Managing prices in an organization can be complicated. If you have a large number of SKUs, a lot of customers and a variety of markets or channels, things can get dicey pretty quickly. Take, for example, even a small distributor with 10,000 SKUs, 500 customers and three markets: The number of price permeations could reach as high as 15 million if you consider all of the possible combinations of SKUs, customers and markets.
While it is not likely that different prices would be set for every possible combination, the challenge of setting an optimal price for each transaction remains. The advent of pricing technology and science helps to manage complex price environments. However, several other factors should be considered when evaluating the effectiveness of your pricing management program. The five signs below are a starting point to consider when assessing your pricing management effectiveness.
· Leadership – Is anyone in your organization paying attention to pricing and profitability? We don’t mean the administrative tasks that occur every day. What’s needed is someone to keep a focus on pricing and project a constant light on pricing challenges and opportunities. We know a CEO of a $400 million company who reviews price quotes on a daily basis as a way to keep the organization focused on price performance. Someone at your company should be leading pricing discussions and oversight.
· Education – Have your financial, marketing, sales management and executive team members attended any training or read any books on strategic pricing? Educational materials and programs are becoming more plentiful and accessible as strategic pricing management is being adopted at an increasing rate. Have your management team members attend a pricing training program or read a book to begin discussions on how to move forward. In terms of books, we like “The Price Advantage” by Marn, Roegner and Zawada. If you are considering training programs, PricePoint Partners offers a variety of options. [link to web page]
· Sales Team – Does your sales team have the authority to discount, change or set prices? If so, you are likely leaking a significant amount of profit margin through your pricing. Without adequate price guidance, sales teams will use discounting as a quick way to close sales. We know of one manufacturer who allowed sales reps to discount up to 10%. Management later discovered that the entire business was being sold at 90% of list price.
· Monitoring – Are you monitoring price performance on a regular basis? Without price metrics, you won’t know when your pricing is headed for trouble. Set up some basic metrics and monitor them on a regular basis. For starters, identify your key products and track the average selling price. You can even set up metrics by region or sales rep. You may be surprised to learn that your highest-volume reps may be at the lowest margin.
· Cost Plus – Are you using a cost-plus pricing approach? Cost-plus is great to insure specific margins, but it doesn’t take into account the market or customer price sensitivity. The result will be lost sales where your price is too high or money left on the table when a cost-plus calculated price is too low. Instead, moving toward a value-based pricing strategy or applying pricing science to determine price sensitivity will help you arrive at optimized prices that will close more business more profitably.
Pricing should be managed with the same vigor as finance, marketing, sales or any other business function. After all, pricing has more potential impact on profitability than any other profit driver. Improved pricing management is worth an investment of time and resources. Start your journey to price improvement by addressing one of the five signs listed above, and you will be on your way to higher margins and a stronger competitive position.