Pricing Strategy The Critical Steps to Success. By Chris Chrisafides

Transcription

1 Pricing Strategy The Critical Steps to Success By Chris Chrisafides Achieving a 1% improvement in pricing every year, year on year equates to raising your EBITDA, for example, from 14% to 15%, all other things being equal. How else can you improve your bottom line by 1%? Think about how much more volume you d have to sell to raise your EBITDA from say 14% to 15%; or how many people you would have to cut from you workforce; or otherwise reduce costs for that incremental 1% improvement. Developing pricing science as a core competency takes time. It is a multistep approach, and just like an automobile, each step is like a cylinder and you need to be running on all cylinders in order to make and maintain fast progress. In this paper I will share with you the critical steps required in order to be hitting on all cylinders and realize immediate benefit from your pricing excellence program. Background When an organization is starting their pricing journey (see Figure 1), they look for quick wins, and early adopters in order to gain momentum, not unlike any business rolling out a new product or technology. A key starting point is identifying the gaps and need that your offering addresses - and illustrating how using your tools and methodologies add value for addressing those gaps and needs. Keep the approach simple in other words, although there may be multiple opportunities to address in your screening analyses pick one or two max that are impactful and bring them to fruition. Once complete, leverage and market this capability in order to facilitate the change management required to penetrate the rest of your market - additional opportunities in that business and other businesses and functions. Use the leader for whom you have added value as one of your champions. These quick wins can happen in three main areas depending in which area your business champion resides either Finance, Commercial, or Marketing. 1

2 The Three Key Areas An experienced Pricing Leader coupled with some maturity of the business along their pricing journey can allow for a more orchestrated and comprehensive approach one that hits on all cylinders at once. These cylinders of Pricing Excellence fall into three main areas of distinct pricing discipline as follows in Figure 2. Figure 2. Pricing s Three Critical Areas Let s talk briefly about these three critical areas associated with Pricing Excellence that must occur in parallel in order to create a comprehensive solution for your business. i. Price Management My definition of Price Management is the process for maintaining the integrity of your price lists, including your process for price changes and approvals, and automated workflow so that requests for new/changed prices automatically get routed properly for approval and then automatically the new prices and effective dates flow automatically into your ERP system. This should also allow for mass-edit capability across market segments or product families, or other segmentation provided for in your market directory. This seems like such a simple area but we allow for complexity to creep in due to lack of organization, discipline, and automation. Most organizations unfortunately maintain prices on spreadsheets kept on PC s and not centrally housed, and the work process for creating/editing prices is inefficient such that it can create SOX (Sarbanes Oxley Compliance) issues and invoice accuracy issues. If you are going to do all the work to ensure you are addressing leakage and maximizing the value you get for your products or services, PLEASE make sure your process for entering and maintaining these prices is optimized and that price changes are taken expeditiously and systematically! 2

3 A more advanced process for price management includes dash-boarding and reporting on price changes, metrics on time required to effect price changes a well as price realization metrics to ensure traction on price changes. Deal Scoring is also an advanced element of Price Management. Although the waterfall elements representing cost to serve come under Margin Management (price analytics), and price floors/targets come under Value Management and are owned by Marketing. Deal Scoring provides the Sales/Commercial organization with a template where they can expeditiously not only enter the desired price per unit, but also enter any and all discounts and concessions associated with the deal and then score the actual projected pocket margin versus the floor/target established by the marketing organization. If the deal conforms to the established margin criteria, it uploads into the system. If it is an exception it is automatically routed via to the designated approver - elegant and efficient. ii. Margin Management Typically, this is the land of low hanging fruit. This is also where you can provide granular levels of detail to the distinct areas of discipline Commercial, Marketing and Finance for parallel action. And this is the key area in which you can internalize these reviews into your existing business processes in order to (1) monitor your traction and benefits realized for actions already identified and (2) identify any new anomalies or outliers which have occurred and need to be addressed proactively. Developing and maintaining simple, high level metrics and dashboards can provide visibility and drive behavior and discipline down through the organization where price analytics can be used to find root cause and address them as well as measure impact. FMEA (Failure Mode and Effect Analysis) or simple root cause analysis are the processes that permanently fix these pricing defects often times. Margin management can never stop. Churn, mix changes, competition, new product introductions, short term tactical actions and changes in strategy require this discipline to remain constant. Some businesses take a more top-down approach while others imbed it into the business and allow the GM or Business Leader to implement as they see fit. Margin Management breaks down into three key areas: Sales, Marketing, and Finance (see Figure 3). Figure 3. Key Areas of Margin Management Here are how each of these three areas can provide ownership and distinct engagement from their disciplines: 3

