Typical pitfalls in pricing model development, and suggestions on how to avoid them Typical pitfalls in pricing model development, and suggestions on how to avoid them Typical pitfalls in pricing model development, and suggestions on how to avoid them

Pricing is naturally crucial for most businesses, and thus one would expect companies to place great importance on developing and implementing robust pricing strategies, models, and the related processes. However, based on my experience, having worked with multiple companies on pricing-related engagements, surprisingly few companies have, in fact, done so. This could, of course, be due to the complex nature of the topic, or a lack of resources, or perhaps some other reason. Therefore, I have provided below some suggestions and tips on how to approach pricing model development.

Although it may seem tempting to simply begin by developing pricing models, schemes, etc., I would recommend putting pricing aside for a moment and, instead, focusing on fully understanding your costs first. After all, you will have a much firmer base on which to build, once you know what your product or service really costs you. Depending on the situation, analyses such as “cost to serve” may prove to be indispensable and are potentially useful in other non-pricing-related activities as well.

Companies tend to set unrealistic targets and goals for pricing model projects. The reasons for this may be twofold. Firstly, there is the question of scope (if the planned project is extensive, it may be difficult to estimate the needed efforts and lead time), and secondly, there is the question of feasibility (if companies do not fully understand their starting point, some of the set targets may be overly ambitious and thus unattainable).

For these reasons, the desired outcome is not always reached, and projects may be discontinued, or their scope may be adjusted. To tackle these issues more productively, it may be worthwhile considering the structure of pricing model projects as a series of “sprints”, each with a restricted and clearly defined scope, and a realistic and justifiable timeline.

A good and useful pricing model always has a high degree of flexibility. What this means essentially is that the model can be used in a variety of situations, including those that are not known at the time the model is developed. It should be possible, for example, for the model to be seamlessly applied for the purposes of completely new customers and new products, and structured in a way that allows effortless adjustment of margins and assumptions.

A typical drawback of a model with suboptimal flexibility is the frequent use of a variety of parallel Excel files and calculations. These calculations usually leave no audit trail and are used without structure and mutually agreed guidelines and principles.

The use of parallel calculations fundamentally diminishes the value of the pricing model and, in the worst cases, renders futile the work put into developing the pricing models. Thus, I would urge everyone to put the main focus on maximizing pricing model flexibility.

It is important to note that there is no “one-size-fits-all” solution for pricing models. Therefore, I recommend a careful consideration of the aspects mentioned above, and making your own determination on how to utilize them optimally in individual situations.