Managing pricing effectively can have a greater bottom-line impact than focusing just on costs. The math is straightforward: A company with a 65% gross margin and operating costs of 50% of sales would need to reduce its cost of sales by 3% or cut operating costs by 2% to equal the result of a 1% improvement in realized pricing.
But a price optimization project is a major undertaking for any company. There are often multiple internal stakeholders, and it is likely to affect a wide range of internal systems and processes. When done right, it can be one of the most profitable activities a company can undertake. But when done wrong, the dangers are equally significant.
With the target of sustainable improvement, here are 10 tips for an organization to implement a price optimization project:
Optimized pricing starts at the top; enlist C-level support
Few things matter more to most CEOs and CFOs than their company’s revenues and profitability. And few things can impact these faster and more positively than a successful price optimization project. Sometimes a pricing project starts because a CEO or CFO initiates it. But more often, it originates from somewhere in the organization and materializes as a draft project proposal.
If you are involved in the development, now is the time to prepare an executive summary of what the intended scope of the project is and its goals. Include what resources are likely to be needed for this — including a senior executive to oversee the project and how well it meets its targets.
Excel is a great tool for ad-hoc analysis but not operational pricing
While Excel might be a good tool for analysis, it is not optimal for managing and optimizing prices in a dynamic way, especially if a more agile and responsive pricing strategy is desired. And given the complexity of international sales, where markets, competitive situations and commercial conditions can vary immensely, a dedicated system will soon pay for itself.
Use a common framework to distribute central and local responsibilities
Typically, there is a central pricing team working with product and category management on setting prices, but your local sales organization should also be involved. Successful price optimization projects rely on a good balance between central and local resources. It needs a hub: A central team that can establish the project structure, manage the framework, and give each market relevant recommendations. And it needs local teams that provide input to the project team and can optimize prices against local conditions and manage exceptions.
Consider this a change management project, not a price list project
While the outcome of your project might be defined as a revised price list based on customer-perceived value and competitive adjustments, the consequences for subsequent processes and systems tend to extend in many dimensions. The end result is often a change in the way you do business as much as it is an adjustment of prices.
Communication is key
Price optimization will affect many different functions internally, so communication needs to be both regular and wide. And it needs to target both your own staff as well as your customers. Think of your communication strategy as having two tracks: one about the project itself and what changes it involves and a second for highlighting results or, why the new prices are what they are. When prices are explained and defended, your sales organization will trust them rather than feel the need to (unnecessarily) discount. Finally, don’t forget to communicate the results portion to your customers too.
Focus on desired outcomes rather than the tech
It’s rare that a price optimization project takes place without achieving an expected deliverable at the end of the project. But at the same time, use caution in pre-defining the deliverables in too much detail in your initial request for proposal. The most successful projects focus on highlighting the key issues and problems and identifying the expectations of what the desired solution should deliver but takes a fairly open view on exactly how that end solution/technology should look. Instead, invite the system providers to inform you about new opportunities and approaches to achieve the results you are looking for.
Pilot + full implementation rather than step-by-step
Setting up a well-planned pilot where results can be evaluated quickly and comprehensively means the lessons learned on a smaller scale can be applied in full, rapid implementation across markets. Doing so repeatedly, adding modules and features in sequenced new pilots, is a tried and tested way to optimize prices and increase profits faster.
Have the right competencies on your team
At a minimum, the following experiences and fields of expertise should be represented on the core team:
- Pricing management – Someone who knows how prices have been set, managed and optimized.
- Product/sales – Someone who understands the category in question and the customers that buy these products.
- Business analysis/intelligence – Someone who has experience in analyzing supply and demand changes and the external and internal factors that influence this.
- IT – Someone who knows how pricing systems interact — or need to interact — with other systems such as ERP and/or production, sales CRM and CPQ solutions, and financial reporting
Price optimization projects are a full-time commitment
While it may be tempting from a cost perspective to assemble the team and let them manage the project in addition to their regular operative functions, don’t. Or, at least allow the overall project manager(s) to focus their attention on running the project and little else. This is especially true if there are expectations for a speedy implementation and evaluation process.
Create a reference framework to understand local and segmented differences
What works well in one market will not be the ideal solution in another – and vice versa. The best way to manage this is to go beyond “how things are today” and create a separate definition of “this is what we want to achieve,” or how we believe the ideal situation should look. This also means defining the different challenges that have prevented us from achieving this so far.
Optimizing your pricing will change how you do business but the pay-off will be well worth it. These 10 steps are based on years of experience spent helping companies improve pricing for the sake of a better bottom line but also better customer experiences.