For anyone interested in this episode, you can find the podcast links below.

Company webpage: https://www.simplifytech.ai/podcast/episode/33b4b086/ai-in-strategic-pricing-enrico-sieni-on-data-driven-decisions-and-customer-insights

Spotify:

Apple Podcast:

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Why Prioritize Pricing Initiatives Early in the Fiscal Year.

The good news is that pricing initiatives offer a clear and measurable return on investment (ROI). Unlike some projects, the financial impact of pricing strategies can often be seen quickly, sometimes within months. This means that a well-executed pricing initiative, launched early in the fiscal year, has the potential to be cost-neutral—or even accretive—by year-end.

AI projects, on the other hand, can be a bit more complex. While AI offers transformative potential, companies often get caught up in the hype, forgetting to define clear business use cases. Without a focused approach, AI initiatives can drag on, leading to bloated timelines and less impressive results than initially promised. It’s crucial to stay grounded and ensure AI projects align with specific business objectives rather than chasing technology for technology’s sake.

Key Considerations for Planning Your Next Pricing or AI Initiative.

Based on my experience with numerous organizations, here are the essential factors to consider when budgeting for your next pricing or AI project:

1. Funding

Engaging with top consulting firms can sometimes result in million-dollar proposals. While high stakes might be justifiable for large-scale transformations, they also heighten the pressure to deliver substantial ROI. Carefully vet your budget to ensure it is aligned with achievable returns. Ask yourself: Is the investment proportionate to the value it will create? And how long will it take to reap those benefits and make it accretive?

2. Scope

If the price tag of your initiative is in the millions instead of hundreds of thousands, you might be aiming too high out of the gate. Start with a smaller, manageable scope that allows for quick wins and immediate monetization of improvements. This is particularly critical in pricing projects, where you can begin to see benefits early and use those successes to justify further investment. Even if you’re overhauling an entire company’s pricing, start with one or two key areas, prove value, and then scale.

3. Focus

Many organizations suffer from initiative overload, juggling too many high-priority projects at once. If this describes your situation, adding an AI or pricing project to the mix will likely result in delays or underperformance. Before launching, ensure your organization can properly allocate resources and that the team is fully dedicated to seeing the initiative through. Since these projects are highly cross-functional, conflicting priorities will likely jeopardize the initial business case.

4. Data Governance

You can’t build a roof without a solid foundation, and the same goes for pricing and AI initiatives. Ensure your company has a minimum level of data governance in place. This means clean, organized, and accessible data that can feed into pricing models or AI algorithms. Without it, your efforts will be undermined by inaccurate insights, leading to poor outcomes. If your data infrastructure isn’t ready, consider building this foundation first, even if it means delaying more advanced projects.

5. Internal Alignment

The biggest threat to AI and pricing projects is that they remain a proof of concept—great ideas that never get fully integrated into the business. For these initiatives to succeed, you need change management practices to ensure organization-wide adoption. Teams might initially resist pricing changes or AI-driven insights, fearing disruption to their usual processes. It’s crucial to position these projects as essential for growth and efficiency, while providing adequate support, training and incentives to help teams embrace them.

6. Ownership

The success of your pricing or AI project hinges on clear ownership. At a minimum, ensure you have three elements in place:

a) Executive-level support to champion the initiative.

b) A dedicated Executive sponsor who will oversee the project’s strategic alignment.

c) A Project Manager, even if part-time, who will be responsible for driving day-to-day progress and overcoming hurdles.

By assigning accountability at multiple levels, you create the conditions for fast problem-solving and more effective project implementation.

7.  “To Be Processes” vs. A Shiny New System

The allure of shiny new systems can backfire, particularly when underlying processes are not already geared towards a new system. Rather than investing in a new system and hope that technology will solve the existing business problems, companies are much better off by improving existing processes and THEN invest in new technology to automate and streamline steps. I have seen many organizations trying to “lift & shift” archaic and bloated old processes, customizing powerful software to accomplish pricing steps which should not be occurring going forward.

