Adaptomy Bulletin 25th March 2022
Issue No.4 by Geraint Holliman and Will Wright
INFLATIONARY IMPACT vs 'PRICING POWER' AND QVP'S
No one is immune to inflationary pressure, or at least the prospect of increased margin pressure except perhaps those who have systematically gone about building 'price equity'. That is, making systematic investment in pricing strategy, long-term. As warren buffet famously said:
If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business.
We'd cavate that by saying, if you've built up price equity and can raise prices without saying a quiet prayer you probably know your worth, and value to customers. And, customers know what you're worth too. It's likely you have Quantified Value Propositions driving your pricing strategy and over time you've accumulated enough credit with customers to raise price when required. This doesn't make any company immune to inflation, just that some will be less sensitive than others. McKinsey have a great article on Pricing Power, which sheds some light on 10 pricing levers that can help and another, more detailed pricing strategy article on Winning the Race with Inflation, which is well worth reading.
McKinsey top 10, in 3 groups:
Set the right price
Attribute-based pricing (ABP): set price based on product performance and other attributes
Fixed-ratio pricing: reprice spares and consumables as percent of base unit
Set configuration pricing: align base unit based on attributes and adjust configurations
Value-based pricing (VBP): quantify lifetime benefits vs the next-best alternative, such as labour productivity, footprint, and throughput
Optimise discounts and rebates
Reset discount structure: based on distributor performance and product differentiation
Reset commission structure: based on value added (eg, demand generation or qualification vs fulfillment)
Deal scoring: guide new deals using dynamic deal scoring to provide right discount
Change order as profit center (COPC): institute process to price and charge for change orders driven by customers
Closed-order variance (COV): minimize cost increases arising during project execution, identifying and fixing root causes
Pricing-performance management: monitor risk, compliance, and value-capture metrics, clear delegation of authority (DOA), etc
There's another interesting perspective from and investment point of view from Intrinsic Investing which builds on pricing equity and value creation: Pricing Power and Inflation
They make a simple assertion, which we'd wholeheartedly support:
As long as our companies continue to deliver superior customer value propositions, we have no concerns about their pricing power or ability to manage through challenging economic times.
Are silo's really all that bad?
Despite never-ending discussion on the damaging effects of silo's, how many of us take a close look at them? Have we really thought through whether they're required or not, whether specialisation is a good thing from time to time or whether we're actually damaging our businesses? A good starting point to get a grip on silo's, good and bad, is 'The Silo Effect', an anthropological study of silo's by Gillian Tett, Moral Money co-founder, author and journalist with the Financial Times, chair of the editorial board and editor-at-large USA.
Silo's are often built with good reason, deliberately, to drive or accelerate production, penetrate a target market, go to market with a new product, they can have immediate beneficial effects. The challenge for most organisations, is when these silo's become an end in themselves, too permanent, protected, myopic and in some cases impenetrable.
It's worth remembering that silos are organisational, operational, cultural and psychological. To an extent they are part of every day life, a way to compartmentalise, to structure and focus. To break down silo's you first have to understand how and why they were created and how they work. From a psychological point of view that means listening like an 'insider-outsider', from an organisational point of view it also means encouraging multi-disciplinary, diverse discourse and collaboration to better understand and integrate new ideas and structures.
Arguably, Silo's are not necessarily bad, they can have a purpose, what's perhaps missing is conscious deliberate decision-making about how and when to use them, and when to change or eliminate them.
Stuff we're thinking about
Just a few things from recent blogs, our 'nudges', thoughts on value and growth and the kind of stuff we're thinking about, an endless stream of topics and points of interest...
Thoughts on Value and Growth: Intellectual Capital
We all know that intangible assets often represent the majority of business value, sometimes up to 80%. Arguably we, as commercial leaders are responsible for managing many of the most valuable of these, such as brand, customer relationships, experiences, reputation. Why is it then, that so much of our attention as commercial leaders is directed toward managing the P&L rather than the assets of value in the business?
Do we have reliable, systematic approaches to quantify differential advantage in our customer relationships and experiences, do we know the asset value of our content our, key commercial processes, know-how and disciplines. ISO 10669 went some way to help value brands using six tenets: transparency, validity, sufficiency, objectivity, financial, behavioural and legal. But, that's just scratching the surface, what about all the other commercial disciplines and the intellectual capital embedded in them?
We've defined 47 commercial disciplines, each of them represents intellectual capital and or an intangible asset, collectively they represent a significant portion of business value, to date we have not found a company measuring their unique contribution. Do you think the C Suite would be interested in understanding how to manage each of these 47 levers of value? If you do, as commercial leaders what can you do about it?
