journal of professional pricing q4 2008

The Journal ofProfessional Pricing

VOLUME 19 l NUMBER 4 l FOURTH QUARTER 2008

The World’s Only Associat ion Dedicated to Pr icing Management

A Professional Pr icing Society Publicat ion

Changing Prices in a Volatile Economic Environment byRanjitSinghandStevenTom

Break the Discounting Habit byReedHoldenandMarkBurton

Think Twice before You Reprice byJimGeisman

The Journey to Pricing ExcellencebybyPaulHuntandJimSaunders

PPS Journal 08 Q4.indd 1 12/15/2008 2:26:19 PM

The Wor ld’s Only Associat ion Dedicated to Pr ic ing Management



The Wor ld’s Only Associat ion Dedicated to Pr ic ing Management


The Journal of Professional Pricing

ADVISORY BOARDMR. ERIC MITCHELLFounder and Chairman of the BoardThe Professional Pricing SocietyMR. JEROLD BERNSTEINPresidentThe Price Improvement Team LLCMS. JANELLE BRECHONDirector of Global PricingEaton CorporationMR. XAN CHAMBERLAINGlobal Pricing ManagerHitachi Data SystemsMR. MARTIN COALSONAsst. VP, Product Development & Yield ManagementUnion Pacific RailroadMR. JIM GEISMANPresidentMarket Share, Inc.DR. SCOT HORNICKVice PresidentOliver WymanDR. RICHARD LANCIONIProfessor of MarketingTemple UniversityMS. LAURA PRESLANIndustry DirectorMicrosoft CorporationMR. GARY RITZERTVP, Retail ConsultingAC NielsenMS. STACEY SCHAEFFERDirector, Price and Offering ManagementSAS Institute, Inc.

PUBLISHER & PRESIDENT

KEVIN MITCHELLPROFESSIONAL PRICING SOCIETYMARIETTA, GA

PROFESSIONAL PRICING SOCIETY

3535 ROSWELL RD., SUITE 59MARIETTA, GA 30062PHONE: 770.509.9933, FAX: 770.509.1963EMAIL: [email protected]:www.pricingsociety.com

ADMINISTRATIVE STAFFCHRIS BUCKINGHAM, Director of Sponsor

Relations

HELEN CAUTHEN MITCHELL, CMP, Meeting Director

LATONIA DUGGER, Membership Associate

STEPHANIE HUDSON, Meeting Planner

WYNETTA JONES, Membership Associate

FABRICIO LOPEZ, Vice President of Marketing

JULIE R. MARTIN, Certification Program Director

KATRESE PHELPS, Director of Membership

DARNELL SHEPHERD, Project Coordinator

JOAN TERRY, Meeting Planner

LIZ WHITEHEAD, Marketing Publications Editor

The Journal of Professional PricingTM is published quarterly by Professional Pricing Society; Publisher Kevin Mitchell. All Rights Reserved © 2008. Professional Pricing Society accepts no responsibility in connection with any liability that might develop as a result of material published; opinions expressed are those of the authors and do not necessarily represent the publisher. No part of this publication may be reproduced in any form by microfilm, xerography, or otherwise, or incorporated into any information retrieval system, with-out the written permission of the copyright owner.


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Turn Pricing Strategy Into Profits

� The Journal of Professional PricingFourth Quarter 2008

AfteraquartercenturyleadingTheProfessionalPric-ingSociety(PPS),EricMitchellannouncedthatheisretiring fromourcompany’sday-to-dayactivities totakeonanewroleasFounderandChairmanofthe

BoardofAdvisors.

Morethan500ofuswerepresentatourFallConferenceinMiamiwhenhemadehisannouncement.WatchingavisualmontageofEricleadingPPSeventsovertheyears,andinteractingwithasteadystreamofourmembers,sponsors,staff,andspeakers,wasamovingexperience—particularlyforthoseofuswhohadwitnessedfirsthandhowhardhehadworkedtofulfillhisvisionforthePricingSociety.Myownprideinhisaccomplishmentsismatchedonlybymyappreciationfortheopportunitieshehascreatedforsomany.

WhenIbeganworkingatPPSinthemid-80s,itwasanewly-launched family business. During school breaks, my youngerbrotherandIwouldhelpourfatherwhereverwecould.Iremem-bervividlyourearlyassignments:preparingmassmailingstoshiptoprospects,managingadatabaseofmembersthatnumberedinthedozensandtheninthehundreds.(Onlymuchlaterdidwe reach into the thousands.)Webeganediting themonthlynewslettersthatalwaysstarted“DearSubscriber”inblacktypeoncanaryyellowpaperfromalocalprintshop.

PPSwasastill fewyearsawayfrompublishingThe Journal of Professional Pricing andinproducingourfirstConferencesandWorkshops,butourcompanymissionwasthesame—tobetheHomeofPricing.Someonementionedtomethatoureventsareakintogrouptherapyforpricingmanagersworldwide.WehavebeenfortunatetohavealeaderlikeEricMitchell,whohadthevisiontoseehowthepricingprofessioncoulddevelopinsizeandimportancethroughoutthebusinessworldandacademia.

Ifyouwouldliketocongratulatehimonhisretirement,[email protected].

NosingleindividualcanreplaceEricatPPS,soweareluckythatwestillhavehisinsightandacumentorelyuponinhisroleas

Chairman.Ourentiremanagementteamwillcontinuetouti-lizehisexpertise.

One of Eric’s first recommendations was that our next eventshouldfocusonhowtosurvive,andeventhrive,duringprecari-ouseconomictimes.Tothatend,wewillbeholdingtwo-dayCertifiedPricingProfessional(CPP)WorkshopsonFebruary12-13,2009,attheFourSeasonsHotelinHouston,TX:

• “PriceCertaintyinUncertainTimes:10WaystoStopLeav-ingMoneyontheTable”-MarkBurton&SteveHaggett,HoldenAdvisors

• “ImplementingPriceChangesinTurbulentEconomicTimes”-RichardLancioni,Ph.D.,CPP,TempleUniversityFoxSchoolofBusiness

• “PricinginaChaoticEconomy:CompetitiveIntelligenceisCriticalforIntelligentPricing”-JohnMcGonagle,TheHeli-conGroup

• “HowtoAchievePricingExcellencein2009”-JimSaunders&AvyPunwasee,PricingSolutions

ByvisitingourPPSwebsite(www.pricingsociety.com),youcanregisterfortheworkshopofyourchoice,checkourcomprehensivedatabaseforthelargestrepositoryofpricingknowledgeanywhere,andpostorreviewnewcareeropportunitiesinpricing.Wealsoinviteyoutosubmitarticlestoourpublications.

IhavehadthepleasureofmeetingmanyofourmembersatPPSeventsinthepastcoupleyearsandlookforwardtoreconnectingwitholdfriendsandmakingnewonesin2009.

IhopethatyouenjoythematerialcontainedinthisissueofThe Journal of Professional Pricing.

Sincerest thanks,

Kevin M. MitchellPresidentProfessional Pricing Society

From the Publisherby Kevin M. Mitchell


The Journal of Professional Pricing �Fourth Quarter 2008

CONTENTSTHE JOURNAL OF

PROFESSIONAL PRICING

10 Changing Prices in a Volatile Economic Environment byRanjitSinghandStevenTom

Inthepastyearsellershavehadtodealwitherraticeconomicconditionsandtheireffectonpricing.AuthorsRanjitSinghandStevenTomofDeloitteConsultingLLP’sStrategyandOp-erationsservicesareaexaminehowcompaniestendtoreacttotheseconditions.Theysuggestfirmsoftenrespondfearfully,iftheycannotusepricingtoreducemarginerosion;orimpulsive-ly,whichcanleadtomisguideddecisionstocutpricesinhopesofincreasingsalestoequally-stressedbuyers.

1� Break the Discounting Habit byReedHoldenandMarkBurtonInthisexcerptfromtheirbook:Pricing with Confidence: 10 Ways to Stop Leaving Money on the Table(JohnWiley&Sons,Inc.,2008;www.pricingwithconfidence.com),authorsReedHoldenandMarkBurtonexaminehowcompaniesfallintothedamagingpatternofofferingunneces-sarydiscounts,therebyreducingtheirprofitsunnecessarily.Thewritersoffersimple,buteffective,waystoidentifywhichsalesrepsandcompanypoliciesarecausingthisproblem.Thesolution,theysay,beginswithsellerslearningtoreflect“alittlearrogance”inthewaytheycommunicatethevalueoftheirproductstoprospectivebuyers.

2� Think Twice before You Reprice byJimGeisman

Duringaneconomicdownturn,companiesstruggletomaintainlevelsofrevenue,growthandprofitability.Everyoneiscalleduponto“dosomething.”Spendingisrestricted.Discountsincrease.New—usuallylower—pricesareannounced.Thisarticleprovidesaframeworkthatpricersandotherscanusetotakecoordinatedaction.Theframeworkfocusesonwaystoincreaseoracceler-atetheonlythingthatcountsintimeslikethese:CashFlow.

30 The Journey to Pricing ExcellencebyPaulHuntandJimSaundersManypricinginitiativesgetofftoagreatstart;but,overtime,thepricingprocess(whichshouldbedynamic)canbecomemundane,control-oriented,andrepetitive.Thisarticleexplainshowtokeepthatjourneycreativeandfulfilling,whileshowingmanagershowtodeliverbusinessresultsthatjustifysignificantnewinvestmentsinpricing.


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10 The Journal of Professional PricingFourth Quarter 2008

Changing Prices in a Volatile Economic Environment

In2008pricingorganizationsfoughttoholdtheirgroundagainstwavesofdecreasingconsumerconfidenceandrapidchanges in raw material costs. These organizations wereseeminglytrappedinavice,whichsqueezedprofitsascosts

movedhigher.Manyweretemptedtoreducepricesinahastyefforttosomehowmeetfinancialexpectations.Incircumstanceslikethis,asalesforcewillclaimitneedspricereductionstomeetquotas;marketerswillpointtoreducedpricingpowerinthemar-ketplaceduetoweakeningconditions;andcustomerswillgener-allyreflectthesamepressuresintheirbusinesses.Competitors,too,willlikelyfacethesamechallenges,butarace-to-the-bottompricewarcansubstantiallyerodeprofitsforallinvolvedlongaftertheeconomicturbulencehassubsided.

Theseresponsesarecounterproductiveandneednothappen.In-stead,pricingorganizationsshouldseizetheopportunitytomakeacarefullyorchestratedeffort tomaintainpricesandpreservemargin.Toachievethis,companiesmustpursuesharp,targetedpriceactionsatthemostgranularproductlevel;andprepareandguideconsumersthroughtheseeconomictimeswithcarefullyplannedcommunications.