4 1. Finance Making transparent and passing through all changes in costs in order to avoid margin erosion Measuring traction to ensure actions are being taken at a granular level and then rolled up to an overall run-rate and actual benefits realized Oversight over working capital elements such as payment terms and other costs of capital Oversight on price age - highlighting all price records which have not changes past an expiration period for example Oversight on any and all negative margin situations and risk assessment on impact of lost revenues due to actions taken (contribution margin impact) 2. Sales Review and address price outliers and anomalies or any small volume customers getting large volume prices or concessions. Simple analytics can be provided to highlight: o Lowest margin deals o Lowest margin customers o Excessive Concessions by category o Customer/Product Margins by Seller/Channel o Highest Margin Customers/Products/Sellers for expansion 3. Marketing Portfolio management tail analysis Price band analysis drive four-quadrant analysis as a standardized approach to product line strategy Track conformance to rules Track NPI ROI Identify where value proposition is not being properly sold and address These few critical and key areas if addressed in parallel in an organized and disciplined fashion will effect change and discipline in an organization s pricing journey and mitigate price pressure. iii. Value Management No matter where in the value chain your immediate customer lies, understanding how the ultimate consumer will value how you affect a product is critical if you want to get paid for what you bring to the table. And this is what Value Management is all about. It requires the discipline of marketing in order to understand how not to leave money on the table when you price your products. It includes identifying and communicating with all of the potential buyer influences and then separating out which product attributes they value the most without allowing price to be one of their options. Further, it then requires developing that value proposition, collateral, campaign, market creation and penetration, and 4

5 ultimately educating your sellers and your consumers of this value and need your offering is satisfying. And then ultimately establishing your floors and targets accordingly. This is an art, and in my experience is usually a gap in most organizations. However creating tools and methodologies on how to execute these techniques is where Pricing begins to overlap with Marketing. And this is good. This gives way to market blueprinting and voice of the customer, and other techniques for assessing value attainable and addressable markets, etc. Keep this area focused on developing and training your marketing professionals on a consistent framework and methodology for performing techniques like Conjoint Analysis, for example. Leverage outside experts as you establish your in-house competency to provide focus groups and third party interviews to understand the value Pricing Science provides and avoid becoming victim to the cost-plus dilemma. Price Optimization is another key area. Typically reserved for airlines, hotels and supermarkets, this technique for testing price stickiness across different demographics or other segmentation can optimize value by identifying an elastic versus and inelastic price. Most pricing software programs offer this capability. Where your deal is with several different end users/market channels in different geographies this approach can optimize your value capture and is used regularly. A Word on Change Management Realize that telling people that there is a problem with how they are pricing their offerings and that you are here to help can be received in different ways. This is a complex sale, and so the focus on adding value must be maintained due to so many competing priorities. This means the right support, attitude, demeanor, and cohesion are required up front not unlike any other complex sale. And these things take time. Starting simple is important. Pick and chose the 20% opportunities that can deliver the 80% value. Your pricing leader and team need to be visible, engaged and willing to roll up their sleeves. Scorecards need alignment as well. If an analysis says that there is $10MM in potential benefit from anomalies identified, the business should pursue these as a way to meet/exceed their business plan rather than having their business plan increased by $10MM. As long as the benefits of the effort are tracked and the business team is rewarded (with the pricing folks being recognized as part of that team and having had a seat at that table ), all and most important the company will benefit. This critical point can make or break your efforts, so be transparent with how this will work at an executive level early in your program. Conclusion The approach of focusing on these three key and strategic areas of Pricing coupled with the tactics identified under each can happen in parallel and be expedited through experienced leadership. The Pricing Leader, along with the program sponsor, executive leadership, and leadership in each discipline (Marketing, Sales and Finance) must be aligned. Put together a timeline, resourcing plan, budget, and 5

6 goals; and execute. Monitor and report on benefits realized, and this program will quickly become a part of your business culture. Execute through a value adding approach from the bottom up. Only in this way will it stick, and stand the test of time and turnover. 6