Regardless of where you are on your Roadmap to Pricing Excellence, whether just starting to define your future pricing processes and strategies or well on your way with processes and tools, you have to ask yourself three simple questions to judge the true effectiveness of your pricing initiatives in regards to your business:
· How are we doing?
· Why is this happening?
· What should we be doing?
While these questions are simple, the answers to these questions require a Performance Management Framework in place to enable you to maximize the ample margin and revenue improvement opportunities out there.
How are we doing?
At first glance, this is the easiest question to answer. The initial answer of most customers that I have worked with prior to our implementation would be that they have good visibility into their main business metrics such as revenues and margins. The key here is that true visibility into “how you are doing” goes much deeper beyond the surface of traditional metrics. It all starts with defining all the costs to serve, discounts, off-invoice rebates, only partially recovered costs such as freight in some cases and identifying the true pocket margin of every single transaction. From there you can really focus on profitability analysis of your customers, contracts, product lines, business units and other aspects of your business.
Why is this happening?
Once you know the true performance of your business, you can start asking the “Why” question.
· Why has my margin declined by 5%?
· Why are the sales branches in the Northeast underperforming compared to others?
· Why did the last round of price changes not generate the expected results?
· Why are we losing money on this customer deal when we expected 10% margin?
Answers to these questions can be a bit more challenging and sometimes require more sophisticated tools for analysis. The first question can be answered by tools such as a Margin Variance Mix Waterfall that explains the impact of key factors on margin such as customer acquisition and attrition, price changes, changing volume, cost changes, product mix, and even the impact of exchange rates. Depending on specific business context, the other questions can be answered by analyzing sales rep adoption of price guidance, customer adoption of list price increases and number of exceptions, as well as tracking the expected costs and customer volume commitments at the time deal was negotiated to the actual costs and customer orders.
What should we be doing?
The final step in defining the Performance Measurement Framework is to align the organization around your business goals and put the necessary processes in place to achieve those goals. Here are some of the key factors that have worked best at customers that I interact with:
· Align performance incentives with the desired behavior
· Provide pricing envelopes driven by scientific segmentation and pricing guidance based on those segments
· Put in an approval process that streamlines price changes and deals with desired behavior and put in a well-defined, enforceable process for exceptions
· Monitor results and let pricers and sales know how they are being measured
· Set up automated alerts that let you know when pricers, sales reps or branches are not compliant
In the end, the success of your pricing initiative depends on the people in the trenches that make pricing decisions every day. It is vital to define the business objectives, strategy to achieve those objectives and then measure performance with a well defined Performance Measurement Framework. The key is to make this information available to the pricers and sales so they can answer the three questions for themselves: ”How am I doing?”, “ Why is it so?” and “What should I be doing?”