How to Implement Price ChangesSome companies choose to impose across-the-board increasesordecreasesinanattempttosecuresalesorretaincustomers.Ablunt-edge,uniformapproachmaybesimpletoimplement,butitwillprovedifficulttoforecasttheresultsorthereactionsofcustomers.Analyzingyourpricesproduct-by-productandmak-ingchangesatthesamegranularlevelcanleadyourbusinesstomoreoptimalandpredictableresults.Howdoesacompanyex-ecuteatsuchalevel?

• Knowexactlyhowyourcostshavechangedonanindividuallevel

• Reassesswhatyourcustomersvalueandtheircurrentmacro-economicchallenges

• Determinewhatkindofpricesignaling(intheformofbasepriceadjustmentsorsurcharges)isappropriate

• Increaseyourvisibilityintopricingperformanceanddiscount-ingactivities,astoooftenincreasesareoffsetbyconcessionselsewhere

Know Your Own Inflation ImpactManyorganizationsfailtodetermineaparticularproduct’struecostandprofitability.Whileusingassumptionstoallocatecostscanbehelpful,atargetedpricingmovementrequiresgreateraccu-racy.Startwiththepricewaterfallatatransaction-by-transactionlevelandaccountforyourcostsdowntonetmargin.Howhasinflationimpacted,forexample,therawmaterialscosts?Orwherearethesecostsfallingforyouandyourcompetitors?Next,doasensitivityanalysistodeterminewhatkindsofcostchangeswillimpactthebottomlinemost.Businessesshouldalsoundertakea“fixorflush”exercise,lookingattheentireportfolioandaskingifeachproductorservicemeetscertainfinancialperformancestandardsorisevenworthofferinganymore.Thisprocesswillbuildanunderstandingofwhichproductsorservicesareexpe-riencingthemostcostpressure,andwhatthedegreeofimpactistothebusiness.Whilethiscanhelpinprioritizingcandidatesforpriceincreases,itshouldbecoupledwitharefreshedknowl-edgeofcustomers’needsandpreferences.

Understand What Consumers Value in the DownturnMarketers always pay close attention to customer needs andpurchasedrivers.Executingapriceincreaseinaninsecureeco-nomicenvironmentmaypromptanorganizationtoreexamineitsknowledgeofitscustomers.Consumerperceptionsarelikelytobedifferentfromevenafewmonthsearlier.Tospeedthepro-cess,stepintothebuyers’shoesandconsiderthemacroeconomicenvironmentthatcurrentlychallengesthem.Askafewkeypur-chasersandyourselfthequestionsinFigure1:

In the past year sellers have had to deal with erratic eco-nomic conditions and their effect on pricing. Authors Ranjit Singh and Steven Tom of Deloitte Consulting LLP’s Strat-egy and Operations services area examine how companies tend to react to these conditions. They suggest firms often respond fearfully, if they cannot use pricing to reduce mar-gin erosion; or impulsively, which can lead to misguided decisions to cut prices in hopes of increasing sales to equally-stressed buyers. The writers maintain that firms should, instead, pursue targeted pricing strategies, focus-ing on select customers. These should then be implement-ed carefully with well-devised communications plans. For more information you can reach the authors at: [email protected] or [email protected], respectively.

Time Frame

Cost Uniformity

System Capabilities

Surcharge Base Increase

Short-Term Long-Term

Customer-

Specific Behavior

Structural

Cost

Advanced Basic

Temporary ad-

hoc fee can be

removed after a

certain period of

time

Price increase is

expected to remain;

change is built into base

price

Business

efficiencies or

additional costs

can be avoided

by modifying

customer

behavior

Price increase is

expected to remain;


price

Systems have

capability to

determine when

surcharges

logically apply

Difficult to write custom

logic into systems,

easier to modify base

price


The Journal of Professional Pricing 11Fourth Quarter 2008

C o u - p l et he s e i n -sights i n t ow h a t c u s -t o m e r sv a lue w i t han in- depth

knowledgeofyourowncoststodetermineexactlywhichproductpricescanberaised—andtowhatextent.Now,yourorganizationcanbeginplanninghowtomaketheincreasesareality.

Choose the Right SignalBetacticalabouthowthepricechangesarestructured.Typically,theytakeoneoftwoforms,abasepriceadjustmentoranad-ditionalsurcharge.Forexample,theovernightpackagedeliverybusinessemploysbothkindsofpriceincreases.Usingabasepriceadjustment,anextdayearlymorningguaranteedpackagemay

nowcost5%more.Afuelsurchargemayalsoapplyincertainsituations; forexample,wherethedelivery locationisparticu-larlyremote.Indecidingwhichtacticalsignaltouse,considerthepointslaidoutinFigure2onpage12.

Competitionisanotherdimensionthatmayimpactthedecisionofwhichsignaltouse.Ifrivalshavealreadyimplementedpriceincreasesordecreases,thensurveycustomerstoseehowtheyhavereactedtothechanges.Apricingorganizationmaychoosetoim-plementasurchargetooutflankacompetitorwhohasoptedforabasepriceadjustmentorviceversa.Ifitmakessensetochoosethesamemovement,thenuseyourknowledgeofwhatconsum-ersvalueduringadownturn,andavoidlettingyourrival’spricesbethemainfactorinhowyousetyourprice.

Withnewpricesandtacticsinhand,theorganizationisreadytoexecute.Nowitneedstobeabletomonitorandtrackresults.

How to Measure PerformanceEven the best-intentioned, thoroughly-crafted price changescanunderperform.Often,thecauseisinternal.Deliveringan“increase”messagetocustomersisdifficult,especiallyifanor-ganizationutilizesasalesforcewhichnegotiatesdirectlywithbuyers.Acustomerwillaskthesalespersonforaconcessionorspecialarrangementtohelpoffsettheincrease,whichnegatesitseffect.Theseactivitiescancontinueuncheckeduntilitistoolatetosavethequarterlynumbers.Organizationsmustbeabletoseetheeffectsofpricingperformanceanddiscountsateverystagetomanagethisbehavioreffectively.

Companiesshouldmeasureexactlywhatdiscountsaregiven(andwhere)andestablishapprovalproceduresforsingle,orcombina-tionsof,discountsthatexceedminimumcustomerprofitabilitylevels.Useastrategicaccountslistbasedonstrictguidelinestoensureparticularbuyersdeservethespecialdiscountstheyreceive.Then,setannualgoalsforthecustomertodeterminewhether

Changing Prices in a Volatile Economic Environment

Figure 1

Figure 1

The Situation:In2008,apartsupplierwas facing a staggering array of costchangestoitssourcedmaterials.Atthesametime,thesalesforcewasreportingadropinrevenuesasconsumerconfidencefellinresponsetotheoveralleconomicenvironment.

The Challenge: Internal debate ragedattheexecutivelevel.Shouldtheyraise

prices to cover cost increases or lowerpricestorespondtocustomerdemands,assalessuggested?Financearguedthatlowering prices would not result inenough incremental volume to justifythedropinmargins.

The Result: Thebusinesstookadetailedanalysis of the competitive intensityof each of their product markets and

implementedacombinationofpricingincreasesanddecreasesinparallel.Thedecreases were aggressively communi-cated to show responsiveness to thosecompetitivemarkets,whiletheincreasescoveredthegapinmargins.Theresultwasanetgaininrevenueandmargins,and credit from certain customer seg-ments forbeing responsive to requestsforlowerprices.

Case Study

What pressures are top of mind for customers in the current state?

For example, a small components manufacturer selling to larger firms may find that its product or service is viewed as either a minor or (converse-ly) a critical offering by a particular market segment. Both scenarios of-fer the seller the opportunity to raise prices with less protest.

How much do consum-ers value each feature in the offering, and what tradeoffs do they make in the purchasing deci-sion?

Consider if the buyer’s industry has weathered the economic turmoil well, and if the firm itself is performing better than the rest of your customer base. Also, consider whether your purchasers can find alternatives for your products and how easy it is for them to switch.

How does a price in-crease for one product impact bundles, both formal and informal?

Changing the price of one element in the bundle may change the value proposition of the overall bundle.



thatdiscountshouldcontinue.Providesalespeoplewithasmallconcessionsbudget,allowingthemtomanagetheirowncustomerportfolioamidstapriceincrease.Finally,organizationsshouldau-ditpricinganddiscountperformanceresultsonaregularbasis.

Devise Your Message CarefullyOrganizationsshouldbedeliberate inhowtheycommunicatepriceincreases.Poorplanningcanleadtoinconsistentmessagesoroneswhichfailtoaccountadequatelyforthecustomers’lossriskfromthepricehikes.Obviously,thiscandamageafirm’scredibilityandresultinitspermanentlylosingcertaincustomers.Whilenoprocessoramountofplanningwillentirelyeliminatecustomer gripes about price increases, companies can employthreemitigationstrategies:

• Developadetailedcommunicationsplanthatexudestrans-parencyandcandidreasoning

• Understandwhichbuyersareaffectedandtowhatdegree• InvolveMarketingandSalestoemphasizesellingandmes-

sagingbasedonvalue

Price communications are sensitive, both internally (to thepeoplewhohavetoexecutetheincrease)andexternally(tocus-tomers). Thus, companiesneedtodetermineexactlywhat channels, tone, andtiming shouldbeused todeliver these messages.Theseshouldnotsimplybeguidelines, but rather re-flectacarefullyorchestrat-edeffort.HoldjointSalesandMarketingsessionstocoordinate the customermessagesandtomaintain

the brand tone. The firstcommunicationshouldem-phasizetransparencybyex-plaining the causes for thecurrentincrease,particularlythe rising economic pres-suresyourfirmisconfront-ingasitstrivestomaintainthesamelevelofserviceandquality.

Although this initial mes-sage will be broad and ge-neric, the resulting pricingexecutionshouldbetargetedand specific. Utilize yoursalesforcetohelpdelivertheprice-specific information.Preparetheteamtohandleobjections with FAQs anddata to build the case forwhy an increase is neces-sary.Ifpricesinyourindus-tryaretiedtoan index,ortheindexisgoingtobethebasisofasurcharge,provide

thequantitativeevidencetoquelldoubtingcustomers.Prepareyourcommunicationsso thatbuyershaveadvancenoticeandtheopportunity to react.Then,provideyour salespeoplewiththeimpactintelligencetheyneedtounderstandhowtoapproacheachcustomer.