Thoughts on Value and Growth: Pathways to profitability
In what must be the most unsurprising news of the week US-based free grocery delivery start-up, Fridge No More, shut down yesterday. Offering free delivery of any grocery item or items, regardless of order size, anywhere in New York city it started up in October 20920 and within 18 months was gone, taking untold investor millions with it, no doubt.
Accused of having no pathway to profitability by one supply chain expert, who called rapid grocery delivery “the worst business model ever created”, Fridge No More was clearly funded on just a hit and hope basis by investors. They were too eager to please without understanding the value of what they delivered (literally, in this case), how customers put a value on it and what they’d be prepared to pay for it. To quote my favourite Jurassic Park character, Dr Ian Morris (Jeff Goldblum) “they were so preoccupied with whether they could, they didn’t stop to think whether they should.”
If start-ups don’t set out with a clear, quantified value proposition then how will they begin to substantiate the value they want and expect customers to pay? A properly quantified value proposition is the fundamental basis for any business plan and forms the primary input to every pricing plan also.
Footnotes: things you might have missed
Most hated unethical marketing practices
Keeping on the subject of brands and purpose, from last week’s bulletin, today we came across the publication of a recent report on the seven most hated unethical marketing practices …. and some of the unexpected big brand culprits perpetuating them!
With SEO firm Semrush reporting at 287% increase in online searches on ethical marketing over the last year, the New Statesman/Lead Monitor polled senior UK marketers and business leaders to identify what are those most unethical marketing practices. Included in the report are examples of some high-profile, and surprising, brands using each of these techniques. See for yourself who some of the embarrassed brands were!
In ascending order of most maligned:
7. Newsjacking – aligning with current events or cultural issues to gain advantage of heightened news awareness
6. Greenwashing – over-inflating a product or brands eco credentials
5. Collaborating with unethical influencers – aligning with influencers who are (or subsequently become) toxic to the brand
4. Clickbait article headlines – luring in readers with spurious or lurid promises not fulfilled by the content
3. Non-transparent data use – using data gleaned from consumer sin ways which were deliberately obscured from them
2. Concealing important information – omitting key details about offerings to make them appear attractive than they really are
And the very worst -
1. Targeting the vulnerable – targeting consumers who least need or are able to afford the product or service.
Marketing often uses emotional messaging but the report suggests that some brands stretch the bounds of acceptability and this can very easily spill over into exploitation as evidenced by some of these reviled practices. No brand can claim to be perfect but these hated practices are eminently avoidable.
Quote of the moment...
"The moment you make a mistake in pricing, you're eating into your reputation or your profits", Katherine Paine, CMO News Group.
What we're reading
Neuromarketing, understanding the 'buy buttons' in your customers brain, Patrick Renvoise and Chris Morin
How many sales messages do you think you see a day? 100? 500? 1,000? In this digital era, it could be as many as 10,000. This fascinating book seeks to understand how neuroscience and the study of how the brain works can impact on of the effectiveness of marketing efforts and help you sell more!
The authors identify the six principal stimuli that impact on the part of the brain that actually makes decisions by processing both rational and emotional inputs. They call it ‘the Old Brain’ (or ‘First Brain’) – ‘old’ because, in evolutionary terms, it’s been part of human neurology the longest – for over 45,000 years! The stimuli that work best on the Old Brain are:
Self-centred. Messages must clearly state the benefit to the recipient, sometimes called the WIFM (what’s in it for me) principal.
Contrast. A clear distinction or contrast (before/after, with/without, etc) – in the storytelling world this is also known as binary opposition.
Tangible Input. Ironically, Old Brain is no good at processing words, particularly complex ones – it prefers concepts and ideas expressed in clear, simple terms.
The beginning and the end. Another core storytelling concept. Old Brain likes to anchor situations with a start and an end, almost ignoring what happens in the middle.
Visual stimuli. Old Brain is hardwired to process situations visually much quicker than those expressed as words.
Emotion. Emotional messages flood the brain with hormones that accelerate synaptic responses between neurons creating stronger emotional attachment and making them easier to remember.
The authors then consolidate this learning into four steps to successful selling messaging:
Diagnose the pain.
Differentiate your claims.
Demonstrate the gain.
Deliver to the Old Brain.
The rest of the book deals with tips and hints on to speak to the Old Brain using a series of building blocks and ‘impact boosters’ to deliver messages in the most appropriate formats that the Old Brain can process. This is a great book for any marketer, the information is succinctly delivered and laid out in a very usable format. Easy to read and even easier to listen to as an audiobook.