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Are You Fluent in Pricing?

Ten Questions

May 11, 2010 By Sylvain Duranton , and Jean-Manuel Izaret

Pricing is the language of business. Through pricing, companies signal which products have the greatest value or “ask” customers to change their behavior. As with all languages, fluency matters. Organizations that are fluent in pricing can convince their customers to pay a little more, buy a little more, or even do both at the same time.

Is your organization fluent in pricing? Ten key questions can help you assess how close you are to fluency and where you might need to improve.

1. Do you have a pricing improvement road map?

Best-practice companies execute against a two- to three-year road map to improve price realization. The road map includes key initiatives to launch and quantifies price-level improvement targets by product line and geography. To develop such a road map, managers need to understand the economics of the business through detailed analysis and identify areas where they can most effectively increase the difference between costs and net realized price. (For most companies, profit margins vary across categories of product and service offerings. Some companies may lose money on the base product and make money on the add-ons, or vice versa.)

2. Do you have a pricing governance body at the top of each division of the company?

In best-practice companies, senior management chairs a pricing committee accountable for defining and managing the pricing policy, with a focus on the tradeoff between margin and volume. It includes all key functions, including sales, marketing, finance, sourcing, and operations, and meets at least monthly. Each member is responsible for a specific type of pricing (for example, marketing might own new-product prices, while sales might be responsible for discount guidelines) and brings a well-argued proposal for any significant price changes to ensure buy-in across functions. Some companies may also implement a “war room” in times of crisis. Using wall charts and complex graphs, a sequence of cross-functional teams meet daily to target customers; monitor the flow of leads, quotes, and signed deals; and watch the win rate.

3. Does a pricing team prepare the data needed for decision making by the committee?

Collecting market data is relatively straightforward; it’s what you do with the data that counts. Many companies have built systems to collect and monitor the price changes of competitors through research panels, sales representatives, or market intelligence teams. However, only best-practice companies effectively consolidate the information, derive the implications, and “operationalize” them into price changes. The missing link is the capability to adjust pricing policies in a responsive way. In times when pricing volatility is high (as it was recently), responsive monitoring becomes even more important.

4. Do you actively work on your top-five pricing “hot zones”?

The pricing committee must focus on the most critical pricing situations. Examples might include an attack by a competitor, a broad market price drop, or a big change in exchange rates. To anticipate these situations, managers need to have a framework for strategic pricing responses and a good understanding of the external landscape. This framework may help companies avoid overreacting to competitive pressure. When faced with the threat of price wars, better-prepared companies are able to de-average their response based on the specifics of the local market, such as capacity utilization, relative cost position, level of gross margin, and level of market fragmentation.

5. Are the decisions of your pricing committee forcefully communicated to the sales force?

Ideally, managers should circulate a quarterly memo covering all aspects of pricing, such as payment terms, minimum order quantity, freight charges, force majeure clauses, and pricing approval procedures. Without such guidance, sales representatives may not always balance the volume-sales imperative with an eye to profit and pricing discipline

6. Is your sales force pricing-ready?

Of course, managers should offer incentives for the sales force to meet price realization targets. But the best companies will also revisit targets periodically over the course of the year in order to maintain the right level of motivation. And even with the right incentives in place, the sales force must be fully equipped to succeed. Decision-making tools such as customer potential scoring help replace art with science in the field, while strong training programs get each sales representative up to speed.

7. Do you know more than your competitors about your customers’ response to pricing?

Best-practice companies capitalize on and codify customer knowledge so they can price more astutely. An understanding of what customers value most, how their economics work, and how they will respond to price changes can be developed through advanced customer-exploration techniques such as conjoint analysis and elasticity analysis.

8. Are you pushing your pricing-innovation pipeline?

Launching a new pricing scheme can be an alternative to the infamous price–volume tradeoff. By adjusting pricing schemes to customer needs, a company can make its offer more attractive relative to its competitors without giving away margin points. This innovation cycle needs to be managed very proactively. Given the stakes, it is critical to test and learn: design the offer, test it through pilots, then adjust and roll it out.

9. Do you actively manage the legal risks?

Across sectors and geographies, fines for pricing approaches that cross legal boundaries are skyrocketing. With the best of intentions, even honest companies can fall afoul of regulations that vary widely around the world. Therefore we urge every company to include the legal team in key pricing decisions, in war rooms, and on pricing committees. The legal department can play an important role in training sales teams and managers on the key legal risks associated with pricing in the industry—for example, by issuing clear written guidelines on do’s and don’ts for managers.

10. Do you have a “pricing cockpit”?

A well-structured pricing organization includes pricing-analyst resources both in key business units and at headquarters. Pricing KPIs are hardwired into a wide range of management processes, from budgeting to strategic planning to marketing and promotions. In fact, we recommend implementing a pricing cockpit of metrics. Companies should monitor price realization by sales representative, customer, market, and line of business every month. The cockpit data can then be compared with the budget plan and with any increase in input costs to track progress. Price realization assumptions should also be factored into budget forecasts, reflecting the latest information on demand.

Are You Fluent in Pricing?

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