Forecast the Impact by Individual BuyerManybusinessesdoaholisticanalysisofhowinflationisimpact-ingtheirprofitability,andwhatresultsapriceincreasewillhaveontheirfinancialstatements.However,minimizingthecustomerfalloutandachievinganticipatedfinancialresultsrequiresun-derstandinghoweachbuyerwillbeimpacted.Buildacustomerimpactandriskassessmentmatrixbasedonthreedimensions:inflationpass-throughability,changeinannualspendandcus-tomerannualprofit.

More resistance will be met from customers who play inhighly competitivemarkets, andwho face a larger increaseinoverallspendduetoyourpricechange.So,classifythembylevelsofrisk.Usethesizeofthebubbleorthecustomerannualspendtoprioritizewhichbuyersaremostimportantineachriskarea.Then,providethesalesforcewiththeintel-ligenceneededforthemtofocusonretainingcustomersina

Managers must recognize that profitability and not volume is the goal. Margin improvement should be pursued by identifying existing differentiators and market segments that are responsive to them.

Inflation Pass-Through Ability Understand the buyer’s ability to pass those costs further along the value chain or to its own customers

Change in Overall Spend Use historical purchase data or a customer’s annual contractual commit-ment and apply the price change to that data to anticipate how the buyer’s overall spend will change

Customer Annual Profit Use this information to identify high-profit customers who should be given greater priority in addressing inflationary price increase concerns

Figure 3

Figure 2

Time Frame

Cost Uniformity

System Capabilities

Surcharge Base Increase

Short-Term Long-Term

Customer-

Specific Behavior

Structural

Cost

Advanced Basic

Temporary ad-

hoc fee can be

removed after a

certain period of

time

Price increase is

expected to remain;


price

Business

efficiencies or

additional costs

can be avoided

by modifying

customer

behavior

Price increase is

expected to remain;


price

Systems have

capability to

determine when

surcharges

logically apply

Difficult to write custom

logic into systems,

easier to modify base

price



prioritizedorder.Reviewthelistofstrategicaccounts,orthoseaccountsthatreceivebetterdiscountsthantheydeserve.Ac-tivelyquestionwhetherthecustomersonthelistarestillthetargetedaccounts,andwhetherthecriteriaclassifyingthemneedtobeadjusted.Ascustomersareidentifiedandpriori-tized,MarketingandSalesalsoneedtodeterminesimultane-ouslyhowtoadjusttheircurrentapproachtoaddressbuyers’economicwoes.

Emphasize ValueMuchhasbeenwrittenaboutmaintainingcorevalueproposi-tionsandpriceintegrityintimesofeconomicrecession; the ease of sacrificing positions issignificantly outweighed by the long-termchallengeof repairing themwhenconditionsimprove.However,therearealwaysopportu-nitiestotweakmessagingandtousecustomerinteractionstostressvalue.Thinkaboutvalueas representing not merely better price, butalsotheusefulnessorutilityoftheproductorservice. Formulate messages and key themeswhichwillremindcustomersofthefullvalueoftheproduct—evenifthatvaluemaybeper-ceiveddifferentiation.EstablishjointplanningmeetingsbetweenMarketingandSalestoshareknowledgeofwhatisgoingoninthemarketanddecidetogetherhowtocommunicateandsell to customers. Determine what channelsshouldcarry themessageandtowhatextenttypicalbuyersegmentspurchasethroughthem.Finally, make sure that salespeople have thetraining to execute more value-based sellingtechniqueswithcustomers.

Make It StickPricechangesmaynotproduce the instanta-neousresultsthatexecutiveswishfor,especiallywheneconomicturbulencecontinuestoupsetfinancialtargetsandgoalsthatweresetbeforetroublesignsemerged.Pricingmanagersshouldcommunicate to the executives the need for

patienceandperseverancetoseethroughthechanges.Sharethedetailedanalysesandspecificpricemovementstobuildthecase.Thenwalkthroughthecommunicationsplan,customerimpactandriskassessment,andrenewedemphasisonmessag-ingvalue.Agreewithexecutivestomeasureperiodicallythecustomervolumeandretentionagainstthepredictionsoftheimpactandriskassessment.

Byensuringeveryonein-houseagreesonthegoalsandthecom-municationsplan,pricingmanagerscancreatethebestconditionsforimplementingsuccessfulincreases.

Title for Page

Microsoft Office Spreadsheet

Customer Impact and Risk Assessment

Inflation Pass-Through Ability

Change in O

vera

ll S

pend (

x$100K)

0

29

58

87

116

Minimal Sub-average Average Moderate Easy

= $60M Customer Annual Profit

Customer 1

Customer 2

Customer 3

Customer 4

Figure 4


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1� The Journal of Professional PricingFourth Quarter 2008

Break the Discounting Habit

In this excerpt from their book: Pricing with Confidence: 10 Ways to Stop Leaving Money on the Table (John Wiley & Sons, Inc., 2008; www.pricingwithconfidence.com), au-thors Reed Holden and Mark Burton examine how compa-nies fall into the damaging pattern of offering unnecessary discounts, thereby reducing their profits unnecessarily. The writers offer simple, but effective, ways to identify which sales reps and company policies are causing this problem. The solution, they say, begins with sellers learn-ing to reflect “a little arrogance” in the way they commu-nicate the value of their products to prospective buyers. Reed Holden and Mark Burton are co-founders of Holden Advisors, a pricing consultancy. For more information, please contact them at: [email protected] and [email protected], respectively.

Inmostorganizationsthediscountinghabitisentrenched.Simpleanalysiscanpointtowherebaddiscountingleavesmoneyonthetable.But,likeanyaddiction,thisoneistoughtobreakcoldturkey.Thebestwaytodislodgeanydeep-

rootedattitudeistoreplaceitwithanother.Successfulmanagersandsalespeopleknowhowtheycreatevalueforcustomers.Theyalsorealizetheyhavetodisplayalittlearrogancewithbuyerstosignal:We are confident in the value we provide; and, therefore, the prices we charge.

Thisattitudereplacestheknee-jerkreactionofdroppingpricewiththereactionof“Doyouknowwhatweoffer?”Companiesknowthatiftheyhaveonemomentofweaknessinthediscus-sionwiththecustomer,theywillsendthesignalthatthereisadiscounttobehad.Allthecustomerhastodoispushformore.Instead,smartsalespeoplemaketrade-offsonthelevelofvalueacustomerreceivesaspartoftheofferingtoalignwiththebuyer’sprice.Thatbitofarroganceiswhatgivescompaniesthecouragetodemandapaybackforthevaluetheycreateforpurchasers.

Whenyoursalespeoplegetaskedforalowerprice,whatistheirresponse? It should be somevariationof “Whatdoyouknowaboutus,andhowconfidentareyouthatwecansolveyourbusi-nessproblem?”

Salespeopleneedtostepbackandaskafewquestionsaboutwhatbusinesspainthecustomerisexperiencing,andwhatthebuyeristryingtoaccomplish.Howdoesthepainimpactthecustom-er’sfinancialgoalsandthreatenitsowncustomerrelationships?Howarethebuyer’sopportunitiesbeinglimited?Thesequestionsshouldbeaskedatthebeginning,withtheimplicitmessagethatyourfirmisinthebestpositionamongallothervendorstoallevi-atethisbusinesspain.Afterthatbaselineisestablished,importantconversationsaboutpricingcantakeplace.That’swhatitmeanstoreplacethediscounthabitwithalittlearrogance.

Inessence,people,especiallysalespeople,needtofeelconfidentaboutwhattheircompanyoffers,andwhyitsproductsandser-vicesfunctionbetterforitscustomers.Ifyouareonewhodoesn’t,then give up discounting for a while and go out and talk toconsumerswhoareusingyourproductsandservices.Askthemasimplequestion:Whydoyouuseourproducts?Then,listentotheiranswers.Ifthesebuyersbelieveinyourcompany,thenmaybeyouhadbetterbelieveinit,too.

Thestartingpointforbeingconfidentinyourpriceisbeingcon-fidentinyourvalue,andthisbeginsatthetopofthefirmwiththeleadershipandseniormanagers.Ifyouwanttostopanyhab-it,you’vegottoreplaceitwithsomething.Hereareacoupleofsteps.First,recognizehowbaditis.Onceyourealizehowmuchmoneyyou’releavingonthetableinyourcustomernegotiations,developsomerulesforwhenyouwillandwon’tdiscount.Startwithyoursmallest,highest-valueaccountsandwritethoserulesinstone.Noticetheresults.See,youdidn’tloseasmanycustom-ersasyouthoughtyouwould.

If You Don’t Think You Can Control Price Discounting, You’re RightHowmanytimeshaveyoufelt theneedtodiscountpricestomeetyourquarteroryear-endsalesobjectives?Whenyouhaveresponsibilitiestorunabusiness,thepressuretokeeptherev-enueflowingandpeopleworkingistremendous.Thatpressureissometimesalleviatedwhenmarketsaregrowingandcustomersareplentiful.Butwhenindustriesslowdown,astheyinevitablydo,thenthepressuretodiscountgoesupexponentially.

There’snothingwrongwithdiscounting.Sometimesit’stherightresponse. It’s the habit of discounting—the unthinking andthrow-caution-to-the-wind desperation—that’s so destructive.Aswithalladdictions,itisverydifficulttostop.Peopledefend


The Journal of Professional Pricing 1�Fourth Quarter 2008

itas“industrypractice.”Clientswillsay,“Wehavenochoicebuttodiscountbecauseourcompetitorsarenuts.”

Infact,therivalfirmsjustlookliketheyarenutsbecausetheyhavethesameaddiction.Theresponsetotheseclientsshouldbe,“Yourcompetitorsaresayingthesamethingaboutyou,andforpreciselythesamereason.”

Discountingneveroccursinavacuum.Companiesdevelopsys-temsandprocessesthatallowittoflourish.Evenwhenfirmsplacebarriersonsalespeoplewhowanttoofferdiscounts,theyoftenfail.Maybetherepmust f irst obtainthe approval of ahigher-level man-ager. In rare cases,thepresidentofthecompanymustsignoff on discountingrequests. But thesystemsusuallyfailfor the same rea-son: They are fo-cusedonapprovingand subsequentlygiving discounts.Everybody learnsthegame.Custom-ers and salespeoplealikeplayitwell.

