and meet customer expectations.
In this environment, innovative pricing strategies allow companies to adapt quickly to market changes, maintain competitiveness in a crowded marketplace, meet the expectations of well-informed customers, and navigate the complexities of a volatile economic landscape.
By embracing innovative pricing strategies, companies can turn these challenges into opportunities, maintaining profitability while delivering value to their customers in a rapidly evolving market.”
Nikolas Spatz: "In addition to increased competition and changing consumer behavior, I believe the third crucial factor is technological advancement in the market. This is particularly relevant when discussing innovative pricing strategies.
The importance of technology, especially in relation to big data and AI, cannot be overstated. These elements are essential considerations in developing innovative pricing strategies, implementing dynamic pricing, and adapting to market trends.
As Tim mentioned, the ability to react to global events is critical. Having the right database and being proactive rather than merely reactive are key components of this technological advantage. This allows companies to adjust their strategies swiftly and effectively in response to market changes.
While my perspective might be influenced by my focus on technology and software, including my work with MARKT-PILOT, these technological advancements are universally important in today's market dynamics. They provide the tools necessary for companies to implement sophisticated, data-driven pricing strategies that can respond quickly to market fluctuations and consumer behavior changes.
In summary, I would categorize these technological advances as the third crucial factor, alongside increased competition and changing consumer behavior, in driving the need for innovative pricing strategies. This technological aspect encompasses the use of big data, AI, and advanced analytics to create more responsive and effective pricing models."
Are there specific market conditions in North America that are accelerating or slowing the adoption of innovative pricing strategies? Is there a sense of urgency to implement these strategies?
Tim Geyer: „From my perspective, there is currently a significant urgency to accelerate innovative pricing strategies for a couple of reasons. First, trends like reshoring are stabilizing supply chains locally. This has led to increased localized competition, making it crucial to align pricing with nearby competitors. The previous strategy of relying on the advantage of local supply chains over overseas competitors is no longer sufficient, as many companies are returning to the U.S. to establish more sustainable supply chains.
Second, in our industrial environment, economic uncertainty—exacerbated by the election year—has resulted in reduced investments in new capital equipment. Consequently, sales and margins for new machinery have declined, putting additional pressure on other areas of the business to boost revenue and profitability. This is particularly relevant in the aftermarket parts sector where we operate, leading to an increased urgency for innovative pricing strategies. Overall, these factors create a pressing need for companies to adapt their pricing approaches to remain competitive and responsive to market conditions. “
Nikolas Spatz: “We can expand on these topics further. Due to decreased machinery investments, companies are now concentrating on aftermarket opportunities, including parts and service maintenance. The entire end-to-end aftermarket process chain has become crucial, whereas it was considered a commodity just two years ago. Increased transparency, especially in B2B e-commerce, is a significant driver for companies to adapt their strategies. It necessitates innovative approaches to handle competition and transparency factors.
Technology is also a crucial driver, though B2B industries often lag behind B2C in technological adoption due to different datasets and data points, varying data quality, and legacy business structures. There are opportunities for improvement in understanding the dynamics of transparency and e-commerce technology in B2B contexts, and helping companies adapt to these new realities based on this understanding. These factors collectively underscore the growing importance of aftermarket services and the need for B2B companies to embrace technological advancements to remain competitive in an increasingly transparent market landscape.”
How does a well-designed pricing strategy contribute to long-term business success? Can you provide examples with measurable outcomes?
Nikolas Spatz: „A well-crafted pricing strategy is essential for long-term business success because it serves as the primary lever for increasing trading value. In the aftermarket sector, every additional dollar generated through pricing directly enhances profit, making it easily measurable and clearly reflected in financial statements. Companies often start with small-scale pilots, such as focusing on ten products, to demonstrate quick returns on investment. Once they establish success at this level, they can confidently expand the strategy to larger product ranges.
Implementing a well-designed pricing strategy leads to immediate impacts on profitability and scalability across various product categories. It creates a foundation for sustainable success, as the strategy can be adjusted over time to meet evolving market conditions. By proving effectiveness on a smaller scale first, businesses can effectively implement pricing strategies across their entire portfolio, driving overall company success.“
Tim Geyer: „I absolutely agree with Nikolas. While some businesses focus on maximizing short-term profitability through strategic price adjustments, as demonstrated by a customer who increased profits by $3 million in just four months, the true value of an effective pricing strategy lies in its ability to improve customer retention and loyalty while supporting the company's competitive positioning in the market.
Transparency and deliberate pricing decisions help build long-term trust with customers by offering value-based pricing that encourages repeat business and fosters enduring relationships. This can be measured through metrics like customer lifetime value. Additionally, a well-crafted pricing strategy should align with the company's desired market position and lead to higher win rates and increased market share.
One company, for example, focused on becoming more competitive in the marketplace to ensure sustainable long-term growth rather than maximizing short-term profitability. By aligning their pricing with their brand positioning, they were able to increase their market share in the parts space by five to ten per cent within two years, effectively doubling their presence. This success was achieved through strategic price increases in some areas and decreases in others, demonstrating the power of a well-designed, flexible pricing strategy in driving long-term business success.“
Nikolas Spatz: „I would challenge the first part you were mentioning because that is more or less like a definition question. The term “strategy” is often used in an inflationary way. A genuine pricing strategy is clearly different from short-term measures to achieve budget targets. A well-considered strategy is characterized by clear goals, defined time frames and consistency. It leads to long-term, sustainable effects. Short-term price adjustments that merely serve to achieve budget targets are not strategic decisions. Companies often fall back into old patterns after achieving these short-term goals, only to look for quick fixes again months later.
