How does a business know that it is a candidate for price optimization to improve business performance? Here are some guidelines to get you started
Unless a company already has very strong competency along the entire pricing continuum — from understanding true product and customer profitability, to setting optimal prices and then ensuring that these price guidelines and processes are consistently and efficiently executed — there are usually changes a company can make that will yield immediate improvements with minimal disruption. For this reason, pricing projects are often a top remedy for addressing company initiatives aimed at revenue and/or margin improvement.
However, to truly be ready to embark on a pricing initiative, companies need top-down initiatives and executive-level sponsorship, as well as the cross-functional team that could implement the recommendations. If this foundation is not first laid, the desire to improve pricing is likely to fall into a nice to have rather than a need to have category.
The impetus to focus on revenue and/or margin shaping projects is most often the result of cost-driven issues: Executives either know or suspect that their margins are too low and that there are identifiable things they could do to significantly enhance those margins. Less often, executives view the promise of revenue enhancement as being attractive enough to warrant embarking on a project.
In addition to having executive level support, supply chain executives need the following:
- Identifiable pain points that can be linked to pricing
- The willingness (over time) to change incentives and business processes to accommodate better pricing processes and adherence to them
- The belief that technology can turn what is largely an art into a science and identification of those processes where technology can make the biggest difference
- Pricing expertise and skills in-house to be able to provide necessary data and to work with the resulting output of the pricing initiative
How to Recognize Potential Pricing Problems
Some of the key indicators that lead organizations to believe they have a pricing problem that needs to be addressed include:
- They cannot understand the key causes of revenue or margin issues
- They lack visibility into the profitability of different customers based on existing sales history but suspect that some customers are getting unjustifiably good deals
- They see a lot of variability of quoted prices in seemingly comparable deals
- There are a number of products that do not have set prices
- The time required to re-set and institute new price guidelines is too long and/or the process is very cumbersome
- The time required to process quotes is so long that customers turn to other suppliers
- They lack the ability to measure true product profitability (beyond cost-of-goods-sold)
- Their first bid acceptance rate seems very low
- There is a large percentage of deals sold below target margin
- It seems like a lot of money is being given away during the negotiating process
- There is no concerted way to make sure that the field adheres to target prices
To institute effective pricing reform, there are a few prerequisite steps that should be taken before the start of a project, however there is no one right starting point across all companies and all projects. More often than not, companies gravitate to first seeing what their problem is using an analytics-focused solution, and then they use that information to determine what to address next.
Prerequisite steps include:
- Highlight the most dramatic impacts of pricing on the whole of the organization — create a sense of urgency around financial goals and operational goals across the organization so that momentum and consensus are maintained
- Dedicate a credible project manager who will oversee both technical and business aspects of the project
- Establish a standing team of committed business and technical managers who have sponsorship responsibilities for the project and are accountable for the ultimate results of the project
- Establish project goals and metrics. Prioritize project scope based on potential gains versus metrics-related goals. Be sure that the organization understands the size of potential returns
- Kickoff a data cleansing project in parallel that prioritizes efforts based on potential returns/improvements they can drive