This mindset en-ables customers toobtain discountsthat often are notnecessary to closethesale.Somesell-ersstartoffbygivingdiscounts“only”tothelargestcustomers.These big buyers order lots of products and services. Perhapsthevolumeofbusiness they transact legitimizes thediscount,butperhapsnot.Invariably,though,firmssuccumbtodiscount creep. Soon, midsized and smaller accounts start getting dis-counts,too.

Sometimes,acompanybelievesthesepricingdecisionsarejusti-fiedbecauseitsparticularofferingsfacelotsofcompetition.Yet,soon,thefirm’snewer-technology,innovative,high-valueprod-uctsstartgettingdiscounted,too.Sure,somejustargumentscanbemade,suchastheseller’sabilitytogetlow-valuecommodityofferingsputonthepurchaseorderaswell.Buttheresultsarethesame.Firmsendupleavingmoneyonthetableinthenego-tiatingprocess.

Thesoftwareindustryisrifewithexamplesofdiscountingrunamok.JustbeforeOracleacquiredPeopleSoft,bothcompanieswereofferingdiscountsashighas80percenttoclosedeals.Theproblemisthatcustomersquicklyfiguredoutthatitwasintheirintereststoholdtheirorderstotheveryendofthequarter.Sub-sequently,allofthebusinessgotclosedatadiscount.Tomakemattersworse,Oracle,thewinnerinthedeal,blamedtheproblemon:“…thetendencyofsomeofourcustomerstowaituntiltheendofthefiscalquarter,orourfiscalyear,inhopeofobtainingmorefavorablediscounts.”1

Can a company’smi s for tune s inpricingeverbethebuyer’sfault?Prob-ably not. Oraclesimplytrainedcus-tomersovertimetoexpect large dis-counts.

RedHatisalead-ing distributor ofLinux-based soft-ware and services.The company re-centlyreported55percent growth inrevenuebutmissedthe mark expect-ed by analysts by1.7 percent, caus-ingaslightdeclineinthestockprice.When questionedabout this, RedHat CEO Matt

Szuliksaid,“RedHatwasn’twillingtoyieldonpricejusttocloseadealattheendofthequarter.Whydosomethingeconomicallyfoolishtosatisfyanear-termmetricforWallStreet?”2

Havingsetthatexpectationwithcustomers,RedHatcontinuestoreapthebenefits.Ithasconfidenceinitspricing,whichshowsinitsgrowth,profits,andstockperformance.

Who Gets and Gives Price Discounts?Hereisanassignment.Askforaplotofallofyourcustomers’pric-ing.Theplotcanbeeitherforahigh-valueproductorforalow-valueone.Ifpossible,havethesummaryreflecttotaldiscountsandtotalvolume.Thegoalistoshowwhichcustomersaregettingwhichdiscountsforwhichproducts.Ideally,thesummarywillalsocomparediscountsfordifferentsizedcustomers.

Break the Discounting Habit

Figure 1: Prices Paid by Total Requirements



Don’taskfordata,askfortheplot.It’sthegraphthatisworthathousandwords.Let’slookatanexampleplot(Figure1).

Theplotrepresentsthepricechargedperpoundforacommod-ityproductalongwiththetotalrequirementsforeachcustomer.Lookatthecustomerwhopaysunder$0.30perpound.Itstotalrequirementisonly10percentofwhatmanylargerbuyerspur-chaseyetitspricesare25%lower.Maybethecodingiswrong,andthecustomerisactuallypurchasingalotmorethanlisted.Maybeitwasasampleordermadeintheexpectationthatacus-tomerwasgoingtobuymoreinthefuture.Whatevertheexcuse,giventhatitishappeninginsomanyaccounts,thisisasuresignofuncontrolleddiscounting.

Itisamazinghowmanymanagersfailtotakeadvantageoftheinsights fromthis typeofanalysis.Whatgetsmeasuredgetsdone.Ifyoureviewtheseplotsandstarttoaskquestionsaboutwhoisgettingdiscountsandwhy,thenyouaregoingtofindthe

problemsthatleadtoexcessiveorjustplainadhocdiscounting.Askforthejustificationsforthediscounts.Askforthepoliciesthatcontrolthem.Likely,youwillnotfindsuchpolicies—that’sthepointofthisexercise.

Takealookatwhointheorganizationisgivingthemostdis-counts.Averagethediscountsforeachofyoursalespeople.Youwillnoticethatsomedon’tgivemany,whileothers(perhapsevensalesmanagers)do.Thisisgoingtobeascaryprocessofdiscov-ery.Don’tgoon thewarpath.This isnotaboutapportioningblame.Justrecognizethatdiscountshappenbecauseofthelackof training, systems and controls.Well-meaningprofessionalsprovidediscountsbecausetheyarecompensated,managed,andtaughttodojustthat.Whenyoufindthediscounts,you’vegottodeterminetherootcausesoftheproblem,andthosecausesarerarelyjustthesalespeoplewhodispensethem.

Ifyoudon’treviewandmanageyourdiscounts,thetrendwillcontinueandpossiblyaccelerate.Ifyoubegintolookatthemandquestionthem,thenthatactalonewillhelppeoplerealizethattheyatleasthavegottodoabetterjobofjustifyingthem.

Ifyoubackthatupwithneededpoliciesandproceduresandputsometeethintoimplementingthem,thenyouwillbewellonyourwaytokickingthediscountinghabit.

Be Willing to Fire Unprofitable CustomersOnceyouknowhowbadyourdiscountingis,youcanbegintotakeproactivestepstorepairthedamage.Salespeopleandman-agerslookforeveryopportunitytosellsomething.Theydon’tstopandaskwhetheranyparticularcustomerororderisgoodforthebusiness.Thisisoneoftherootcausesofexcessivedis-counting:sellingtocustomerswhodon’t(andwillnever)valuethethingsyoudoasafirm.

Tomakemattersworse,thesemaybethecustomerswhoswitchvendors,complainabouteverything,andextractallsortsofex-traservicesthattheydon’tpayfor.Whydowecontinuetoservethem?Becausewearetrainedtosatisfythecustomers,whateverit takes. Whether it’s smart—in other words, profitable—to

continuetoserveindividualcustomersrarelyenterstheconversation.

Costaccountantshavedevelopedwhatthey call the “20-225” rule.3 Profes-sors Cooper and Kaplan at the Har-vardBusinessSchoolhaveshownthatoncethecostofsupportingcustomersis taken into account, only about 20percentofcustomersareprofitable.Infact,these20percentofcustomersac-countfor225percentoftheprofits.Ofcourse, this means that the other 80percentofcustomerslose125percentoftheprofits.Thisprincipleappliesequallytobothprivate-sectorandpublic-sectororganizations.

Therealityisthatservingalargeper-centageofcustomersrepresentsalossforthebusiness.Thechallenge,ofcourse,isforacompanytodistinguishbetween

thecustomersitcanserveataprofitandthoseitcannot.

Thefirstthingtodoisselectthelow-hangingfruit.Makealistofallyourcustomers,fromthemostprofitabletotheleast.Focusonthefiveor10percentofyourcustomerswhoareleastprofit-ableandfirethem.Thesepurchasersgetthebigdiscountsbutfailtogiveyouthebigvolumetheyinvariablypromised.Thesehigh-maintenancecustomerspaylateandareonspeeddialwithcustomerservicebecausetheyaresodemanding.Inotherwords,thesearetheoneswhocostthecompanytoserviceandkeeponthebooks.

Firingthemwilldothreethings.First,itwillincreaseyourprofitseventhoughitmayinitiallycostyousomesalesrevenue.Second,itwillsendthesignaltosalespeopleandcustomersalikethatthecompanyhaspricingstandardsandiswillingtostandbythem.Yourteamwillloveyouforit.Finally,itwillfreeupresourcestopursuemoreprofitablecustomers,whocanaddprofitsandrevenuetothefirm.

Figure 2: Discount Effectiveness, Four-Year Period



How Effective Are Your Price Discounts?Dellprofitsaredownbecauseitspricecutshavefailedtosparksalesofpersonalcomputers.DellmustbetheonlycompanyintheU.S.–EuropeanPCbusinessthatthinksitcanstilldothat.Itsfallfromfamehasbeenaslowaffair,butawarningsigncameinSeptember2006whenprofitsweren’twhatitexpected.

Dellislearningwhatmostotherhigh-techfirmslearnedinthemarketdownturnof2000—thatprice-cuttingworksifyouhaveacostleadershippositioningrowthphasesofmarketcycles.Ifyoudon’thave thecost leadershippositionand/or themarketslowsdown,thenyouneedtoswitchfromapenetrationpricesstrategytoaneutralone.

Howcanyoutell?LookatthegraphinFigure2whichshowspricediscountingandgrosssalesgrowth.Whenonelinestartshead-ingup(discounting)andtheotherstartsheadingdown(salesgrowth),itshouldn’ttakemuchmoretosig-nal that it’s time to at least startthinkingaboutchangingyourstrat-egy.That’sbecauseyouaretradingprofits for salesgrowth.Here, theleverage is lousy: For every dollarof revenuedrop,you loseadollarofprofits.Profitsdisappearbeforerevenue does. Long before. Dell’sexcuses are beginning to sound alittle too familiar fromquarter toquarter.AformercompanyCEO,KevinRollins,saidthatDellis“ac-celeratingpriceadjustments.”

Itisunclearwhatthatmeans.Whencompanies move to neutral pric-ingstrategy,itisagoodideatoletotherfirmsknow.Confusingstate-mentsnotonlyfailtodothatbuttheyactuallywillincreasethepricediscountingbyotherfirms.

Ifyoudon’thavetheresourcesofthebigcompany,youstillwanttomake sure it’sworthwhile to investigateprice effectiveness.Startwithasimpleplotofaveragediscountsandsalesgrowthonayear-to-yearbasisforatleastfouryearsliketheoneinFig-ure2.Thiswillgiveyouatrendline,andthecomparisonofthetwoprovidesagoodideaoftheoveralleffectivenessofdiscounts;and,perhapsmoreimportantly,howthateffectivenessischang-ingovertime.

NoticeinFigure2thatdiscountsareincreasingdramatically,yetsalesgrowthisslowingjustassharply.Fewerandfewerincre-mentalsalesarebeingdeliveredforthesamerelativeamountofdiscounts.Thisrepresentstwothings:increasedcompetitivenessinthemarketandslowinggrowthintheprimarymarket.It’saclearsignthattheeffectivenessofpricediscountingisdeclining.It’stimetolookforotherwaystosupportthesaleoftheproduct.Promotionandimprovedsalesskillsaregoodareastoconsider.

