Best practice for starting Strategic Pricing
Declining profit margins are forcing companies to find new ways to improve profitability. Most companies have been through the cost cutting and strategic procurement processes and are now looking for the next level to pull. Strategic pricing is starting to become more popular as more senior executive have begun to leverage the power of pricing.
To start strategic pricing in a company and for it to be successful you must first have senior executive backing/sponsorship. If you are not able to get this backing you will have a very difficult time making the change sustainable. A good chart to show the senior executive team is the impact of a 1% change on profitability. This chart is a good eye opener to visually show the impact a 1% change in price is relevant to the other improvement levers. This will help in getting the conversation started as to how you would make this actionable.
As a majority of company’s current pricing strategy is reactive and ineffective, you will have many options for areas to start with. Talking with all the functional areas related to pricing is a good area to start with. They will be able to provide many examples of opportunities/issues they have worked through. Remember to include sales in this conversation, as they will know the customers the best and will have good input as to what they believe is needed to be successful. Remember to go into each of these conversations with an open mind and be a good listener. One additional resource that is often overlooked is the actual customers, so make sure have conversations with them. The customer relationship you build at this point will be very valuable as you move forward in the strategic pricing process. You may want to introduce yourself as a customer insight manager as they will be more open than if you present yourself as the strategic pricing manager.
With all the insight in hand, you will want to work on processes and procedures to make sure you are able to capture the improvements from the changes you will need to make. Creating a pricing approval process that does not slow down the sales cycle is very important. Automating the process as much as possible is essential, so a minimal amount needs to be manually reviewed. Creating a monthly or quarterly pricing review with a cross functional team including senior executives will keep the process on track. Creating a pricing council including customers and outside representative will help in getting additional input as to responses of competition to your pricing moves and provide input to the wants and needs of the marketplace.
This is the point when you will need help for your information services department or a consultant to help look at your transactional data. Most companies do not have all the data you will need in one data warehouse, so you need to make sure you able to include the following information: customer master, part master, discount matrix (if applicable), cost data, and sales by line item. You will want to be able to look at the transaction data by line item, so you will be able to identify low hanging fruit. Some of the common areas to start looking at are: spare parts pricing, discounting matrix (if on exists), sales by customer, sales by territory, sales discounting groups, sales by product group, sales with negative or low margin, and sales by order type. Using the data create scatter plots looking at the discount for list on the y axis and dollar value of the order on the x axis. You are looking for areas of opportunity/outliers to identify quick wins. Some of these outliers will not be actionable; as they were may have been part of a good will offer from the sales team or other reason. These should still be tracked to understand the true profitability of a customer and the sales person. Additionally, looking at the list pricing process by product family will offer additional opportunities.
Know you are ready to start making actions on the identified opportunities. Remember small changes to produce big results, so even those small half percent adjustments will keep the senior executive team involved in the process. Getting and keeping the sales on board with these changes is a must. Start by getting the leadership of the sales teams to believe in the changes and they will help create the snowball effect. Creating tools for the sales team like; economic value estimation models, perceived and financial value models, and value proposition statements for each market segment for each product will assist in the adoption process. These tools will also help the sales team to move the conversation away from what is my discount to how does this product/service improve the profitability of the customers company. Strategic pricing is a journey not a sprint, so remember to keep making small changes to keep profitability moving in the same direction (up and to the right).