What is the Pricing Maturity Model?
The Pricing Maturity Model is a model that differentiates businesses on how developed their pricing principles are. It was first coined by the EPP Pricing Platform. Nowadays businesses tend to operate on all kinds of professionality levels. Some businesses make decisions based on subjective knowledge, experience, gut-feel or guesswork, while other businesses put a lot of emphasize on being data-driven.
However, we at SYMSON have noticed that more and more businesses are using data for their pricing strategies. The way in which data is used varies per company, but we can distinguish 4 different pricing levels.
According to the Pricing Maturity Model, there are 4 levels of pricing maturity. Ranging from the merchant on the street, all the way up to Amazon, which makes use of tons of data.
The pricing maturity model is not a rigid model without room for a business ‘s individual characteristics. However, it is a useful model for determining where the pricing of a business is at and how it can be improved in the future.
Especially for B2B distributors could this model be helpful since many distributors fall 1 or 2 steps behind in the pricing maturity model. Most of the time, this is because they don’t know how or why moving to the next level is beneficial or they have doubts about feasibility. However, higher level pricing tools empower pricing managers and small improvements in price can lead to a substantially higher profit.
In this article we will explain what the 4 levels of the pricing maturity modelare and how you can determine where you fit in the model. Next, we will explain what steps you should take, to make your pricing even better!
The levels of the Pricing Maturity Model
- Pricing 1.0: 100% Manual Pricing – The most basic pricing that you can do is selling any of your products at any price to whomever wants it. Most companies will likely not have such pricing strategies, but some merchants at the local market still do. At their stand you can sometimes still haggle the price down, depending on the time of day, how much the merchant already sold and on how much he likes you. Most of the pricing decisions that are made at the pricing 1.0 level are subjective.
- Pricing 2.0: Pricing as a Project – Pricing 2.0 is already a lot less subjective than pricing 1.0. At this level, a business tries to sell the right product to the right client at the right price. Most of the time certain pricing rules are in place so that pricing is somewhat consistent within the organization. Such pricing rules could be based on making a certain profit margin or giving a maximum discount. Organizations at this level also keep track of their pricing, they use data visualisation tools such as PowerBI or Excel. To keep track of costs, number of sales and selling prices.
- Pricing 3.0: Pricing as a Process – Organizations that have a certain process for their pricing can be classified as organizations on a Pricing 3.0 level. Organizations at this level have a standardized process for their pricing and they are selling their products for prices that take into account multiple factors. For example, these organizations use data on competitor prices, their own cost price to determine a price for their products. Most of the time they already have (simple) software for their pricing
- Pricing 4.0: Pricing as a System – At the most advanced pricing level, pricing is no longer a simple task, it has become an entire system. At this level, companies use algorhytms to generate the right price for each customer automatically. Artificial Intelligence & Machine Learning are often associated with these processes and there is a continuous learning cure at these companies. Tests are conducted in a controlled manor to further optimize prices.
This may sound like a lot and you may not exactly now where you fit in this model. In our experience most companies now fall somewhere between pricing 1.0, 2.0 3.0. Examples of companies that are already at the highest level are for example Amazon or Bol.com. But how can you improve your pricing? Here are steps for each pricing level so that you can level up your pricing.
How to improve your pricing?
Pricing 1.0 > Pricing 2.0 Go from a volume driven approach to a price driven approach. Most companies that are at pricing level 1.0 focus on selling their inventory. However, they should start to focus on their prices. The best thing these businesses can do is determining their product cost and then choosing the right margin and business rules for a steady profit.
Pricing 2.0 > Pricing 3.0 Businesses that want to level up to pricing 3.0 should focus on achieving a value driven approach. These companies should focus on knowing what they are worth to the consumer and start selling at that price. This can be achieved by doing thorough competitor research and knowing the strengths and weaknesses of your product and brand. Also, these businesses should start to think about software specifically for pricing analytics.
Pricing 3.0 > Pricing 4.0 To go to the highest pricing maturity level, one should focus on automating the mundane tasks of pricing. At pricing 3.0 you already have a lot of pricing knowledge. But to get to the next level, businesses should put all their knowledge to use. Businesses should start to make use of algorithm’s to automatically adjust prices when certain key values change. Such as competitor prices or the cost price.
Pricing 4.0 Nice! If you are already automating prices with the use of AI & ML your pricing is more mature then most companies out there! To improve from here, pricing 4.0 businesses should focus on A/B Testing and improving the dynamic pricing algorithms. Especially A/B Testing and controlled testing should be part of the daily jobs of pricing managers at pricing. 4.0 companies, because this makes sure that you are on top of new trends and innovations.
At SYMSON we mostly help clients going from pricing level 1.0, 2.0 & 3.0 to pricing 4.0 (Pricing as a process). For example, we helped a wholeseller to go from pricing 2.0 to pricing 4.0. Their pricing was first based on basic business rules. But with the help of the SYMSON system we managed to determine the optimal prices for their products. Do you want to know more about the pricing maturity model? Or do you want to know more about what SYMSON can do for you? Please contact us!
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