Anotherpointisclear.Ifthecompanyisn’tdevelopingnewprod-uctsortechnologies,itisgoingtoseedecreasesinbothsalesvol-

umeandprofits.Morediscountswillnotsolvethatproblem.Infact,it’sonlygoingtomakethingsworsebysacrificingprofitsforsalesthatjustaren’tthere.

Let’slookatonemoreplot(Figure3)thatpointstothedramaticimpactof“periodsofdesperation”mentionedintheintroduc-tion.

WhatyouseeinFigure3isthateveryquarter,demandtakesaspike.Thereasonisapparentinthequarterlydropintheaveragesellingpriceforproducts.Thisisasuresignofend-of-perioddes-peration.Funnythingwasthatwhenseniorexecutiveswereaskedifthiswasaproblem,theysaid“No.”Thelower-levelmanagersknewwhatwasgoingon,buttheseniormanagersdidn’tbelievethem.Itwasonlywhentheysawthisplotthattheyrecognizedtheyhadaproblem.

Whatwasthefix?Theyadoptedasystemthatsimplifiedpricesso everyone could see what was happening. They trained thesalespeopleaboutthevaluetheyhadfortheircustomers.Theydidhavevalue—lotsofit.Theyweretheleading-edgetechnologysupplierinthisbusiness.Sure,therewererivals.Butthecom-petitors’technologylaggedbysixtoninemonths,whichwasthewindowoftimeneededtohaveahigherprice.

Thediscountingwasbadbecauseitjustpulledbusinessfromthefuturemonthbutatalowerprice.Noincrementalsaleshere.Thegraphofthatbadbehaviorshowedtheexecutiveteamtheyhadtokickanend-of-perioddiscountinghabit.Whentheydidthis,ratherthangettinganexpecteddeclineinsales,revenueactuallyincreased17percent.Profitswentup37percent,orroughly$300million—moneygrabbedoffthetablebytherightplayer.

Nowyouknowthedepthofyourpricingproblem.Thechoicesmaybehard,buttheprocessiseasy.Afteryourreviewofwhereandwhenyoursalespeoplearediscounting,you’vegottodecidewhenitisclearlyamistaketogivediscounts.Itmaybewithsmall

Figure 3: Monthly Discount Effectiveness



customers.Itmaybewithbuyerswhopurchaseyourhigh-valueproductsandserviceswhichhavelittlecompetition.Itmaybeincertaingeographicmarketsorwithsalespeoplewhohaven’tbeenthroughyourvaluetrainingprogram.You’vegottoidentifywhereyouaregoingtostopgivingpricediscounts.

Thesearetherules of engage-ment.Theyletsalespeopleandmanagersknowthatyouarebeginningtolimitpricedis-counts,andthatyouarewill-ing to let somebusinessgo.Ifyouhavedoneagoodjob,it shouldn’t cost you muchvaluable business. Hope-fully,youhaveidentifiedthecustomers that shouldn’t bereceiving discounts. If theydecidetoleave,itisgoingtobegoodforyourbusiness.Ifarivaltakesthem,itisgreatforyou,sinceyourcompetitor’smarginswilldeteriorate.

Thetricktorulesofengagementistostartwithsomethingeasy.It’sgottobesomethingthateveryonecanunderstandandagreeonasthenextstep.And,itneedstobesomethingthatyoucanputsometeethinto.Forexample,considerorganizingdiscount-ingdollarsasabudgeteditem.Eachsalesmanagergetsabucketofdiscountdollarseachquarterforhisregion.Hemustbecare-fultomakethemlastfor90daysandensurethattheappropriatecustomersearntherighttothediscountsallocated.Standardsmustbeenforced.

Ifyouaren’twillingtoputteethintothenewrules,thenyou’rewastingyourtime.Salesmanagerswilljustkeepaskingtogettheirbucketsrefilled.Sure,ifyoufeellikeblusteringaboutdiscountsgoahead,butunlessyouarewillingtoenforceyournewpolicy,youarebetteroffdoingwhatyouweredoingbefore.Onecompanyannuallyfiresitsmostextremediscounters.Thiskindof“rank-

and-yank”strategyhasothercosts,butitdefinitelysendsamessageaboutwhattheorga-nizationvalues.

From PRICING WITHCONFIDENCE: 10 WaystoStopLeavingMoneyonthe Table by Reed Holden and Mark Burton (Copyright © 2008 by Holden Advisors,

Concord, MA) is reprinted with permission of John Wiley & Sons, Inc. To purchase a copy of the book, you can visit: http://www.wiley.com/WileyCDA/WileyTitle/productCd-0470197579.html

Notes1. Oracle 10-K, June 25, 2004.2. Stephen Shankland, “Red Hat Pulls out a Profit,” c/net news.com, December 22, 2004.3. Robin Cooper and Robert S. Kaplan, “Profit Priorities from Ac-tivity Based Costing,” Harvard Business Review Onpoint, April 15, 2000, Cambridge, MA.

The trick to rules of engagement is to start with something easy. It’s got to be something that everyone can understand and agree on as the next step.


WHY WATCH, WAIT AND HOPE?For many organizations, this is an all too familiar feeling when the end of the quarter rolls around.

Watching, waiting and hoping that deals will come in, margin guidelines will be realized, inventory

will be available and revenue targets will be attained can turn even the most sophisticated

organization into a frenzied pressure cooker of last second heroics.

CHANGE THE GAMEGet the forward-looking visibility you need to proactively plan and respond to changing business

and market conditions. Synchronize and align your business across key functions to enable

proactive responses to intra-period changes. Symphony Metreo has helped leading organizations

meet their financial goals with innovative forward-looking solutions that align and synchronize

top-down planning with bottom-up execution by focusing on the strategic levers of Price, Volume

and Cost. Call us today at 650-935-9400, or visit our website at www.symphony-metreo.com.

Copyright ©2008 Symphony Metreo, Inc. All Rights Reserved.


Pricesareoftenthefirstthingtogoduringarecession.Often,pricesareloweredonanadhoc,deal-by-dealba-sisintheformofnegotiatedordiscretionarydiscounts.Sometimescompaniestrytostabilizeorincreaserevenues

byloweringpricesacross-the-board.Inbothcases,theresultsareoftendisastrous.Dramaticcutsdon’t leadtomorecustomers,andrevenuesdrop.Avoidingthisdoomsdayscenariocannotbedonebythepricinggroupalone.Itrequiresthesupportby,andcoordinatedactionof,manyparties.Thispapersuggestsawaytoaccomplishthisbyfocusingonimprovingcashflow.

Happiness Is Positive Cash FlowAlthough price is an obvious variable in a business model, itshouldnotbethefirstthingtochange.Ifeconomicforcessug-gesttheneedforlowerprices,then(beforetakingthisstep)fo-cusonhowto improvecashflow.Bydoingso,youcanoftenidentifycreativewaystoimprovefinancialperformancewithoutchangingprices.

Whycashflow?Toooften,weneedtoberemindedthatcash,notearnings,iswhatgetsdepositedinthebank.Earningsmayhavesomethingtodowithcash,butfrequentlytheydonot.Enronwasaprominentexampleofhowmisleadingearningscanbe.FollowWarrenBuffett’sleadanddevotemostofyourattentiontocashandcashflowandlessattentiononearnings.

Whenyoulookatpricingasameanstoincreaseoracceleratecashflow,severalnon-pricealternativestolowerpricesmayemerge.Thesealternativesmaybeoutofthepurviewofthepricingde-partmentbutcanbeusedasanopportunitytoengageotherareasanddecreasethepressureforpriceadjustments.Someofthesearenon-pricechangesandcanbeimplementedquickly;othersarelowriskandhavemodestorganizationalcosts.Loweringlistpricesshouldbeyourlastresort.

Look for Improvements SystematicallyEconomicdownturnsareperiodswhencompaniesdesperatelysearchforwaystomaintainrevenues.Alargenumberofoptionsseempossible—oftentoomany.Tofindthebestonesaffectingcashflow,therearetwokeystosuccess.First,searchsystemati-callyforimprovementsandfindthemosteffectiveones.Then,

selectafewofthemostpromisingideas,implementthemcare-fullyandapplythemconsistently.Goodmanagementis1%in-spirationand99%execution.

Abenefitofasystematicsearchforimprovementsisspeed.Onecanmoreeasilyengageothergroupssinceanorderlysearchusu-allytakeslesstimethanadisorderlyone.Acarefullythought-outapproachalsohelpspeoplegetcomfortablewiththeavailableop-tions,makecontributionsandadapttochange.

The“fishbonechart”showshowcashflowisrelatedtosomecom-monfinancialmetricsandcanbeausefulframeworkforsystem-aticallysearchingforalternativestocuttingprices.

Increasing or Accelerating Cash Flow Beforeexploringtheoptions,here’saquickoverviewoftherela-tionshipbetweenpricelevelsandcashflow.

Whenlistpricelevelsincrease,sodotherealizedrevenues,which,inturn,shouldresultinhighergrossmarginsandmorecontribu-tiondollars.Morecontributionmeansmorefundsareavailableforoperations,investmentsorsimplyincreasedprofitability(whichbyitselfmaycontributetobettercashflow,butthetimingofpay-mentsisequallyimportant).Anyeffortstoimproveprofitabilitywillbefornaughtifthemoneycomesintooslowly.Shouldprofitlevelsbehighenough,butinsufficienttopaycurrentexpenses,thengetpaidsooner(customeradvances)orstretchoutpayables(payininstallments),whilegettingcontrolovercosts.

The credit department may set credit terms, but the pricinggroupcaninfluencethetimingandpredictabilityofcashflowbyencouragingtheequivalentoflayawayplans—especiallyinindustrieswithseasonalorcyclicaldemand—anddiscountpoli-ciesthatencourageearlypayment.Theessenceofallcash-flowimprovement techniques iswell known:BuyLow, SellHigh,CollectEarlyandPayLate.PricingcangreatlyinfluencetheSellHigh/CollectEarlyelements.

Improving Profit Movingupthefishbonefromcashflowtoprofits,therearetwowaystoraisethelatter:Increasecontributionordecreasecosts.

Think Twice before You Reprice

During an economic downturn, companies struggle to maintain levels of revenue, growth and profitability. Everyone is called upon to “do some-thing.” Spending is restricted. Discounts increase. New—usually low-er—prices are announced. This article provides a framework that pricers and others can use to take coordinated action. The framework focuses on ways to increase or accelerate the only thing that counts in times like these: Cash Flow. The author of the piece, Jim Geisman, is principal and founder of MarketShare, Inc., Wayland, MA. For more information he can be reached at: [email protected].



