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Pricing and Profitability Management
A lever worth pulling [Insights video]
Nothing impacts business performance like a focus on pricing.
Acting as a lever, small pricing improvements can realize big bottom-line benefits. Yet fewer than 3 percent of businesses effectively manage, execute or communicate prices.1 A successful improvement initiative requires a holistic, cross-functional approach.
Tune into this episode of Deloitte Insights to learn more about how companies can increase profitability through an effective pricing strategy.
1Laura Preslan, “Price Management: Conventional Wisdom is Wrong,” AMR Research Outlook, February, 2, 2004.
Sean O'Grady: Hello and welcome to Insights. Today we are talking about Pricing and Profitability Management and some of the best practices an organization may use to get the most of its money. Joining us on the desk in New York to discuss this topic are two guests. The first is Julie Meehan a principal in Deloitte Consulting LLP and the second is Mike Simonetto also a principal in Deloitte Consulting LLP. Folks thank you very much for joining us here today. To begin, why should companies be focusing on improving pricing capabilities Mike?
Mike Simonetto: Sean the answer is actually quite simple. Nothing impacts business performance like a focus on pricing. Typically, three to four times of the bottom-line benefits come from taking on pricing than any other initiative your company can undertake. In addition, over 90 percent of the companies that have addressed pricing are either satisfied or very satisfied with the results. So, clearly there is both a business imperative improving your performance and then a degree of success, which is usually missing in other business improvement initiatives.
Sean: Julie do you agree?
Julie Meehan: Yes and I’d also say that pricing really acts as a lever. So, a business that actually makes small improvements toward pricing can actually realize big impacts on their bottom line and I’d also say that now more than ever with the globalization of the economy there are lot of pricing challenges that come across border and with pricing arbitrage that we are seeing. So, really focusing on pricing now can have a big benefit in your bottom line.
Sean: So why is this such a challenge for companies?
Julie: It is a good question. Right, with all of these benefits it is a pretty compelling case to make an improvement but we actually found in a study a couple of years ago that fewer than 3 percent of the companies effectively manage, execute, or communicate prices today1 and I think there are many reasons for that. The first is just the complexity of pricing. It can be daunting to know all of the advanced math and the science that you need in order to calculate prices. With the discipline that you need in order to maintain your focus on execution, it can be very complex to manage that along with the market complexities and the customer complexities as well. The other side of it is the lever aspect that I talked about, so it is great when you are making improvements, but if you happen to make an error in pricing, even a small mistake can actually have big negative consequences on your bottom line and a mistake in pricing can actually be long lasting and hard to correct. So, I think some companies have a little bit of a fear of the high stakes aspect of pricing and don’t take on improvement initiatives.
Sean: How about you Mike, what do you see as the biggest challenge for companies here?
Mike: I think, beyond question, the biggest challenge is the cross-functional nature of pricing. Pricing isn’t done in a silo. If you think about it, marketing has to be involved, sales has to be involved, manufacturing has to be involved, finance has to be involved, supply chain has to be involved. Typically, these functions are silos and they don’t interact that well together. We have a saying that pricing touches everything and everything touches pricing and if you can’t get all those people to the table together with an agreed-upon pricing strategy, direction, focus, you are not going to get the kind of improvements that Julie mentioned. It is very, very difficult. In addition, you are changing the existing order of things, you are challenging the status quo and typically companies and people aren’t comfortable with that, so you are going to change the way prices are set, the way pricing is done and the current owners of that power are not going to want to see that change. So, there is a normal level of organizational resistance and finally there is an aspect that Julie mentioned earlier in her lever discussion. There is an aspect of unintended consequence. If you really haven’t thought through pricing, really haven’t taken a holistic approach, looked at it from a number of disciplines, which Julie is going to cover in a minute, you can easily drive mistakes which you never intended to. As an example, if your sales force is compensated by volume they are not your sales force they are customers that you happen to pay, but thinking through those consequences before you make those movements is critical.
Sean: So you have done a good job of laying out the challenges. It begs the question what does a company need to do to improve their pricing?
Julie: It is a good question. We have a little bit of a unique approach to it. We advocate a holistic and integrated approach. Because of those unintended consequences that Mike mentioned and the cross-functional nature of pricing, it is important to understand all aspects of pricing before you get started. So, we have what we call a Six Box model. There are six competencies to effectively manage price. I’ll just go into a couple of the most important here, but the price execution, by far, is one of the most important. These are really just the processes and policies that govern your decision making in a profitable way on a daily basis at the transaction level. If you get everything else right about pricing but you can’t do price execution well, it doesn’t matter. I’d say that another important one is the organizational alignment and governance and this is really speaking to what Mike addressed earlier about the human aspect of pricing. This encompasses everything from how you incent and compensate your sales force to how you structure the pricing organization – is it centralized or is it decentralized. How you manage the change that Mike mentioned can be difficult for organizations when they try to improve pricing. And then I’d say the third one is really the advanced analytics and pricing setting competency. There is a massive amount of data available now that companies need to mine for insights. They need to constantly measure and monitor their pricing performance in the market. They need to look forward and do some demand forecasting, econometric modeling so that they can set market-relevant prices and capture all of the value that they can in the market.
Sean: Well thank you for that model Julie. Mike, your final thoughts best practices on improving pricing?
Mike: Sean, finally the most valuable best practice is to remember that pricing is at its most basic about human interaction. That price is the fundamental intersection point between the buyer and the seller. So all the analytics Julie mentioned, all the tools, all the techniques, all the processes, all the procedures, all those are all about understanding and managing the changing human behavior. In addition, there are some very simple things to do. One of these, in terms of launching an initiative like this and making it successful, is pricing initiatives that are very quickly self-funding. So set your program up that way, make sure that you are delivering tangible value to the organization every 90 days, very simple rule, relatively straightforward to do, but that proves several things to the organization. Again, we are back to people. Prove to the organization there is value here, prove that it can be done and frankly that it is well-worth doing and what we typically see is companies will start with a pilot, some sort of smaller initiative where the company will see the success of the pilot and then you can’t control how it floods across the organization.
Sean: Back to your metaphor from earlier it sounds like pricing is a lever worth pulling, so thank you both very much for joining us today. We have been talking Pricing and Profitability Management with Julie Meehan a principal in Deloitte Consulting and Mike Simonetto also a principal in Deloitte Consulting. If you like more information about Pricing and Profitability Management you can find this book, you see it there on the screen, at a store near you or by visiting our Web site. You can find that information at www.deloitte.com/insights/us. For all the good folks here at Insights, I am Sean O’Grady, we will see you next time.