While attending a recent pricing conference, I had an interesting discussion with two pricing managers about the challenges they were encountering while trying to get their organization to focus more on pricing. The pricing managers were inspired by one of the conference presentations that was delivered by a PROS customer who happened to be from their industry. The presenter had shared lessons learned from his company’s pricing transformation journey, including the importance of price optimization software in helping them achieve their overall goals.
The pricing team members had listened to the presentation with great interest, recognizing their company could also benefit from pricing software. They were in the early stages of their pricing maturity, lacking the good data and the analytical tools needed to adequately evaluate their deal pricing and provide visibility into profitability at the customer, product and deal levels.
Here are a few foundational steps you can take to build a solid business case for pricing improvement.
Step 1: Define the Destination
Any journey begins with first defining the destination. In this case, you need to align the need for pricing improvement with the company’s key strategic objectives. What is the company’s overarching objective or goal? Is it to become the market share leader? Increase profit margins? Improve competitive positioning in order to expand into new markets or distribution channels? Help others in the organization understand how improving pricing will help the company achieve its overall objectives.
One PROS customer defined its key strategic objective as shifting its business model from a product -centric to a customer-centric focus, which they named the Commercial Excellence program. When they were ready to launch a pricing initiative, they introduced it to the organization as an important new pillar of Commercial Excellence that would enable them to go to market with more competitive offerings based on their customers’ willingness to pay. In addition, by improving net profitability they would have greater financial resources to invest in niche market segments and product innovations that appealed to customers.
Aligning the pricing initiative to the Commercial Excellence program made it easier to drive urgency and organizational support for pricing improvement.
Step 2: Identify the Value Leakage
It can be challenging to build a case for pricing improvement when companies lack the analytical tools to understand the true impact of pricing decisions on profitability. However, you can mitigate this issue by running some simple analyses using the data you have. Begin by selecting a few sample deals and gathering data on the Net Invoice Price and Volume generated for each deal. Scatter plotting this data will indicate the amount of price variance among the sample set. It will also reveal signs of unnecessary discounting. For example, the scatter plot below shows low volume deals priced at similar levels to high volume deals. In fact, some low volume deals are actually priced significantly below deals with much higher volumes. You can also run the analysis by substituting the total Discount % for Price on the y axis.
If you don’t have pricing software, it might be challenging to quickly pull this data together for a large number of transactions. If so, you can begin with a small representative sample of deals. One company sourced the information it needed by pulling together pricing terms from quotes delivered through Outlook the prior month. Their scatter plot revealed significant value leakage, with some $1,000 deals receiving the same discount % as deals valued at $5 million. The results greatly surprised the company’s leadership team and made them realize how much money they were leaving on the table in their deal negotiations. The analysis justified the need for better data and analytics to provide pricing guidance to the sales team.
Step 3: Agree on the Priorities
In addition to analyzing the numbers, it’s important to speak to Sales and others involved in the pricing process to understand the context behind deal pricing. Discuss the story behind the numbers, particularly for deals that are outliers. Identify areas where improving pricing capabilities could also make it easier for the sales team, and discuss how best to prioritize improvement efforts. Such conversations are a great way to build internal support for a pricing initiative.