In many companies we see, there is confusion over the right way to set prices. Poorly structured list prices, inconsistent customer discounts, rebates paid regardless of performance and cost plus mark-up pricing.
All of these challenges are symptoms of a company needing pricing strategy overhaul.
As CEO, you can make a substantial positive impact to profitability by making seemingly small but powerful changes to the way you set and manage price in your company.
After working with over 100 companies across 9 industries, we have determined that:
- Most companies do not have a clearly defined and published pricing strategy. There are often as many pricing strategies as people who sell or negotiate with customers.
- There is a lack of clarity around what is the right pricing strategy and how pricing tactics manifest from this strategy.
- There are many ideas to improve pricing practices but no roadmap or priority plan or method to implement pricing improvements. Consequently, no real progress is made and the revenue model remains the same.
- Those companies that can reflect and identify blind spots compete more profitably.
The costs of having no clear pricing strategy or doing nothing can be substantial.
We estimate that companies that use cost plus pricing to set prices are leaving at least 1.0 – 2.0 percentage points of margin on the table.
When the business relies on costs from suppliers to set prices, they inevitably end up charging too little or in some cases too much and missing the deal altogether because of a superstitious attachment to a nominated company margin target.
Sales reps often become frustrated or lose morale to win new business. In some cases, they may resort to excessive discounting to win business, triggering margin erosion across other channels and lowering total company profitability.
One client we worked with in the freight industry had a deeply entrenched cost plus culture. Cost increases were identified by the finance team and then translated into a required price increase that was blanket applied across the business.
The effect of this approach was to make certain routes uncompetitive whilst others were too cheap. Consequently, the balance between load and yield was not optimised. Sometimes they were too expensive and sometimes they won business but missed out on margin.
In addition, business units were pitted against each other in their attempts to win business. They often under cut each other to offer the same service. The net result being that customers would manipulate the situation and get a much lower price than otherwise would be the case.
After undertaking the diagnostic process, we co-authored a pricing strategy roadmap for margin improvement.
The roadmap had buy in and support from the team. The proposed initiatives were a mix of easy to act on, quick wins and some longer-term programs to deliver strategic gains.
The initiatives that are obtained from the diagnostic process are practical and commercial. The outputs will allow you to implement new ideas quickly and easily generate margin expansion.
The interactive workshop program to support the diagnostic process creates clarity, buy in and focus on action. A key outcome from the diagnostic process and workshop is the initiatives and action plan.
Priority initiatives can be implemented by your own management within days or weeks.
Pricing initiatives are tracked in a cloud based project platform to allow all levels of management to see progress and ensure real collaboration.
Small teams of pairs or three collaborate to build out solutions by co-opting others into an agile lean process on an as needed basis.
There is no need to second people from their day jobs and have endless long unproductive meetings.
The Pricing Diagnostic is a fast and low invasive approach to identifying your pricing margin and revenue strategy opportunities and risks.
In 4 to 6 weeks, a detailed picture of margin risks and opportunities will be identified. A roadmap to implement revenue and margin initiatives will be published for the executive team.
STEP ONE – Initial discussions
Initial enquiry + understanding of key issues & opportunities.
Agreement on objectives and outcomes
STEP TWO – Diagnostic
Diagnostic invitation issued to participants. Responses analysed and evaluated. Draft report issued for management review. Diagnostic Workshop completed with client nominated high performers team.
STEP THREE – Final Roadmap report
Post the workshop, a final more detailed roadmap and initiatives plan is published. This plan identifies key quick wins and longer term margin expansion projects. All initiatives are loaded into a cloud based project management platform for ease of communication and tracking.
STEP FOUR – Track, Monitor, refine
Each month, a project update and check in conference call is arranged to track progress and identify additional next steps as required. This monthly call process keeps the team focused and ensures implementation of initiatives
- Revenues > $30M per annum
- CEO sponsorship of pricing initiative
- Pricing champion to drive initiatives forward internally