Master value-based pricing to boost revenue and profitability by understanding and leveraging customer value drivers. Learn how rigorous pricing strategies can increase revenue by 5% to 10% or more without substantial volume loss. We explore key topics including customer value, operational criticality, bundling, competitive pricing, strategic and tactical pricing, pricing governance, and necessary tools and talent. 

Hi, I am Scot Hornick and I lead Oliver Wyman's Pricing, Sales, and Marketing Practice in the Americas. I help companies drive profitability through improved commercial effectiveness. I "cut my commercial effectiveness teeth" working on airline revenue management. In an industry with such notoriously razor-thin profit margins, it was an article of faith that pricing science was a key factor in an airline's success or even its very survival. So, when I began working on pricing outside the travel industry, I was struck by the relative simplicity of the approaches that were employed. Usually, it was just cost-plus pricing: This illustrates one of the paradoxes of pricing. The fatter historical margins are, typically the more simplistic current pricing practices are, and that means greater opportunity to achieve margin improvement through more sophisticated pricing.

The key to the right pricing approach is to carefully consider how your customers value the product or service your company provides them, and you have to bear in mind that, that itself is a moving target. A recent survey we conducted together with the New York Stock Exchange found that 71% of CEOs see rapidly changing customer demographics and preferences as an opportunity to fuel growth. Tracking value as customer needs evolve is a discipline very different from that required to estimate the cost of producing your product or service.

As an example, one of our clients, a manufacturer of spare parts for commercial aircraft, had a practice of discounting parts they had in stock but charging more for parts where they had to initiate a new production run. While that certainly reflected a cost reality, since it costs more to ramp up production for a part than it does to pull it out of inventory, it failed to capture the value that their considerable inventory of ready-made parts had. After all, if you happen to have the part that can get a $75 million aircraft quickly back in the air and productive again, it is likely worth far more to the customer than it would be if they had to wait for you to ramp up production.

Then there are other factors that can have an outsized effect on customer value. For one, operational criticality of the product or service. Maybe technical differentiations that lower their total cost of ownership or downtime. Bundling or "kitting" of ancillary products or services to simplify the customer's purchase decision. Competitive prices for comparable products or services. And finally, familiarity and interoperability of products or services with an already installed base.

Of course, for any given industry, the customer value drivers can vary, but the first step is always determining what they are and how much they matter. Something that may vary by customer segment.

Operationalizing value-based pricing typically involves the establishment of two related, but separate sub-functions within pricing. First, Strategic Pricing, and second Tactical Pricing. Strategic Pricing is charged with understanding the key customer value drivers by segment and defining segment-specific pricing approaches or even pricing formulas that translate those drivers into a recommended range of prices for each product. Tactical Pricing in turn is responsible for applying these strategic approaches to specific customer opportunities and using deal context to help the sales team negotiate pricing.

A few additional elements round out a successful value-based pricing approach. Pricing governance that allows for a structured escalation of pricing exceptions for larger or more strategic deals. A function that collects data and market insight to inform perspectives on competitor price levels. A market feedback mechanism that tracks quote conversion rates and customer feedback to understand when the market is telling us our prices are too high or possibly too low. A set of pricing tools to support strategic pricing and tactical pricing, and to enable the sales force with solid pricing guidance. Finally, the right pricing organization and customer-focused talent to undertake value-based pricing.

Whether you're a CEO looking to improve margins or a private equity fund looking to drive value creation at a portfolio company, taking steps to recognize the value of your offering and the way you price can drive significant upside. Indeed, helping clients apply the same rigor to their pricing function as they do designing their products and services has unlocked billions of dollars in value for them. It's also one of the reasons I'm so passionate about the work our team does. I'm Scot Hornick, and this is my take on value-based pricing.

This transcript has been edited for clarity.

Master value-based pricing to boost revenue and profitability by understanding and leveraging customer value drivers. Learn how rigorous pricing strategies can increase revenue by 5% to 10% or more without substantial volume loss. We explore key topics including customer value, operational criticality, bundling, competitive pricing, strategic and tactical pricing, pricing governance, and necessary tools and talent. 

Hi, I am Scot Hornick and I lead Oliver Wyman's Pricing, Sales, and Marketing Practice in the Americas. I help companies drive profitability through improved commercial effectiveness. I "cut my commercial effectiveness teeth" working on airline revenue management. In an industry with such notoriously razor-thin profit margins, it was an article of faith that pricing science was a key factor in an airline's success or even its very survival. So, when I began working on pricing outside the travel industry, I was struck by the relative simplicity of the approaches that were employed. Usually, it was just cost-plus pricing: This illustrates one of the paradoxes of pricing. The fatter historical margins are, typically the more simplistic current pricing practices are, and that means greater opportunity to achieve margin improvement through more sophisticated pricing.

The key to the right pricing approach is to carefully consider how your customers value the product or service your company provides them, and you have to bear in mind that, that itself is a moving target. A recent survey we conducted together with the New York Stock Exchange found that 71% of CEOs see rapidly changing customer demographics and preferences as an opportunity to fuel growth. Tracking value as customer needs evolve is a discipline very different from that required to estimate the cost of producing your product or service.

As an example, one of our clients, a manufacturer of spare parts for commercial aircraft, had a practice of discounting parts they had in stock but charging more for parts where they had to initiate a new production run. While that certainly reflected a cost reality, since it costs more to ramp up production for a part than it does to pull it out of inventory, it failed to capture the value that their considerable inventory of ready-made parts had. After all, if you happen to have the part that can get a $75 million aircraft quickly back in the air and productive again, it is likely worth far more to the customer than it would be if they had to wait for you to ramp up production.

Then there are other factors that can have an outsized effect on customer value. For one, operational criticality of the product or service. Maybe technical differentiations that lower their total cost of ownership or downtime. Bundling or "kitting" of ancillary products or services to simplify the customer's purchase decision. Competitive prices for comparable products or services. And finally, familiarity and interoperability of products or services with an already installed base.

Of course, for any given industry, the customer value drivers can vary, but the first step is always determining what they are and how much they matter. Something that may vary by customer segment.

Operationalizing value-based pricing typically involves the establishment of two related, but separate sub-functions within pricing. First, Strategic Pricing, and second Tactical Pricing. Strategic Pricing is charged with understanding the key customer value drivers by segment and defining segment-specific pricing approaches or even pricing formulas that translate those drivers into a recommended range of prices for each product. Tactical Pricing in turn is responsible for applying these strategic approaches to specific customer opportunities and using deal context to help the sales team negotiate pricing.

A few additional elements round out a successful value-based pricing approach. Pricing governance that allows for a structured escalation of pricing exceptions for larger or more strategic deals. A function that collects data and market insight to inform perspectives on competitor price levels. A market feedback mechanism that tracks quote conversion rates and customer feedback to understand when the market is telling us our prices are too high or possibly too low. A set of pricing tools to support strategic pricing and tactical pricing, and to enable the sales force with solid pricing guidance. Finally, the right pricing organization and customer-focused talent to undertake value-based pricing.

Whether you're a CEO looking to improve margins or a private equity fund looking to drive value creation at a portfolio company, taking steps to recognize the value of your offering and the way you price can drive significant upside. Indeed, helping clients apply the same rigor to their pricing function as they do designing their products and services has unlocked billions of dollars in value for them. It's also one of the reasons I'm so passionate about the work our team does. I'm Scot Hornick, and this is my take on value-based pricing.

This transcript has been edited for clarity.