Conclusion

Pricing and AI initiatives can deliver significant value, but only if they are properly scoped, funded, and aligned with your company’s strategic goals. By planning early, defining a clear scope, and ensuring internal alignment, you greatly improve the chances of success. If you need help navigating this process, don’t hesitate to reach out—we’re here to guide you through it.

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Consequently, we push critical initiatives down the road, limping along with unoptimized processes and missed opportunities to improve sales and margins. We tell ourselves that next quarter we’ll focus on pricing, next year we’ll make the necessary changes.

The good news is that, at some point, the pain threshold becomes so high that you have no choice but to address the unoptimized process. But waiting until that breaking point often results in unnecessary stress, strained relationships, and in some unfortunate cases, the need for a leadership change to finally get the job done.

This is especially frustrating when you consider that pricing initiatives are some of the fastest ways to deliver financial results. I’ve seen companies recoup 2x, 5x, or more of their initial investment in just months! Remember that a 1% improvement in price typically yields 11% bottom line improvement. And if you’re thinking, “I’ll get to it next year,” ask yourself: “Why not now?” The impact pricing initiatives can have on your bottom line makes them worth prioritizing.

So, what if your budget is already tapped out? I get it—budgets are tight, and competing priorities abound. But the key is to get creative. Start by looking at ongoing projects that may have lower ROI or could be paused to free up resources for a pricing initiative. You can also consider smaller, quick-win pricing projects that don’t require much investment but can deliver meaningful returns—such as conducting a price leakage assessment or refining customer segmentation.

Cross-functional collaboration can also help unlock hidden resources. If you demonstrate the potential ROI of a pricing initiative, it may be easier to justify reallocating budget from other departments or areas. I’ve seen teams partner with sales, finance, or even operations to launch pilot projects with minimal costs and reap the rewards quickly.

Many businesses are entering the Budget season right now…consider this your friendly reminder to start budgeting for your upcoming pricing initiatives. Don’t wait until next year to ask for funding. Start planning now, even if it means reallocating resources or starting small. Engage your key stakeholders, outline the pricing opportunities within your business, and build a business case that justifies the investment.

Pricing is one of the most powerful levers for profitability, and waiting only postpones the benefits. So, take the first step today and make sure your organization is set up to optimize pricing before the next fire drill strikes.

If you have any questions or need help, please reach out.

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When managed properly, this fear can be healthy, prompting organizations to carefully plan their actions, run incremental pilots, and consistently monitor feedback from both internal and external stakeholders. However, without proper processes, training, and monitoring mechanisms, customer churn can quickly escalate, causing devastating impacts on the business.

A recent example of this worst-case scenario is American Airlines, which cut its annual profit forecast last week due to a failed new commercial strategy and excess capacity in the market. The failed strategy included several key changes:

1. Reducing the sales team as part of a cost-cutting effort.

2. Renegotiating contracts with corporate travel agencies, reducing perks and discounts.

3. Encouraging customers to book directly, rather than through third-party sites and travel agencies.

This combination of fewer discounts, reduced sales support, and a worse user experience—asking customers to do more work themselves—proved to be a lethal mix. It is likely the strategy was not adequately tested before rollout, and the most impacted customer segment was business travelers, who are typically highly valued by airlines.

The implications were enormous. Revised full-year profits are now expected to be less than half of the original estimates, and the Chief Commercial Officer who spearheaded the strategy lost his job. This situation serves as a stark reminder that changes of this magnitude need thorough evaluation and testing across all major customer segments. Additionally, precise monitoring must be in place to detect significant shifts in customer behavior.

Particularly during weaker economic environments, churn metrics can be confused by the overall demand softness, making it more difficult to discern signal vs. noise. However, by agreeing on specific triggers upfront, companies can implement remediation actions if churn accelerates beyond predicted (and acceptable) levels.

American Airlines’ CEO, Robert Isom, promised a “reset,” including reinstating some of the eliminated sales positions and renegotiating contracts with corporate customers and travel agencies. Courting back customers is always a humbling experience, typically involving financial concessions and the need to rebuild trust.

While this was a tough lesson for American Airlines, it serves as an important reminder for all businesses: careful planning is crucial when making significant pricing and value proposition changes. Would you like to review the effectiveness of your pricing metrics? Please reach out.