Trimmingmajorcostareasisonepartofprofitimprovement,butthesalesandmarketinggroupsmaybeabletoaffecttotalcontributionbyreallocatingcostsinsteadofjustcuttingthem.(Inthenext sectionwediscussactions thatcan increase totalcontribution.)

Although most marketing and sales departments know howtoimprovetheireffectiveness,theseadjustmentstaketime—ascarcecommodityinthischallengingperiod.(Desireforimme-diateresultsisonereasonwhythereissuchpressuretocutcostsandchangeprices.)

Recognizingthatnothingcanhappenovernight,herearesomewayscashflowcanbeincreasedbeyondtheeffectofcostreduc-tions:

• Findmorecost-effectivepromotionalorsalesmethods.• Substitutetelemarketingformoreexpensivedirect-salespros-

pecting

• Service smaller customers with telesales instead of directsales

• Usecommissionedsalesrepsinsteadofsalariedsalespeople• Overlaysalescompensationprogramswithprofit-focusedsales

incentives

Marketingmaybeabletopursueasegment-focusedeffortaimedatlessprice-sensitivecustomerswithhelpfromthepricinggroupanditsanalysisofcustomerdata.Ifsalesareslowingdownandclosingdealsisgettingharderorhappeninglater,lookforwaystoreducethesalescycle,whichwillfreeuptimeformoresellingorwillreducesalescosts.

Companies that focusoncuttingcostsoftendo soacross theboard,buttheseactionswon’tdomuchfortotalcontribution.Itisprobablybettertolookintowaysmarketingcanhelpwiththisratherthanthesalesgroup,whichwillbeunderincrediblepressure.

Figure 1: Profit Drivers: Price, Costs, and Volume

MarketShare, inc.

Gross

Margin

Product

Volume

Promotion

Sales Method

Total

Contribution

Other Costs

Marketing

& Sales Costs Cashflow

Payment

Terms

Profits

Realized

Price

Cost

Features

Packaging

Discounts

Demand

Customer Loyalty

Logistics

Incentives

Support

Development

Price

Level

Think Twice before You Reprice



Increase Total ContributionWhileitisalwaysusefultolookatwaystoincreaseefficiency/ef-fectivenesstolowercosts,considerfocusingontotalcontribution(grossprofits)tooverhead,theotherfactoraffectingprofitandultimatelycashflow.

Itrequiresdoingsomethingtoinfluenceaveragegrossmarginandtotalunitvolumeacrossallsales.Increasingoneorbothofthesetwovariableswillincreasetotalcontribution.

First,wewillexploretheimpactofvolumewhichcomesfromheighteneddemandorcustomerloyalty.Thenwewillconsidergrossmargin.

Inorder to spurdemand in the short run (without changingprices),onemustsegmentthecustomerbasetoexploitanyvol-umeopportunities.Butwhencom-petitionintensifies,thetraditionalapproach—volumediscountsched-ules—tendstobecomelesseffectiveinattractingthe“heavyuser”seg-mentinaparticularmarketortheexistingcustomerbase.

Therefore, more volume must beachievedbyincreasingpenetrationintoexistingcustomergroups.Onewaytodothisis,forexample,usinglow-tono-costincentivesliketrain-ingtogetreferralstonewprospectsinsideoroutsidetheaccount.Iftheincentiveisadiscount,thenmakesurethecostoftheaddeddiscountisoffsetbythesavingsinsalescostfromhavinganinternalsaleschampionwhowillhelpsellnewprospects.

Sometimesyoucangethigher-volumecustomerstoincreasetheirpurchasesbytrimmingservicestheydon’tvalueandloweringthepricetoreflectthis.Inthiscase,yourfinancialconcessionfreesupmoneyforthebuyertopurchasemoreproduct.Althoughtheaveragepricemaygodown,theaddedvolumewillgeneratead-ditionalcontributiondollars.

Whilelookingforwaystoencouragedemandinthenearterm,considerstrategies,too,forthelongrun.Onemethodisadd-onsales.Inthesoftwarebusinesscustomerstendtospendmoreonupgradesandsupportthanontheinitialpurchaseoftheproduct.Similarly,youmayincreasevolumethroughcarefulattentiontocustomerretentionorloyalty.

Notethatthelatterisnotbasedonloweringpricessincethatwillonlyattractprice-sensitivebuyers,anotoriouslyficklegroup.Ef-fectiveloyaltyprogramstypicallyworkbestwhenpriceissimplyoneofmanytools.

Engagingcustomersislimitedonlybycreativityandwillingnesstotrynewprograms.Forexample,companiesregularlydocrosspromotionswithfirmsofferingcomplementaryproducts.News-lettersorwebdownloadsprovidelow-costwaystogetthesame“shareofmind”asafavorableprice.Often,dealerseminars,in-storedemos,local/regionaleventsorfreefactoryconsultationscanstimulatesalesandincreasecustomerloyalty.

Asanaside, ifyouwantto increase loyalty,you’dbetter startmeasuringitjustasyouwouldvolumechangespertransactionfrompriceadjustments.Don’tforgetroughmeasuresarebetterthannoneatall.Roughlyrightisbetterthanpreciselywrong—orlate.Loyalcustomersgeneratepositiveword-of-mouth.Andthisiswhatsellsproducts.

Improve Gross MarginKeepingcurrentmarginstosustaincashflowisparticularlytoughascompetitorsslashpricesinascrambleforrevenues,andcus-tomerstightentheirbelts.Ifunitmarginsareheadedtowardsacliff,productvolumesmaynotexpandenoughtomaintaincon-tributionlevels.

Therefore,lookforwaystopreservemargins(oratleasttomini-mizeerosion.)Abouttheonlythingthatcanbedonetokeepunit

margins high in a price-com-petitivemarketistomakesurethevariablecostsfallfasterthanpriceserode.(Wedealwiththeotherwaytomaintainmargins,“realizedprices,”below.)Mostcompanies are more adept atcutting costs by elimination,butsubstitutioncanoftenpaylonger-termdividends.

In terms of costs, the peopleresponsible for the logistics—costsofmanufacturinganddis-

tribution—tendtobeprettygoodatcostcontrol.Forexample,they may substitute lower-priced cardboard for plastic. Someactivitiesmaybemovedtoshelteredworkshops—savingmoneyandprovidingacommunityservice.(Theremayevenbesometaxincentivestoencouragethis).

Anotherareaforcostimprovementisinsupport,andcustom-ersthatconsumetheseservices.Supportcostsmoneyandmaybeprovidedfreeevenwhenuserswouldbewillingtopayforit.Lookforasegmentedserviceoffering.Inthesoftwarebusinessanywherefromonetothreetiersofsupportmayexist,butoffer-ingsareoftennotasnuancedastheyshouldbeinfirmswheremostsalescomefromexistingcustomers.

Ifincentivesarepaidtosalesrepsorthroughindirectdistribution“becausethat’sthewaywedothingsaroundhere,”thenthismaybeanotherarearipeforchange.Youmaybeabletoaltertherulesoftheincentivegameandcreateacompetitiveadvantage.

Onecompanyusedtogiverebatesormarketdevelopmentfundsbasedonthenumberofsingleunitssold.Theyshiftedtorewardsbasedonbundlesofunitssold,instead.(Inthiscase,theypaid1.8timestheoldincentive—butforsellingtwounits.Thenewincentivewasamorevisibleandattractiveamountthantheoldone.)

Longer-term, gross-margin improvement can also come fromproduct development using “design-to-cost” or “design-for-manufacture-and-assembly.”Design-to-costresultsinproductswhosefeaturescustomerswillpayforatlevelsthecompanycanafford.Design-for-manufacture-and-assemblycanreduceprod-

In order to spur demand in the short run (without changing prices), one must segment the customer base to exploit any volume opportunities.



uctcostsby20-40%,andlifetimesupportandrepaircostsbyevenmore.

Productsthatusestandard-sized“widgets”arecheapertoproducethanproductsusingcustomizedones.Forsoftwarecompanies,thismeansleveragingintellectualpropertybyre-usingpartsoftheircodebase.

Ascost-efficientasyourvariablecoststructuremaybe,whenyoulookatitthroughthelensofcash-flowimprovement,newop-portunitiesforefficiencieswillusuallyresult.Ifvariablecostsfallfasterthanpriceserode,thencontributiondollarswillincreaseleavingcompanieswiththebestcoststructureinastrongerpo-sitionwhenthemarketrecovers.

Realized PricesEarlier,wediscussedhowvari-ablecostsaffectgrossmargin.Butthereisonlysomuchonecandoonthecostside.Abet-terwaytoimprovemarginsistofocusononeoftheimpor-tantpricingmetrics—realizedprices. Although it may notbepossibletoimprovethem,theyofferagoodstartingpointgiventhetightrelationshipbe-tween higher realized pricesandimprovedcashflow.

Oneoptionistodevisemorevaluable products that canbear a higher price. Besidessimplydeveloping them,youcanreconfigurethefeaturesofyourofferingssotheirvaluebe-comesmoreobvious.Packagingmayalsobeusedtocombineproductspreviouslyconsideredseparateoradd-onstohitahigherpricepoint(andthereforerealizedprices)—regardlessofwhetherthefeaturesareproductorservices.Butmakesuretheproductvaluedeliveredlinesupwiththeneedsofcustomersandtheirwillingnesstopay.

Customersthathavebeertastesandabeerbudgetdon’twant—andwon’tpayfor—champagne,sodon’tserveit.Lookinsteadforprospectsorcustomerswhoarelessprice-sensitive.Youcan’tbeallthingstoallpeoplesofocusonwhatyoudowellandgetpaidforit.

Decreasingdiscountsisanothersubtlewaytochangepriceswhileimprovingcashflow.Perhapstheeasiestwaytodothisistolookforinappropriately-highscheduleddiscounts.Sometimes,theyarerelatedtoproductvolumes;and,sometimes,theyaregivenforspecificsalesorcustomerperformance.Inthecaseofvolumediscounts,makesurethediscounttierbreaksareappropriateanddon’tstartatunacceptablylowvolumes.Similarly,makesurethetop,publishedvolumediscountsarenottoohigh.Bothofthesechangesaresubtleandcanbeintroducedovertime,sotheyarelikelytobeoverlooked.

Wherediscounts are given for sales or customerperformance(whichiscommonwithindirectselling),oftenfirmsneedonly

tomonitorperformanceandtoenforcetherules.Again,thesechangescanbeintroducedgraduallytoavoiddisruption.

