Do you understand your pricing process?
Pricing is often regarded as a strategist’s playground, a world of math, game theory, and grand economics trade-offs. The reality is far more humble. You cannot reap the benefits of strategies which you cannot execute. If your strategy isn’t tightly aligned to your pricing process, minimal improvement will be seen.
At the end of the day, we’re not going to see a return on any of that investment unless it turns into someone flicking the right switch and billing a customer for more money. Preferably without overriding that system price the instant they think management has stopped watching them. So before we draw that (carefully analyzed) line in the sand, we need to get grounded in reality…
What pricing process does your organization REALLY price most of their transactions?
- Spot Pricing / Transaction Specific
- Formal Quotes or RFQ’s
- Customer Agreements
- Catalogs and Price Lists
- Mark-up From Vendor Rebates
- Pricing Analytics System
For your pricing strategy to be effective, you need to map out the changes you want to see and identify the right touch points in the pricing process.
And then you need to monitor and police them. Speaking as someone who has participated in no less than four pricing transformations, there’s a good reason I’ve been called “price cop”.
Controlling Price Setting
The first and most logical control point for the pricing process is price setting. Price setting is one of the first steps in pricing, where you translate your pricing objectives into a concept of price for the selling team. This could be take the form of target pricing guidance, setting list prices, or providing your pricing team with updates to your pricing policy. In any event, you are going to need to be able to translate that change into specific changes during price setting.
Your price planning process needs to pay careful attention to ensure strategies are executed. Rogue pricing behavior is common, particularly in commission-based sales cultures who are culturally accustomed to doing what they please. If you are attempting to transform such an environment, plan to invest additional time during the early stages of the change to stress the importance of pricing to your sellers, line management, and customer services representatives.
Proposal Pricing Strategy
One of the key steps in price setting is determining your proposal pricing strategy. Should a large prospect inquire about a significant relationship, how do you want the team to respond?
It is very easy to get consumed by “deal lust” when a large opportunity presents itself. This is where your bid pricing desk needs to have well defined pricing goals. Your pricing objectives need to balance margin vs. volume for large opportunities. The same goes for deal terms. This is where trying to define pricing structure risks really pays off: these protect you from surprises.
Senior management needs to carefully watch progress against the objectives of pricing decision makers to ensure the risk and profitability of the business remains acceptable.
Transparency and control are paramount.
Ongoing Management & Oversight
An effective pricing transformation enshrines the process of pricing in your operating model. Your pricing process policies and strategies should be tied to individual goals and adequately staffed. Measurements need to be set in place to facilitate oversight and execution.
This rigor separates the pricing winners from the also-rans.