Petr Partsch, sales chief for Linde Gases, Czech Republic, shares with McKinsey how understanding the full potential of value completely changed the company’s approach to pricing.
The “aha!” moment: the spectrum of value
The thing that mattered most to us was understanding the value of products and services for each group of customers. We really suddenly found out exactly how value was determined by different segments of industry, the size of customers, and the ways the product was used. It was a new thing for us to have such a clear view of spectrum of value. Smaller customers were less focused on cost but more on the level of service, for example. For bigger customers, technical capability and reliability were more important. These in effect became pricing criteria.
In the past, pricing was not a skill we focused on, and we were not very sophisticated about it. We thought about increasing prices with inflation or growing price as much as possible, but there was no logic or strategy. When we started to take pricing more seriously, we realized that we needed not only to collect better data but also to be more systematic about using it.
Building a pricing system around value
We started developing a new approach after collecting better data—including from our sales reps—and having discussions with our customers about what they valued. But we mainly did tests by implementing different surcharges. We learned which fees or product price levels various customers in various segments would accept and which would reject them. We learned how they valued our various services, so we started to structure our services differently.
Some large customers, for example, just wanted a reliable supply of gas but did not need technical support. So we could not charge for it. Smaller businesses wanted the technical support. Some companies, such as the metallurgical ones, needed more application knowledge, which we could provide. We worked hard on communicating our value that was relevant to the given segment we were targeting.
When times were good, our customers accepted price adjustments without too many problems. But in tough times, we had to defend our prices and faced significant competitive pressures. We just defended our volumes, not our prices. But we knew we had to change this situation, because sooner or later we would lose profits. We had to change our behavior and ask for compensation from our customers for the products and services we provided that they valued. We knew we would have some losses, but we maintained our profit level, and from the revenue point of view, we stabilized our market share.
It’s all about people
It was hard to convince our colleagues to go with this more rigorous approach to pricing. So we showed them models of what would happen if we did not change and how our profits would evaporate. We became much more sophisticated with our segmentation. We even differentiated by region as well by the different level of competition in segments or regions. But we had to overcome many objections based on “experience.” Many of our salespeople, for example, were not convinced it was possible to charge different prices by region, because the Czech Republic is small. Or they did not believe big customers would accept an increase in prices when their consumption levels were low. So when the data provided a suggestion for prices, we discussed them row by row, product by product, and customer by customer to convince our people to try it.
Most importantly, we had to have a couple of success cases. I and my managers participated in meetings where prices were planned, listened carefully to reasons from salesmen why some changes were dangerous, why some price increases are too big. We took responsibility for what happened with customers. We helped our customers see that prices were going up, that we’d invested in technology and infrastructure to make them reliable. When they understood this, they did not want to switch. And our salespeople saw this too and became braver in how they talked about prices with customers. We spent hours and days with our people to explain, train, support, and then explain again.
In the end, business is about people. So you have to invest a lot of time with your people and your customers to communicate and convince them.