Customerpricesensitivitycanparticularlyaffectthesalesforce.Fromthesalesperson’sperspectivepriceloomslargebecauseitcanoccurtwiceinthesalesprocess:Whenthecustomerisdecid-ingwhichvendors“areintheballpark,”andwhenpricestandsinthewayofclosingasale.

Inlargecontracts(whereitcounts)scheduleddiscountscanplaceacompanyintheballparkmoreoften,assuggestedabove.Thesecanalsonarrowthegapthathastobefilledbynegotiateddis-counts.Duringaneconomicdownturn,negotiateddiscountsof-tenincreasedramaticallyduetocustomerpressure,whichreflects

thecompetitiveenvironment.Therefore,thegreatestoppor-tunityfordiscountreductionisofteninnegotiatedordis-cretionarydiscounts.

Thisisanareawherethedis-count analysis often donebypricerscanbeinvaluable.Since the sales organizationwill be under intense pres-sure,nowisnotthetimetomakemassivechangestone-gotiateddiscounts.However,thisisthetimetounderstandwhy some transactionshaveinappropriately high dis-counts and provide suitablefeedbackbeforeadealisdonetoavoid futureoccurrences.

Oftenasalesrepwillavoidover-discountingwhentheyknowthatother,similardealsweredoneatlowerdiscountlevels.

Price LevelsIfthereisnowaytoincreaserealizedprices,andyouhavelookedineverynookandcrannyforwaystoimprovecashflow,thenyoumaybe stuckwith lowering listprices. If youmustdropprices,thenbeselectiveandmakesuredemandislikelytogrowenoughsothatcontributionprobablywon’tdecrease.Herearesomeplacestolook:

1. Products Where Value Delivered Is Too Low Relative to the List Price. If you can’t increase valuewith features orpackagingfirst,thenlowerpricesonlyifdemandwillincreaseandcausethetotalamountofcontributiontogoup.

2.Products Where Discounts Are Uniformly High. Makesureitisthediscountsthataretoohigh,nottheproductvaluethatistoolowrelativetolistprice.Ifthediscountsareuniformlyhigh,reconfiguretheproductstoeitheraddvaluesodemandwillgoup;orstripoutfeaturesorservicessogrossmarginwillimprove.

3.Groups of Customers Associated with Higher Negotiated Discounts. If these customers only care about price, theneliminateasmanyextrasasyoucan(e.g.,features,services,consideration).Maybe these are thebuyerswho shouldget



newproductslastorshouldgototheendoftheservicequeue.Makesuretheassignedaccountrepshavetherightnegotiat-ingskillsandsupport.Ifallelsefails,thenmaybethisisthetimetofirethecustomersandredeploysalesinmoreproduc-tiveareas.

4.Discounts Are Roughly the Same across All Sales Reps. This is a case where pricesmayactuallybeoutofline.Inthissituation,youneedtodotwothingsatonce:lowertheprices and lower the negoti-ateddiscounts given, so oneoffsetstheother.

Nowisthetimetoreallybese-lective. Start with products forwhichlowerpriceswillresultinhigherdemand.Movetoofferingswhosevariableandoverheadcoststructurecanbechanged.Makesuresalespeopleandcustomersunderstandthevalueproposition,andthatitisclearlyarticulated.

Now What?Ifallavenuesformaintainingcashflowareblocked,andyoumustcutpricestostayinbusiness,thentryhardertofindalternatives.Seekideasfromcustomers,salesreps,otherpricingprofessionals

orconsultants(iftheycanimprovecashflowquicklytocovertheirfees!).Inanycase,thisiswherecreativityandout-of-the-boxthinkingcanreallypayoff.Thismaybethetimetobemoreinnovativeandtotakemorerisks.

Mostcompaniesaretakinganum-berofstepstoincreasecashflow.Often, some of these activitiesarenotaseffectiveastheymightbe.A10%improvementinthreethingsyouarenowdoingineffec-tivelywillverylikelyincreasecashflowmorethananyonenewideaateammightimplementovera12-monthperiod.

Home-runsolutionsarepossible,butmostballgamesarewonon

singlesanddoubles(andmakingfewererrorsthanyourcom-petition).Clearly,theoperationalchangeswhichhaveanim-pactoncashflowgowellbeyondpricing.Inmanycompaniespricingisanactivitythatcutsacrossmanyareas.Therefore,whenitcomestimetoadjustprices,itmaybeagoodideatoengageotherdepartments tofindnew approaches that canhave the same impactaspricechangesoncashflow.You’llbesurprisedathowmanyusefulandoftenelegantideasareoutthere.

Home-run solutions are possible, but most ball games are won on singles and doubles (and making fewer errors than your competition).



The Roadmap

Everycompanyhasapricingprocess,butitmaybeex-ecutedpoorlyorwell.TheWorld-ClassPricingFrame-work(Figure1)outlinesthestagesofgrowththatpric-ingmanagersandtheirorganizationsmustgothrough

onthejourneytoexcellence.

Eachstageofthisjourneyisalogicalprogressionfromthepreced-ingone.Awell-definedseriesofstepshelpscompaniesadvancefromoneleveltothenext,aprocessthattypicallytakessixto18months.Morerapidprogressionisseldompossiblebe-causeculturalchangeisoftenattheheartofthemovetothenextlevel.But,asthecompanyevolves,somusttheroleofthepricingmanager.EachlevelwithintheFrameworkprovidesanopportunitytoadd new tools, processes and capabili-tiesthatwillimprovethefirm’sbottomline and enhance your role as a pricing manager.

Thisarticlewilldescribeeachlevel,andsummarizetheroleofthepricingman-ager and the key process benchmarksfor determining whether a companyhasachievedaparticular levelofcom-petency.

Level 1 – The Pricing Firefighter About30percentofcompaniesaremiredatLevel1.Pricingmanagersintheseor-ganizationsfeel likefirefighters,alwaysstrugglingtocontrolthelatestflare-up.

Pricingishighlyreactive,andfirmsareconstantlyunderpres-suretolowerprices.Thesalesdepartmentdominatespricingde-cisions,andthreatsoflostdealsandunhappycustomersleadtofear,whichinturnleadstodiscounting.Theprocessesinplacehave typically evolvedover time.They are relatively “adhoc”andrelyontheexperienceofafewindividuals—whichputsthecompanyatrisk.

Mostlyadministrative,thejobinvolveslotsofpaperwork(keep-ingsalesup-to-dateoncontractrenewals,changingpricelists,

The Journey to Pricing Excellence

Many pricing initiatives get off to a great start; but, over time, the pricing process (which should be dynamic) can become mundane, control-ori-ented, and repetitive. This article explains how to keep that journey creative and fulfilling, while showing managers how to deliver business re-sults that justify significant new investments in pricing. The authors of this piece are: Paul Hunt (president) and Jim Saunders (vice president, pric-ing management) of Pricing Solutions, a consul-tancy associated with the Advantage Group. For more information you can reach them at [email protected] and [email protected], respectively.

WORLD CLASS PRICINGPROCESS MATURITY

PROCESSMATURITY

LEVELS

THE MASTER

WORLDCLASS

LEVEL 1

BaselineProcess isIneffective

LEVEL 2 Internal

ProcessIn Place

LEVEL 4

OptimizationProcessesIn Place

LEVEL3 Value

ProcessesIn Place

LEVEL5 Excellence

inExecution

© 2002 Pricing Solutions Ltd.

Gain Control

OptimizationTools

Price/ValueAnalysis

30% of companies

40% of companies

<10% of companies

20% of companies

<1% of companies

Figure 1: The Five Levels of World-Class Pricing



etc.).Theanalyticalrequirementsarebasic.Thepricingmanagerinthistypeoforganizationistypicallya“TypeA”personality,thrivingonstressandenjoyingthefeelingof“savingtheday”byreactingquicklytoanarrayofdemands.

However,thistypeofroleisunsustainable.Ultimately,thecom-panywillreplacethatpricingmanagerwithsomeoneofsuperiorskills.However,ifthemanagerissmart,heorshewill initiate the change.

Thewayoutoffirefightingistogain controlofthepricingpro-cess.Thismeansimplementingtoolsandprocessesthatreplacereactivedecision-making(andthefearthatdominatesit)withproactivedecision-making.

Level 2 – The Pricing Policeman ThehighestpercentageofcompaniesoccupiesLevel2inpricingperformance.Managersatthislevelbehavemorelikepolicemen;theycontrolpricingandenforcepolicies.TheLevel2pricingmanagerhasimplementedadvancedanalyticsandguidelinesthathelpcreatestructureandprocessaroundpricing,whileestablish-ingthegroundrulesthatthesalesdepartmentmustfollow.Pricingisnowfairerandlessarbitrary.

However,thesalesteammaybecomefrustratedandfrustrating.Eventhoughpricesmaybe“fair”becausepolicies arebeingapplied rigorously, theywilloftenviewtherulesasinflexibleandnotalignedwiththemarket and their customers’needs.Hence, atmanyLevel2organizations,thesalesteamcallsthepricingdepartmentthe“salesprevention”department.Con-sequently,adjustingcompensationandrewardingthesalesteamforimproving profits isacornerstoneofmain-tainingsalesdiscipline(seeFigure2).Level2compa-niesstoprewardingsalespeopleforwinningdealsthatdilutecompanyprofits.

Level2requiresaccountabilityforpricingperformance.SixSigmaisoftenusedinthe“gaincontrol”phaseofpricing;andperformanceobjectivesareestablishedforthepricingprocess.Thesemeasuresmightincludethedegreeofvariationinnegotiatedprices,ortheflowtimetoapproveaquote.ThetoolsusedatLevel2includedis-persion analysis and pricingwaterfalls,andareprimarilyfocused on internal, ratherthanexternal,measurementsofpricing.

Softwarethatprovidesthesetools can help a pricing de-partmentbecome“worldclassatLevel2.”However,oppor-

tunitiesforcreatingandharvestingvaluefromintensiveknowl-edgeofcustomerseludetheLevel2company.Toprogressfromcontrolledtooptimal,theorganizationmustmovebeyondrulesandguidelines,andintoadeeperunderstandingofthevalueitsproductsandservicesdelivertocustomers.

Level 3 – The Pricing Partner AtLevel3,astepthat20percentoforganizationsreach,pricingmanagersbehavemorelikebusinesspartners.Nolongerdoap-proacheslike“costplus”or“lastyear’spriceplus”ruletheday.Instead, the organization invests in understanding the valuedeliveredandsetspricesaccordingly.Theresultismuchgreaterharmonyamongsales,marketing,andfinance(atruepartner-ship)aroundtheissueofpricing(Figure3).Nolongerarefac-tionsfocusedontheirownnarrowagendas;everyoneisnowinthesameboatbecausepricingistrulycustomer-driven.