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However, my experience tells me that these teams often struggle to make noteworthy progress and elevate pricing performance to new heights. Industry pundits typically mention that as much as 75% of pricing initiatives will fail.

Having created and led pricing teams at three different multinationals and coached numerous pricing experts, I know firsthand how easy it is to get sucked into the “transactional vortex.” The day-to-day pricing activities can be so fast and furious that finding time to improve processes, metrics, and systems becomes daunting. As a result, pricing initiatives often end up stalling.

But beyond just being “busy” there are other drivers that can sabotage your pricing roadmap. Here are the main ones I have often encountered, with some suggestions on how to tackle them:

1. Complexity

Pricing typically has many tentacles across the business, making it difficult to implement changes while avoiding unintended consequences. This challenge is even more daunting in businesses with high transactional velocities, outdated ERP systems, and poor data quality. To address this, review the scope of your initiatives carefully and ensure scope creep does not sabotage your progress: try to “bite-size” a larger initiative into smaller (and less risky) workstreams. Also consider executing “enabler” projects that will be vital for the success of the main pricing initiative, for example by cleansing data or implementing key system requirements.

2. Resource Constraints

Your pricing team may be overwhelmed by day-to-day tasks, leaving little time for strategic initiatives. This is often an excellent opportunity to bring in external expertise, such as a pricing consultant. While this comes at a cost, the faster and more successful implementation of your initiatives can outweigh the expense. If that is not an option, look at dialing back certain processes, to free up time. For example, many teams spend an inordinate amount of time on internal reporting, which may be an area to rationalize.

3. Sensitivity

Pricing changes can test customer loyalty. If customers have better and cheaper alternatives, there is a higher risk of losing sales. This fear can create a stalemate among various stakeholders. To mitigate this, conduct thorough research before making price changes. Solid customer and product segmentation, along with rigorous market testing using pilot and control groups, is essential.

4. Lack of Expertise

Sometimes, the organization is committed to making a change but lacks clarity on how to execute it. There may be gaps in analytics capabilities (e.g., not evolving the skills and technology tools to keep up with the data), understanding how systems are interrelated, or how a price change may impact external and internal stakeholders. It is likely that other companies have already navigated the same questions, so seeking external advice in such situations can prevent unnecessary rework and costly mistakes.

5. Uncharted Territory

New circumstances can necessitate entirely new processes or systems. For example, during the 2019 trade war with China, manufacturers had to figure out how to pass on additional costs from trade tariffs. Similarly, if your organization prices based on material goods and now needs to price services, it can be a daunting task.

In these instances, external help can accelerate the resolution of your challenges and lead to better results. I often see companies struggling to figure out a certain problem, not realizing that other industries already have mature processes for that specific issue, enabling easy cross-pollination, if you know where to look.

6. Regulatory Constraints

Local legislation may prevent certain price changes, depending on your industry or country. Engaging the appropriate experts is crucial, as errors can result in significant penalties.

Hopefully, this list will help you diagnose what is preventing your organization from expediting key pricing initiatives. If you need additional help, please reach out.

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However, this shift is not always well-received by customers. While traditional purchases give customers outright ownership of a product or service, subscriptions merely provide access for as long as payments are made. Yet, subscriptions can offer customers certain benefits: they spread out the cost over time and often include updates and improvements at no additional charge. Nevertheless, companies that successfully manage this customer transition enjoy some significant benefits.

The Microsoft Case Study: Activision Blizzard Acquisition

A notable example of this transition is Microsoft’s recent $69 billion acquisition of video game company Activision Blizzard. This high-profile deal, finalized in June after nearly two years of navigating global antitrust scrutiny, raised concerns among various stakeholders. Regulatory bodies feared a potential monopoly in the gaming industry, and customers worried about the implications for non-Microsoft platforms like PlayStation.

Activision Blizzard’s flagship game, “Call of Duty,” highlights the stakes involved. In 2022, the latest version generated over $1 billion in sales within its first ten days. By October 2023, “Call of Duty” held the Guinness World Record for the best-selling first-person shooter series, with over 425 million copies sold and more than 100 million active players monthly across all platforms.