The second example in Tim’s answer illustrates a real strategic decision: there were clear objectives and a long-term approach that led to measurable success. This differs fundamentally from ad-hoc measures to achieve the budget.
A sustainable, well-thought-out pricing strategy therefore requires clear objectives, a defined timeframe and the willingness to consistently pursue the course taken rather than constantly making short-term changes.“
Tim Geyer: "You hit the nail on the top. Companies have often fallen into the trap of raising prices solely to meet short-term quotas, which is counterproductive for long-term sustainability. A smarter approach is to selectively increase prices only where there's room for growth, without overshooting in areas where you are already at the upper limit. However, this remains a tactical move, not a strategic building block."
What effects do modern technologies, particularly pricing software, have on a company's pricing strategy?
Nikolas Spatz: „Key advancements in pricing strategies include the improvement of data-driven decisions, enhancement of dynamic pricing, and automation leading to increased efficiencies. Modern tools and software now provide instant results and data points, replacing the outdated practice of using large Excel spreadsheets passed between departments. This automation frees up time for pricing teams to focus on strategic tasks. Software that processes large amounts of data now enables data-driven pricing decisions, allowing companies to develop well-founded strategies and make precise, competitive, market-based decisions tailored for customers. Dynamic pricing capabilities allow real-time action, maximizing sales potential through continuous optimization. These technologies enable swift reactions to market changes and effective optimization of pricing strategies. Together, these advancements significantly enhance a company's ability to make informed, timely, and competitive pricing decisions.“
Tim Geyer: "I agree and would add that the key benefit is making better decisions by incorporating more data in less time. We can now combine data from various sources to make smarter, more informed pricing decisions without requiring advanced mathematical expertise. Modern software tools can handle complex calculations, but successful pricing still requires business acumen and stakeholder management skills. Ultimately, pricing isn't just about perfect formulas; it's about involving key stakeholders to understand, convey, and explain the value you bring."
When we talk about software and technologies in pricing, we also must talk about artificial intelligence. How is AI used in the pricing process, particularly within pricing software?
Tim Geyer: „AI plays a crucial role in pricing processes through three key areas. It enhances data cleaning and organization by identifying and correcting errors in vast amounts of data from various sources, including customer and product intelligence. AI algorithms also provide optimized pricing recommendations by combining different datasets based on market trends, historical sales data, and customer behavior, working in tandem with human expertise. Additionally, AI contributes to market and sales forecasting by predicting future movements and scenarios through analysis of historical data patterns, supporting business planning and allowing companies to experiment with various value drivers.
AI has proven valuable in identifying trends across industries and product groups. For instance, in the filter product category, prices have consistently increased in both European and North American markets over the past 24 months. In contrast, electronic components experienced price spikes during the COVID crisis but have since normalized. By considering these data points, companies can adopt more proactive pricing strategies rather than simply reacting to market changes.“
Nikolas Spatz: "Your points are well-made and extend beyond MARKT-PILOT, applying to pricing strategies in general. The crucial factor, especially when looking five or ten years ahead, will be AI's improvement in forecasting - potentially the 'Holy Grail' for predicting market dynamics.
Another significant AI application is personalized pricing. By analyzing large datasets, AI can generate individualized pricing offers for clients. Some companies are already using AI to recommend discounts based on historical data and future predictions of a client's annual performance. This allows for tailored offers that may differ significantly between clients, all thanks to AI. This personalization enables companies to treat clients differently, but in a way that benefits them and increases their value. It is an exciting development in creating customized offers at a scale. It is just a great opportunity to tailor make these offers.“
Tim Geyer: „That's a great point. The key question is whether we are optimally leveraging AI across different components of our pricing strategy. Your example illustrates how AI can be extremely helpful in generating individualized pricing recommendations. In our case, given the messy nature of market data, we primarily focus on using AI for data cleaning and validation. This ensures the input data for our pricing strategies is as accurate as possible. Currently, companies are trying to find the right focus for AI applications based on their specific situations. Ultimately, all these AI applications need to work together cohesively for an effective pricing strategy."
For better reading experience, we've split the interview in two parts. For the second part, continue reading here: Driving Profitability Through Technology: A Deep Dive into Modern Pricing Approaches (2)
Nikolas Spatz is Senior Project Manager at Horváth. At the management consulting firm he is responsible for the Pricing & Profitability solutions in the USA and leads the respective initiatives in close collaboration with the German Headquarters. With experience from industry and consultancy he advises clients how to increase profitability through innovative and sustainable pricing strategies. His projects range from initial assessments and analytics over pricing strategy to state of the art automation and software solutions as well as implementation.
Horváth is a global management consultancy for transformation, performance management and pricing with more than 1,300 employees with offices across Europe, the USA, and other global markets. Learn more about Horváth.
Tim Geyer is the Managing Director for North America at MARKT-PILOT, where he leverages his extensive experience in pricing strategies and revenue growth management. With a focus on data-driven decision-making, he plays a crucial role in transforming pricing methodologies to enhance profitability and customer satisfaction. Under his leadership, MARKT-PILOT aims to integrate advanced technologies and market insights to optimize pricing processes across the organization.
From concept to implementation, experts Nikolas Spatz from Horvath and Tim Geyer from MARKT-PILOT discuss modern pricing strategies. (Part 2)
Tim Geyer, Managing Director of North America, recently joined industry experts from Syncron to break down all things market-based pricing.
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