Thepricingmanagerisconsideredabusinesspartnerpreciselybecausehe/sheistunedintothecustomer.Oftenatthislevel,managerswillbegivenbudgetsforconductingprice-sensitivityresearch.Armedwithcustomerinformationaboutpricesensitiv-

Situation #1 Situation #2

A) Price $1,000,000 $800,000

B) Total Commission (10% of sales) $100,000 $80,000

C) Likelihood of Winning 50% 90%

D) Expected Commission (BxC) $50,000 $72,000

E) Company Profit $300,000 $100,000

F) Profit Change --na (67%)

• Paying salespeople based on volume is not in the company's best interests.• Consider this example in which the salesperson is paid a 10% commission based on

volume.• By lowering the price to $800,000, the salesperson has increased her likelihood of win-

ning and her expected commission (i.e., from $50,000 to $72,000).• The company, however, has experienced a 67% decrease in profits.• Clearly the pricing objectives of the salesperson and the company are not aligned.

Figure 2: Poorly-Aligned Sales Force Compensation

Function Perspective in Levels 1 & 2 Perspective in Levels 3-5

Sales Lower prices Adjust the offer, reduce the price

Finance Raise prices Optimize the tradeoff between price and volume

Marketing Trust me, the price is right Measure the value, and then price it accordingly

Figure 3: Moving to a “Pricing Partnership”

The Journey to Pricing Excellence



ityandthelinktothecompany’soverallvalueproposition,themanageris inanidealpositiontointegratetheviewsofsales,marketing,andfinance,andtobecomeamajorvoiceatthetableduringstrategicdiscussionsaboutpricing.

Managers at Level 3 already have excellent analytical skills.(TheyhadtodevelopthoseatLevel2).Buttheyhavealsode-veloped twomore important skillsoftendisplayedby seniorexecutives: change management and strategic thinking. Theformerisimportantbecausepricingmanagersmustusetheirinfluenceeffectively.Theycannotdictatepricestosales,market-ingandfinance.Byusingtheirskillsofpersuasionandlettingthedata lead, they canbuild a consensus around importantpricingdecisions.

Similarly, strategic thinking is an important skillbecause atLevel3,pricersareinvolvedindevisingpricingstrategy.Thisnecessitates that they connect the dots between pricing andthevariousgoalsandobjectivesoftheorganization.AtLevel3

managerswillalsobemeetingwithmoreseniorpeople,andwillbeaskedfortheiropiniononlong-termimplicationsforpricingasitrelatestomajorissuessuchasnewproductlaunches,newpricestructures,mergersandacquisitions,marketforecasts,etc.Eachoftheseissuesrequiresastrategicperspective.

ManagersatLevel3companieshavedeepinsightintowhatcus-tomersvalueandhowmuchtheyarewillingtopayfordifferentofferings.However,theirabilitytopredictcustomerreactionisstilllimited.Theyhavenotappliedthescienceofoptimization.Todo so, they must bring amore rigorous and scientific ap-proachtopricingthatenablesthemtomeasurepriceelasticitywithprecision.

Level 4 – The Pricing Scientist AtLevel4,pricingmanagersintensifythedegreeofanalyticalprecisiontheybringtopricing,andhavehonedtheirabilitytotunecompanyofferingstooptimizeprofitsbysegment.Asare-sult,theorganizationmovesfromvalue-basedpricingintopriceoptimization.Thekeyphrasesatthislevelare“profitoptimiza-tion”andpriceelasticity(acornerstoneofeconomictheory,whichisnowbeingappliedrigorouslyataminorityoforganizations–lessthan10percent).

Twotoolsformeasuringelasticity–priceoptimizationsoftwareandpriceelasticityresearch(i.e.,DiscreteChoice)–haverevolu-tionizedthefieldofprofessionalpricing(Figure4).

It isdifficult toachieve this levelofpricingprocessmaturitywithouttherightorganizationalstructure.Ahallmarkofcom-paniesatthisstageisthepositionofaVPPricingorChiefPric-ingOfficer(CPO).ThispersonwillhavesignificantauthoritywithrespecttopricingandwilloftenreporttoeithertheCEOoranotherhighlyrespectedandpowerfulindividualwithintheorganization.

It’s importanttonotethatLevel4pricersmusthaveexcellentanalyticalskills(developedinLevel2),butdonotneedtobestatisticians.Rather,theymustbeabletohireandutilizeindi-vidualswithdeepstatisticalexpertise.Level4pricersmustexcelatchangemanagementandknowhowto“bringdatatolife,”sothatittellsastoryaboutthecustomer,themarket,thecom-petition,etc.

Another characteristic ofLevel 4 companies is theresponsibility of the seniorpricingperson for creatingthepricing culture.There-fore,heorsheisdeeplyin-volvedintrainingthesalesand marketing teams onhowtopriceeffectively.

ToreachLevel4isamajoraccomplishment. It meansyou have achieved a highlevelofexcellence,areinthetop10percentofpricersandwillbeingreatdemandforavarietyofprojects.Oneof

themostnotableareasisbusinesstransformation.Bybringinginanexperiencedpricer,anorganizationcanoftenspeedupthere-coveryofthebusiness.

Level4companieshaveachievedexcellenceinmeasuringpriceelasticity, andhave created a strong corporate culture aroundpricing.ButtheyhavenotreachedLevel5.Todoso,theymustrefinetheircapabilitiesevenfurther.

Level 5 – The Pricing Master AtLevel5youhaveachievedpricingmastery, a feat that lessthanonepercentoforganizationshaveaccomplished.WeusedaVinci’s “PerfectMan” to symbolize thebalanceofart andscienceinLevel5.

AcompanyhasreachedLevel5whenithasmetthefollowingcriteria:

1. TheCEOrecognizespricingasastrategiccapability.

2.TheimprovementsimplementedtoachieveLevel4arewith-standingthetestsoftime;thecompanyhasmaintainedLevel4performanceforatleasttwoyears.

Figure 4: Optimization Tools

Attribute Discrete Choice Optimization Software

Data Source Survey Transactional Data

Underlying Hypothesis

Simulated purchase decisions are predictive of future behavior

Historical behavior is predictive of future behavior

Strengths New products Price increases Product line price gaps Price structure

Price increases Discounting Price Structure

Weaknesses Not based on actual purchases

The past does not necessarily reflect the future



3.Thecompanyachievessubstantiallysuperiorbusinessresultscomparedwithitscounterpartsinthesameindustry.

4.Thecompanyhasfully-designedandimplementeda“Design-to-Price”processfornewproductlaunches(Figure5).

OneLevel5company,forexample,wantedtodeveloparo-bustpipelineofnewproductstopropelitintothenextdecadeofgrowth.Because thepricing teamhadhistoricallyplayedamajorrole indevelopingthenewproductpricingprocess,newofferingscouldbeevaluatedquickly,andeitherdiscardedorinvestedinfurtherbasedontheirabilitytogenerateposi-tivemargin.

Of course, once a company hasachieved this level of compe-tence, itmustconsidertheques-tion: “How do we continue toimprove?”

At this stage, the demarcationbetweenpricingandotherissuesbeginstoblur.Firmswilladdresspricing in the context of largerstrategicissuesandwillengagethepricing team inhelping to solvethosechallenges.

For instance, a company wasconsideringamajor investmentin a new plant. The businessstrategy team,whichwasmak-ingadeterminationofthebusi-nesscase,requestedthataseniormemberofthepricingteamjointheinitiative.Thepricingman-agerwasassignedtothisprojectand played a major role in this make-it-or-break-it businessdecision.Bycombiningdeepanalyticalstrength(i.e.,build-ingforecastingmodelsprojectingtheimpactoftheadditionalcapacityonindustrypricing)withtheabilitytolinkpricingto the value proposition (e.g., customer segmentation, pricesensitivity,pricestructure,productofferings,etc.),thepricing

managerwasable tomakea substantial contribution to theoveralldevelopmentofthebusinesscase.

ItisnotuncommonforLevel5pricerstomoveontootherpo-sitionsinseniormanagement.Theirhistoryhastypicallybeenoneofdeliveringdramaticimprovementsinbusinessresults;andtherefore,theyareoftenassignedtoturnaroundsituations,par-ticularlyincompaniesthathavegoodproducts,butareachiev-ingsub-standardresults.

SummaryThejourneytopricingexcellenceisbothrewardingandchal-lenging.Pricershavetheopportunitytodeliverdramaticim-

provementsinbusinessresultsifthey continue to develop theircapabilities in analytical andchange-managementskills.Thisallowsthemnotonlyto“letthedata do the talking,” but alsotobuildsupportandalignmentamongdifferentfunctionalareasthatoftendon’tseeeyetoeye.

Asthepricerevolves,he/shewillmovefromaveryreactivemind-set (Level 1 – Firefighter) to amoreproactive,control-orientedapproach(Level2–Policeman).Oncehe/shehasgainedinternalcontrol,itisimportanttogatherexternalinformationthatbuildsalignment among the variousfunctional areas (sales, market-ing,finance)aroundthecustomer(Level 3–Partner).The fourthstage is optimization, in whichpricersgainanevendeeperun-

derstandingofthecustomersegmentationandthevalueproposi-tion(Level4–PricingScientist).Thefinallegofthejourneyistoachievemastery(Level5–PricingMaster).Youmightsaypricersatthisstagearedoingtheir“levelbest.”Butthequestcontinues;Level5isanever-endingsearchforimprovementthatoftentran-scendspricingandlinksintotheentirebusinessentity.

Figure 5: Design to PriceBy determining willingness to pay before cost, world-class companies such as IKEA put the customer first. The benefit is a much higher prob-ability of new products succeeding in the market place.

Core Customer

Willingness to pay Price Target

CostOffer

Design to Price By determining willingness to pay before cost, world class companies such as IKEA put the customer first. The benefit is a much higher probability of new products succeeding in the market place.


For change agents seeking profit nirvana, please note: effective pricing is your most powerful lever to getto the top! At Pricing Solutions, we have helped many companies in many industries take theexhilarating ride to the top; to take price increases, reduce needless discounting and grow theirbusinesses. If you agree that every penny counts and you want to drive pricing improvement, give usa call or visit our web site.

OUR

APPROACH

TO PRICING

ACCELERATES

YOUR CLIMB

UP THIS

SIDE AND

AVOIDS

THIS

SIDE

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