The Shift to Game Pass To reassure the gaming community, Microsoft announced it would continue producing “Call of Duty” for all platforms. However, for Xbox users, future distributions of the game will be exclusively via Microsoft’s Game Pass subscription, eliminating the option to purchase single installments.

This move has significant implications. Previously, each “Call of Duty” title cost between $50 and $70. In contrast, a Game Pass subscription has plans of $9.99 and $16.99 per month. Assuming Call of Duty will be included in the higher tier, the cost would add up to roughly $200 annually—a substantial increase. While Game Pass offers a wide array of games, it is unclear if “Call of Duty” fans will find this attractive if their primary interest is in just one game.

On the cost side, Microsoft may not see significant savings. Traditional distribution methods will still be required for other platforms, meaning the shift to Game Pass will not necessarily reduce marketing or distribution expenses. Additionally, some loyal customers fear that bundling “Call of Duty” into Game Pass could undermine future investments in the franchise, losing focus and resources to other internal projects.

Microsoft’s Bet on Loyalty and Subscription Revenue Microsoft is betting on the strong loyalty of “Call of Duty” fans to drive subscriptions to Game Pass, thereby increasing its subscription revenue. However, this strategy faces a potential obstacle: subscription fatigue. With consumers already overwhelmed by numerous subscriptions, there is a risk that fewer customers will sign up for Game Pass, even if they are long-time “Call of Duty” enthusiasts.

If Microsoft’s gamble pays off, it could pave the way for other companies to adopt similar subscription-based models. Netflix and Amazon have already shown interest in the video game industry and are planning to introduce their own games, of course as part of a subscription. Alas, for the consumer this will probably mean that their future video game entertainment needs will require yet another subscription.

Would transitioning to subscriptions be the right model for your business? Please reach out to discuss together.

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Instinctively, retailers could just lower their pricing to attract more business and keep growing their share. And, in fact, most retailers are lowering their price points to accommodate budget-conscious customers: Target announced that it is slashing prices on more than 1,500 popular items immediately, with another 5,000 products to follow soon. Other retailers such as Ikea and Aldi have also recently reduced prices to re-engage churning customers. Walmart has doubled down on its “rollback” initiatives.

However, we all know that just slashing prices is not the secret for long-term success: no retailer wins in a price death spiral to the bottom. Fortunately, these retailers are savvy and while searching for profitable and sustainable growth they exploit other levers too.

Which other growth strategies are retailers adopting? Here are four main levers, with examples:

1. Customer Segmentation:
   With a strong foothold on lower income shoppers, and still being the largest retailer in the US, Walmart is feeling the pressure from other physical retailers, such as the Dollar Store, as well as online players (e.g., Amazon). Having found higher income customer brackets as the next area for share gain, Walmart has launched a new private brand called “Bettergoods”, focusing on trending items but with a higher quality. The hope is that the new product expansion will attract customers that would generally go to other stores, for example Costco with its Kirkland private brand, as well as provide more variety for existing customers thus improving loyalty.
2. Product Segmentation:
   Responding to customer feedback, particularly those looking for value but at a lower price point, Target is launching a new value brand called “Dealworthy”, with roughly 400 curated items. This is a similar approach to the dollar stores as well as Amazon’s “Amazon Basics”. Given the large amount of shopper purchase history at Target’s fingertips, the company can run data analytics and focus on top demand items. The intent is to protect customer loyalty and minimize the need to shop for these products elsewhere.
3. Customer Experience:
   Enticing customers to visit the stores is important for same-store metrics. As a result, Walmart has invested over $9Bn in the last couple of years, updating over 1,400 stores to improve the shopping experience. Target had already started this process prior to Walmart, with positive outcomes, prior to the current slowdown. In addition, most large retailers are improving their digital experience, to help customers find and order products more efficiently, thus increasing loyalty, particularly for those who pay an annual subscription (e.g., memberships at Costco, Amazon Prime, Sam’s Club and Walmart).
4. Services:
   Walmart has heavily invested in the digital infrastructure and its delivery mechanism. About 20% of US deliveries slated for the same or next day arrived in under three hours, making it competitive against Instacart and Amazon.
   Also, under the umbrella of “convenience”, Walmart is driving adoption of its own App, making it easier for customers to pick-up items from outside the store or have items delivered directly to the customer’s address. Lastly, both Amazon and Walmart are developing the next frontier of home delivery, through drones. Walmart has teamed up with Wing, Zipline and DroneUp and is already executing some deliveries in select (more remote) zip codes.

