Weathering the Economic Crisis: Improving Your Realized Price

A few years ago, in much better economic times, a multi-billion dollar firm found it was losing $60 million of pure profit by failing to enforce pricing terms in customer contracts. You would think that in an economic crisis, companies would do anything to protect earnings, but in reality it is quite the opposite. Even now, when financial health has never been more critical, companies continue to leak cash due to uncontrolled discounting in hundreds of transactions. However, excessive discounts, intended or not, can only help increase unit sales; but companies risk losing not only profit but also revenue. It is time to take a closer look at your pricing strategy, your internal pricing methods and the prices actually being realized by your company.

There is a common misperception that service or product pricing is simply math done by one or two people. Obviously, the net price to the customer is derived from a list price or MSRP after factoring in discounts, concessions or rebates and other contract terms. But it takes many processes to realize this net price from customers. And these product pricing processes become complex when various people involved in pricing have diverging incentives and objectives. Even if the strategy is sound for a given set of customers and competitors, internal processes for modifying lists and for controlling discounts could be broken. While pricing strategy gets attention in board rooms, senior managers spend surprisingly little time overseeing execution. And when a sound pricing strategy fails due to poor execution, it feeds the general perception that protecting product pricing is more difficult than downsizing and other painful cost cuts.

Executives looking for a low-risk approach to improving earnings and cash flows through product pricing should:

• Justify pricing strategy: Articulate justification of pricing strategy to internal and external stakeholders. They should consider B2B markets, where purchase managers accepting price increases from vendors have to justify such decisions to superiors. Sales reps also balk unless they can clearly explain and justify at increases in product pricing. Focused training can help frontline personnel to communicate pricing strategy consistently with customers and comply with internal guidelines effectively.
• Map product pricing processes to understand bottlenecks:Understanding how price-related information flows amidst the company’s people, processes and IT systems to reveal and prioritize issues for resolution. For example, pricing people may be side-stepping analysis and due-diligence due to constant pressure from sales reps to make quick decisions. Transparency in internal processes, standardized analysis and documented policies help protect price and speed up approval decisions.
• Align product pricing objectives and incentives in the near term: Define roles and accountability for various people involved in the product pricing execution so they pull in the same direction. Aligning functional objectives using compensation is ideal but that can be quite difficult and entangled in company politics. Instead, managers should specify common goals across functions in line with the scope of product pricing projects. This helps build the "burning platform" and keeps people from blaming each other. Otherwise, why would sales reps earning commission based on volume follow directions from a product pricing manager interested only in margin?
• Track and measure success of the pricing strategy: Senior executives should monitor execution by reviewing sales results and carefully considering feedback from frontline teams. Regular cross-functional meetings are useful in tweaking actions for greater effectiveness, say, deciding what to do with customers who are unwilling to comply with contract terms.

Building a Product Pricing Strategy for Success

All these product pricing actions are possible within the scope of full-time jobs held by existing employees. Others with limited resources should also evaluate their internal product pricing processes for basic quality. When things are done right, the benefits of a product pricing strategy are significant and almost immediate. One manufacturing company gained $10 million in one division alone after a cross-functional team helped tighten the product pricing process within 10 weeks. A tooling manufacturer realized $40 million from a price increase by improving internal controls and training sales personnel. Both companies improved their ability to realize price without losing market share.

Originally published in MinnesotaBusiness 1 February 2009.

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