how to build an efﬁcient and effective pricing organization€¦ · how to build an efﬁcient...

©2015 PROS, Inc. All rights reserved. Confidential and Proprietary.

How to Build an Efficient and Effective Pricing Organization

Tonya DeWeese Senior Vice President, Sales Excellence

May 2017

2 ©2015 PROS, Inc. All rights reserved. Confidential and Proprietary. 2

Abstract

• Companies in every corner of the world grapple with how to structure their pricing organizations to maximize their revenue and profitability – and to deliver the results they’ve committed to their senior leaders. For each one, it varies according to the company’s culture, products and customers. In this session, we will deliver specific insights along with information and a framework for developing a pricing infrastructure or Center of Excellence.

• Participants will be guided with tools and reference materials that will help them prepare for the structure, measures and size of their team, along with a future roadmap for creating a highly effective organization.

Attendees will learn:

• The best organizational construct based on their business model

• The most common metric and KPI’s to ensure focus

• Challenges that may be impacting success


Strategy and Governance for Pricing

• Strategy

• People

• Process

• Tools


Topics and Discussion

•Establishing a Center of Excellence (COE) • What are the key questions to consider? • Most effective structure based on business characteristics • Overview of Best Practices

•Benefits and challenges with each model

•Defining measures within and beyond the COE

•Assessing your current maturity and desired future state

•Q&A throughout


Key Questions to Guide the Decision

What level of centralization / decentralization?

Where does pricing functionally report?

Where does the expertise need to live?

What roles / how many resources devoted to pricing across the globe?

What processes / communication / cadence across pricing stakeholders?

How does Pricing Strategy support the overall Corporate strategy?

Who owns the KPI’s that are affected by pricing actions

• Revenue Yield

• Win Rates / Renewal Rates

• Customer Retention

• Margin

How should pricing investments be allocated across the business?

How should the new capabilities change the roles and responsibilities for price determination and execution?


Pricing Organization Best Practices

1. Pricing as a Profit Center

2. Start with a strong pricing leader

3. Pricing Center of Excellence (different types and approaches)

4. Cross-functional Pricing Council

5. Right level of centralization / decentralization

6. Specific roles for Strategic, Tactical, and Execution activities

7. Healthy “tension” between Sales & Pricing

8. Clear definition of roles and accountability


What does a high caliber pricing organization look like?

7

• Fully defined accountability and authority for pricing decisions

• Managed as a “profit” center vs. “cost” center

• Collaborates with Sales, but with healthy tension

• Develops internal pricing thought leadership

• Constantly generates pricing improvement opportunity ideas

• Shares pricing best practices and tools

• Creates a sense of urgency around developing pricing excellence


What are symptoms of an ineffective pricing organization?

8

• Confusion between roles, responsibilities, and accountability

• Pricing initiatives fall through the cracks

• Pricing decisions are reactionary rather than opportunistic

• Inconsistency across segments, geographies, customers

• Too many “exceptions”

• Fox in the hen house

• Excessive discounting

• Diminishing returns from pricing improvement initiatives

• Struggle to move past “low hanging fruit” opportunities


Pricing Group as a Profit Center

Incremental Potential Benefits of Pricing

Center of Excellence

Benefit

Should be commensurate with potential benefit (upside)

• People

• Processes

• Tools

Cost / Investment

“… 1% increase in price translates to 8-11% increase in profits … “

Net Positive Profit Impact

Less


Strong, Active Pricing Leader

● Strong

– Experienced Executive (SVP)

– Interacts with C-Level peers

– Runs a large Profit Center

– Chief Pricing Officer

● Active

– Raises awareness

– Achieves senior management support

– Continuous stream of margin improvement ideas

– Facilitates cross functional dialog


Pricing Organization Scope / Roles

• Sets global strategic objectives • Establish price strategy and positioning • Identify strategic opportunities & trade-offs • Coordinate pricing topics in context of company goals and objectives • Raise awareness • Manage pricing center of excellence • Facilitate cross functional dialog & senior management support

• Implement pricing strategies / policies • Drive pricing improvement opportunities • Take macro pricing actions • Track performance metrics and market changes • Train and communicate to organizational stakeholders • Produce tactical price recommendations • Produce policies and guidelines

• Communicate prices to customers • Evaluate / approve deals • Process exception requests • Conduct / facilitate deal negotiations

Stra

tegi

c Ta

ctic

al

Exec

uti

on

CEO / COO / CFO

Pricing Leader Chief Pricing Officer / SVP Pricing

Strategic Pricing Roles

Tactical Pricing Roles

Pricing Execution Roles

• Pricing managers • Pricing analysts

• Price administration • Deal desk • Sales / Customer Services


Centralized vs. Decentralized Pricing Organizations

58.2% 29.8%

12.0%

160 Centralized

82 Decentralized

33 Other

Source: Deloitte / William Richard Survey “Is There a Career in Pricing?”


Highly Centralized Pricing Organization

CEO


Strategic Pricing Roles Tactical Pricing Roles Pricing Execution Roles

Pricing Center of Excellence

Business Unit

Business Unit

Business Unit

Prices

Customers Customers Customers

Prices Prices

Pricing Council

Finance

Sales

Product Marketing

Operations

Geographic / Product Business Units


Highly Decentralized Pricing Organization

CEO



Business Unit

Business Unit

Business Unit

Prices

Customers Customers Customers

Prices Prices










Dotted line reporting structure Geographic /

Product Business Units

Pricing Council

Finance

Sales

Product Marketing

Operations


Hybrid Pricing Organization Example

CEO

Business Unit

Business Unit

Customers Customers

Prices Prices






Strategic Pricing Roles Tactical Pricing Roles



Guidelines & Policies

Global Strategic Accounts




Exception Approval

Geographic / Product Business Units

Pricing Council

Finance

Sales

Product Marketing

Operations


Where Should Pricing Reside

Sales Pricing & Margin

Should be a healthy tension between pricing and sales

Balanced Sales & Margin Growth

Pricing often succeeds when reporting to • Finance • Product Management • Strategy • CEO/BU Head

Pricing reporting to Sales could result in the “fox guarding the henhouse”


Where Pricing Resides

10.2%

17.5%

33.1%

39.3%

Sales Finance Marketing Other

Source: Deloitte / William Richard Survey “Is There a Career in Pricing?”