Which of these strategies could you apply for /your business, instead of just lowering your pricing?

If you would like to brainstorm more options for your business, please reach out.

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On one side, there is the precedent of the airline industry fee structure, which often leaves a sour taste in customers’ mouths…Want to check in luggage? Fee. Want to board sooner? Fee. Want to select your seat? Fee. Want internet access? Fee.

On the other side, there is the allure of higher profits since fee revenue can be extremely lucrative and help capitalize on services which would otherwise be included (i.e., free).

A fee structure could also be advantageous for customers, if implemented in a smart way. It allows organizations to tailor offerings to distinct groups of customers, providing options that suit their needs and budgets.

To make this work, customer segmentation is key. By dividing customers into groups based on their preferences, you can create fee structures that make sense for each group.

For example, going back to our air travel analogy, a frequent business traveler will potentially pay a fee to embark and disembark the plane quickly, or use internet service during a flight to continue working.

Meanwhile, on the same plane, a family with young children would be willing to pay extra to sit together or to purchase children snacks that had little toy surprises to play with.

Fees can help you customize the customer’s experience and give them better control of paying for what they care most about.

So how can companies best navigate these decisions? Here are some thoughts for you to consider:

1. Avoid overwhelming your customer. Customizing your offering should not be an excuse from doing your homework on customer segmentation. Having some pre-planned packages, with a few options to add-on is efficient. Conversely, an extensive list of “a la carte” options to choose from can become overwhelming for most customers. If you have been in a fast-food restaurant where you “build your meal,” you can relate…choose your protein, choose your vegetables, choose your side, choose your toppings, choose your sauce, choose your drink. For most new customers, this can be a stressful experience.
2. Identify your typical “buyer personas”. Understanding your customer segments can help you create more targeted combinations of your offering. By analyzing your historical sales data, coupled with some deep dives (e.g., focus groups, surveys) one can identify the main customer segments and their needs and preferences. For example, many automative manufacturers identify a particular customer segment which is interested in “sportier” driving. For this segment of drivers, they would offer a performance package, which selects the bigger engine, bigger brakes, more rigid suspension. There may still be some additional options to choose from (e.g., ceramic brakes, racing seats), but most of their wish list may already be addressed. Aim to have a few of these packages readily available to choose from and provide a few additional options if needed.
3. Keep the fee “reasonable.” Of course, the perception of what is a “fair” price can be very subjective, but we have all seen instances where the add-on fee is just excessive. If you have ever tried to buy a product online to just find out at the checkout that “shipping” was multiple times the value of the product, you know the feeling. There are certain price points where most customers would expect the option to already be included in the base price, so charging extra for a basic feature could drive customer dissatisfaction.
4. Understand your competition. It is sometimes easy to go overboard with pricing when you have a base price and many options to add on. Keep an eye on the additive aspect (base price plus all typical options), to ensure you remain market competitive.
5. Avoid surprises and mandated fees. The most controversial fees tend to be ones that are imposed and come as a surprise. This includes surcharges and other fees that are not mandatory (e.g., not related to taxes or other governmental charges). If you must add a fee to every customer, make it visible upfront and explain what it is for (e.g., Uber’s surge fee). Anything added at the end of the checkout process and not driven by a customer’s choice, is likely to create friction. Examples are fees which appear only upon checkout, such as “resort fees” or additional hotel charges, service charges. For a B2C customer, this is an irritating experience. For B2B customers, very often this turns into underpaid invoices and write-offs.

By taking a thoughtful approach to adding fees, you can boost your revenue while keeping your customers happy. It is all about being thoughtful about your offering and finding the right balance. If you would like to discuss further your specific situation, please reach out.

