This is a guest post by Eric R. Robles. This article originally appeared on his blog, http://www.priceworkshop.wordpress.com/, and appeared in the March 2013 edition of “The Pricing Advisor”
The General Manager of a mid-sized company just got informed that despite the high volume (units) the company produced this year, sales units and revenues are dropping compared to previous years. Last year, external forecasts predicted business challenges for the following year due to the economy’s volatility. During a general meeting the marketing department reported that market share has dropped significantly in all four quarters for the first time in five years. Historically the company has enjoyed double-digit growth year-on-year since it was established in the region.
And as expected existing competitors and new entrants are gaining ground due to their lower prices and growing presence in the market. Meanwhile the finance department also furnished their report, and the same undesirable performance reaches the General Manager. That profit margins are leaking away particularly with the top products being sold by the company. Reviewing on the financial data it was found out that discounts and rebates was not properly administered due to hesitations of losing volume further. Customers have now become more hesitant when responding to the company’s prices. And to complicate the situation, the sales organization was not only short of its sales targets but also the quality of profit margins gained on a per unit sold was not healthy – and on frequent occasions even losing.
The General Manager has now decided that it is high-time to stop the bleeding, shift-gears and make a move to change how prices is managed. But how will he start the change?
The succeeding are ten essential elements required to establish an effective ‘pricing organization’ and achieve pricing excellence.
- Pricing Road Map. Begin to diagnose and map the organization’s current pricing policies and practices. Evaluate existing challenges and opportunities – identify what is relevant and what is not. What needs to be challenged, what needs to be changed, and what needs to remain. Assess the current pricing operations, processes, systems, tools, capabilities and alignments within the organization. Identify the key departments, business units and ‘champions’ that will contribute significantly with nurturing and realizing both short-term and long-term pricing goals. Establish a common purpose and road map for pricing.
- Pricing Body (Leadership). An effective pricing organization should not be built in isolation (silo) rather a collaborative function; therefore it is paramount to have a high level of coordination with departments or business units that will have the most impact to overall pricing strategy. For instance Finance, Marketing, Sales, and Demand Planning department are some of the organizations that their individual performances have a direct impact to pricing. However, this will depend to the organization’s structure and nature of business. The bottom line, buy-ins is critical when making pricing decisions, thus the presence of a pricing body or committee is a must when establishing the pricing organization. Organize a body or leadership committee composed of representatives from functional level management and top management to champion the pricing organization.
- Pricing Champion. The person for this role will champion the discipline of pricing in the organization. And will bring-in leadership, best practices, innovation and strategic ideas to help establish the pricing road map. Another significant role will be to effectively reconcile data and information from other departments and conclude with actionable analysis and recommendations. One critical role is to act as ‘ambassador’ who can effectively communicate from different business perspectives and successfully align commitments from stakeholders. Resistance from within the organization (in the initial stages of the implementation) is expected thus it takes effective communications and good interpersonal and negotiation skills in order to bridge different business perspectives and align it to pricing decisions. The pricing champion shall perceive pricing as both a science and an art – hence, deep commercial awareness, knowledge of the market, numbers crunching, creativity / innovation, and good business acumen is an ideal requirement. However it is important to note the role and responsibilities of the pricing champion may still differ according to the purpose, objectives set and organization.
- Change Management. Employ change management program to prepare the organization for the transition and to realize the desired change. This will lay the foundation for the pricing road map. Friction and resistance from employees is expected especially that old processes and routine will re-organized and re-established. Partnership with the Human Resource department is ideal to reinforce the transition and change. Other support endeavors like leveraging on branding and marketing principles to communicate the pricing strategy will not only strengthen ‘change management’ but it will also institutionalize a strong ‘pricing culture’ within the organization.
- Key Performance Indicators. Develop and employ well-defined performance metrics / KPIs aligning departmental objectives to support short-term and long-term pricing goals. The objective is to align and enforce commitments and resources. One effective way is to seek buy-in from stakeholders and co-develop performance metrics. It is imperative the each organization within the company clearly understands how their individual performance will impact prices and eventually revenue
- Pricing Policy and Guidance. It is substantial that a pricing policy and guidance be put in place both in the (a) regional level in order to align and reinforce local level pricing and discounting policies, and (b) country level to give the organization flexibility to meet market demand requirements, respond to competitive moves and to make the most out of short-term business opportunities. A good policy and guidance will clearly communicate the company’s pricing objectives and set guidance on how prices and discounts will be set and implemented.
- Price Exemptions and Discounting. A comprehensive and well-defined price exemption and discounting policy and process should be implemented in order to properly administer and police discounting and rebates. Discounting and rebates should be designed and planned in a way that will drive both sales units and profits, and as well protect the product’s brand position.
- Sales Incentives. Formulate and put in place well-defined sales reward programs and incentive schemes to help administer prices effectively and purposely. This is also a good way to align sales KPIs to short and long-term business objectives. Create control mechanisms and integrate it to the sales rewards and incentive program. For instance, (a) sales rewards and incentive KPIs should be anchored to the extent of discounts the sales man will give to customers. Another way, (b) sales rewards and incentive KPIs should be tied to the quality of revenue a sales man will bring in to the company – e.g. “..is the large percentage of the revenue driven by high profit products, or is it driven by low profit products?” It is foremost to understand that the sales organization is the last element in the ‘price value chain’ responsible for implementing the prices and realizing the strategy. Any inefficiencies in this level will increase the chances of a failed price strategy.
- Reporting. Providing the right information to stakeholders through regular weekly, monthly or quarterly reports are crucial to keep track of outcomes of pricing decisions made. This is not only good practice to achieve transparency but as well it strengthens accountability of each department. Numbers are measurable and remains to be the best indicators to track strategy realization.
- Milestones. Celebrate and communicate pricing milestones to the organization. Communications is of great significance in sustaining the pricing strategy in the long run. Economic benefits gained during a business period such as increased sales units, market share, profit margins, and revenue are good examples of milestones. Milestones are clear indicators of the organization’s achievement, performance and progression in the pricing road map.
Given that these fundamental elements are vital to the transition and change, the design of the pricing organization may still change or vary in accordance to the organization’s structure, business objectives, competitive landscape and long term directions. Whether it is a start-up, medium size or large scale enterprise – a good pricing endeavor begins with pursuing and establishing a well-defined pricing organization.
There are two approaches to this, one is top-down approach of establishing the pricing organization - that is the initiative, push and sponsorship will come from the very top of the company’s leadership – in most cases it is the call of the Chief Executive Officer. Therefore strong support and commitment is expected to be extended from all levels of the leadership and equally from all business organizations operating within the company. This approach is characterized by a more formal, progressive and sustained approach to implementing the pricing organization.
While the bottom-up approach would be more challenging and difficult since it usually starts as a breakthrough business case or best practice. The challenge in this second approach to implementing the pricing organization is that there is a need to sell the benefits (first), get buy-in from the leadership and business divisions where pricing have influence with their output and performance.
Introducing changes to the way pricing is done in the organization is not a short term commitment of time, redirection of resources and realignment of commitments - rather it is a long term endeavor that is both progressive and sustained. And changes implemented to the organization are paramount in order to attain pricing excellence.