Centralization vs. Decentralization

Favors Decentralization Favors Centralization

• Highly variable market conditions and competitive behavior across geographies and segments

• Low degree of variability in products, service, competitive pricing, and so on, across broad market geographies

• Individual contracts negotiated within local markets

• Little connection between list prices and invoice or contract prices

• Active price reporting and comparison through third parties

• Close connection between list prices and invoice prices

• High discretion in pricing available • Small amount of available discretion in pricing

• Field sales incentives more fully aligned with profitability

• Field sales incentives largely based on volume / revenue performance

Source: The Price Advantage, McKinsey & Company


Balanced Measures and Scorecard

Characteristics Strategic Tactical Execution

Objectives Visionary, large impact on Businesses

Projects, significant impact on results

Efficient and effective execution of processes

Time Horizon Long term – at least 1 year, preferably multi-year

Medium term – at least one quarter

Weekly, daily

Accountability Executives and Senior Managers

Middle Managers, Program Managers

Managers, Supervisors and individual contributors

Work Processes Covers many Covers fewer Covers limited (1-4)

EXAMPLES: • Margin Yr vs. Yr • Revenue Growth

• Price increase effectiveness

• CTS Recovery %

• Cycle time • Exceptions to Guidance


Metrics Definition: Common Metrics

Pricing improvement Price realization

Pocket price premium versus market prices Improved product mix Reduced price variance List price yield % Reduction in price waterfall elements Price trend versus historical price levels

Pricing efficiency Reduced cycle time to quote

Reduction in costs associated with review and quoting of deals Improved time to generate list prices Reduction in cost associated with generating list prices % of quotes auto-approved


Less common metrics Improved forecast accuracy Reduction in percent of total revenue from underperforming products or customers Cost to Serve (CTS) Recovery % Reduction in leakage due to input cost change

Sales effectiveness % change volume

% of sales meeting quota Change in % of quoted deals won Change in customer attrition rate (number or revenues) Reduced time spent on price admin Volume compliance

Metrics Definition: Common Metrics


Performance Management: Financial Metrics

•Dependent on availability and quality of data • Bad data erodes confidence

•Does it require IT to access the data you need? • Slows process • Increases cost

•Calculations can be complex • Rigor vs. Acceptance


Traditional vs. Contemporary Target Setting

TRA

DITIO

NA

L

CO

NTE

MP

OR

AR

Y

Regional Target

SBU Targets

Corporate and Strategic Targets

SBU Targets

Regional Target

Regional Target

Regional Target

Customer/ Product Targets









Traditional vs. Contemporary Target Setting- Roles and Tactics

Regional Target

SBU Targets

Corporate and Strategic Targets

SBU Targets

Regional Target

Regional Target

Regional Target









Segmented approach – Customers, Products, Geographies

Collaborate and Iterate

Visibility and Accountability


Pricing Strategy Consideration

25

Sample Pricing Strategies

Cost Plus Market Based

Inventory Based

Value Based

Cost structure and margin goals drive pricing points

Market analysis of competition or other

factors drives price points

Market analysis of customer’s willingness to pay for attributes of your

product drives price points

Availability of inventory for highest value use drives

price point

Source: PROS Research

©2013 PROS INC. | All rights reserved | Confidential & Proprietary – Unauthorized Distribution Strictly Prohibited |

Easier and Higher value with centralized --------> Higher value with some level of decentralized approach


Consider the Go-to-Market Approach

Pricing Architecture

Negotiated Pricing

Non Negotiated Pricing

Have List or Book Prices No List or Book Prices



Consider Categories of Pricing

Source: PROS Research

Either negotiated or non-negotiated

B2B Pricing Taxonomy

Spot

Commodity-based

Agreement / Contract

List / Matrix

Jobs / Bids / Projects

Special Requests

Make to Order

Consumables

Subscriptions

Contract RFPs

SPA/Q/Rs

Catalogs / Books

Customer / Product matrices

Posted Prices

Primarily Negotiated

Primarily Not Negotiated



Are you ready? And what does the future look like?

• Level of current maturity and targets for desired end state are key to drive actions

•Prioritize the areas to improve


Areas of consideration:

• Price Setting

• Pricing Organization

• Data and Tools

• Pricing Processes

• Performance Management

Assessing Maturity – People / Process / Tools

Level of Maturity:

• Rudimentary

• Ad-hoc

• Foundational

• Advanced

• World-Class


Assessing Maturity


Assessing Maturity for Effectiveness

Price Setting and Strategic Organization (People)

Data and Tools Process


Determining the gaps and areas of focus

2.8 2.7

1.9

2.3

1.8

2.3


Determining the gaps and areas of focus


Recap

• Establishing a COE • What are the key questions to consider? • Most effective structure based on business characteristics • Overview of Best Practices

• Benefits and challenges with each model

• Defining measures within and beyond the COE

• Assessing your current maturity and desired future state

how to build an efﬁcient and effective pricing organization€¦ · how to build an efﬁcient...

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