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From a quantitative perspective, they measured the number of mentions of pricing power in company transcripts and it is now well below average. And this was also spanning across different industries (automotive, pharma, aircraft, chemicals), therefore not a sector specific issue. A similar development is likely to affect the North America market next.

Looking at the broader picture, this development is unwelcome, but not surprising:

• The pricing tailwind following the Covid19 supply interruptions and mismatched demand/supply is dissipating.
• Energy deflation, partly offset by salary and logistics increases translates to slowing inflation.
• Increased international imports, particularly from China, create a tougher competitive environment.

Fortunately, not all the metrics are down trending, leaving many pockets of pricing power, if you know where to look for them.

Here are some recommended steps to combat impending pricing pressures:

1. Negotiate vendor cost down quicker than customers do with you. It is a no brainer, but many companies lose the battle by moving too slow and in a narrow fashion.
2. Elevate your price and margin metrics to the next level: you cannot detect “death by 1,000 cuts” if you are looking at your pricing at an aggregate level only. Well, you can, but you will realize way too late in the game that you have a MASSIVE problem on your hands. Instead, keep a sharper eye on developing trends from the bottom up, which will allow you to rectify profitability issues before they escalate.
3. Manage price and volume with renewed intensity: if you are making short term price concessions in exchange for volume, make sure that incremental volume materializes. With potentially slower demand and economic backdrop, the promise of volume may be unfulfilled. Therefore, if you must concede price in exchange for volume, try at least to structure it around a rebate program: this will allow you to first win the volume, then concede the discount.

With slower inflation and potentially a softening market environment in the future, pricing remains a key business lever. In other words, it is time to step up your pricing game. Please reach out if you need assistance.

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Let us address the elephant in the room: while the current AI revolution is indeed producing remarkable outcomes, particularly in creative realms like visual, audio, and textual generation, it is not without its hiccups. Despite notable advancements, such as the ability to generate content, AI still grapples with issues like “hallucinations” (read more on this phenomenon on the IBM site). Nevertheless, the pace of technological advancement remains staggering.

On the pricing front, although major pricing software providers have integrated some AI functionalities, many of these capabilities are mere extensions of previous offerings (i.e., calculations of willingness-to-pay or price versus volume matrices). For AI to truly revolutionize pricing, the focus must shift from “generative AI” to more “computational AI,” empowering machines to define, model, test, and scale pricing approaches. This evolution is inevitable but will unfold over years rather than months.

So, how can companies position themselves to harness the benefits of these technological advancements? Here are six actionable recommendations:

1. Clean your data: As the age-old adage goes, “garbage in, garbage out.” This principle holds true in the realm of AI. Take the time to meticulously clean and map out your data inputs. While machine learning can mitigate some issues, starting with clean data will save headaches down the road.
2. Streamline Your Processes: AI has proven extremely useful at replicating and automating numerous tasks which historically belonged to “knowledge workers” only. Several examples have been posted on how LLMs have been trained on patent process and international tariffs. However, to expedite the “training” process of the models, having clear process steps, documented procedures and typical exceptions can dramatically accelerate the process.
3. Develop your change management muscle: there is certainly a learning curve that every organization will need to handle, adapting to a new worker & machine collaboration. Help your employees understand how AI can aid make the company better instead of undermining (or completely replacing) their work.
4. Cultivate Early Adopters: Identify and support individuals within your organization who are eager to embrace AI initiatives. Their successes and insights will inspire others to follow suit.
5. Help the rest of the organization follow along: while early adopters will pave the way, do not forget to involve and educate the rest of the organization. Lack of understanding and fear will quickly alienate a portion of your enterprise.
6. Strengthen your Project Management: Many organizations struggle with managing AI and data science initiatives effectively. Despite the allure of new technologies, robust project management practices are essential to avoid diluting your efforts. Prioritize initiatives wisely, focusing efforts on pivotal areas for effective implementation.

By leveraging these recommendations, businesses can position themselves to navigate the AI landscape effectively and capitalize on its transformative potential. If you need some additional help, please reach out to me.

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