Pricing Audit – Unlocking The Value

A pricing audit is often a good first step towards unlocking the value of your pricing opportunity.

There is often significant value in asking an experienced pricing leader to review a company’s current pricing processes and policies to understand where margin is being retained and lost. As a general rule, we have found the best advice comes from executives who have managed the pricing organization at businesses which are similar to but not part of your industry. This ensures the auditor is familiar with the basic business but can sidestep industry blind-spots.

Key Components of A Full Pricing Audit

A good pricing audit blends process assessment, organizational psychology, financial analysis, customer value, and competitive strategy. The final product should be a comprehensive view of how value is created by your organization and claimed in the market place.

  • Transaction Administration
    • Pricing Systems
    • Price Lists / Maintenance
    • Bid Pricing / Deal Desks
    • Price Increase Process
    • Price Overrides
    • Billing / Collections
    • Analytics
  • Organizational Roles / Responsibilities / Incentives
    • Sales
    • Sales Leadership
    • Customer Service
    • Pricing Team (if any)
    • Product Management
    • Other Strategy Teams
    • Cost / Item File Team
    • Accounting
    • Credit / AR
  • Current Selling Process
    • Roles
    • Typical Selling Cycle
    • Sales Pitch / Key Features
    • Preferred Segments
    • Order Taking Process
    • Service Management
    • Sales Oversight
    • Reporting
  • Current Pricing Strategy & Policies
  • Financial Assessment
  • Voice of The Customer
    • Segmentation
    • Capabilities
    • Buying Process
    • Why They Buy
    • Alternatives
  • Competitive Perspective
    • Existence of Competitive Intelligence Process
    • Current Market Leader
    • Capability Gaps
    • Board View
  • Transfer Pricing Policy / Transfer Prices
  • Any Profitability Analytics
  • Pricing Data Inventory

Typical Timing

If a medium sized business already has some basic analytics in place, a good pricing audit can be completed within 30 – 60 days. Additional time may be needed if pricing documentation is being created for the first time. This can be prolonged (at management’s discretion) if there is a need to build out analytics capabilities to support the decision making process.

For some organizations, this is an unparalleled opportunity to leap forward in terms of customer analytics, dashboard reporting, and product strategy. A good pricing audit should provide at least a cursory view of these areas to understand the value created by the team.

Practical Value

Most good pricing auditor can give you at least a high level roadmap to facilitate board discussion on pricing and commercial transformation. Since the success of strategic pricing is often dependent on other functional teams (IT, marketing, sales), assembling this road-map may require a broad perspective and some political air-cover from the sponsor.

These road-maps can provide a powerful route to growth, however, often accomplished with minimal incremental investment in the business. Pricing Excellence improvement programs are unique in that the benefit often drops straight to the bottom line, frequently while freeing up capacity that used to serve marginally profitable accounts. This gives the business room to pivot their capabilities to support a more profitable customer or market segment.

This also gives you a risk assessment of a company’s pricing capability. In cyclical industries the key activities of a pricing team vary across the business cycle. One year may have intense price increases; the next may require you to hold price through a decrease. An even more challenging case is a flat market, since that limits your ability to correct problems. A good exam team should be able to tell you which area “will break next” if the market shift.

Cyclical markets are also an opportunity. For example, a good time to impose fuel surcharge policies is when fuel prices are low. While they won’t immediately impact revenue, the proposed adjustment can easily be explained to a customer and documentation put in place. While this has the air of buying your Christmas presents in July, it can work wonders in getting a client to accept policies they would not otherwise embrace.

Still have questions on how a pricing audit might apply to your business? Drop us a line at the contact information on this page and we will attempt to answer your questions.

Transfer Pricing Issue Considerations

The services of a transfer pricing specialist may be required if you are dealing with an aggressive tax authority. The transfer of value between related parties is sure to be a question from any IRS auditors (or their foreign counterparts). You will need appropriate transfer pricing documentation in the event of a tax audit.

From experience, the best way to manage this type of risk is to “audit” yourself prior to any risky policy decisions. This is a common practice in multinational companies. Outside of the stress of a formal audit process, there is ample time to ensure audit quality and bring any gaps into compliance. While there will be audit fees, this ensures any transfer pricing examinations will go smoothly.

Transfer price accounting can be a swing-vote in determining the effective profit of an operating unit.