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"A small leak can sink a great ship." - Benjamin Franklin
How would you rate the importance of effective product pricing on a 1 - 10 scale where 10 is "critical?" Most C-suite executives would answer "9" or "10" because every pricing decision, or failure to make one:
- directly alters future cash flow of their business, and
- sets precedent which dictates the nature and frequency of price decisions in their future.
Yet for many companies, product pricing represents the most significant unexploited opportunity to improve cash flow. Why? Because many things conspire to frustrate pricing efforts, among them:
- complexity (of integrating channel, customer, competitor and cost considerations),
- uncertainty (of demand elasticity which hinders profitable price/volume trade-offs),
- a dominant pricing culture (obsessed with profit margin at one extreme, or volume and market share at the other),
- dysfunctional performance incentives,
- lack of awareness that pricing can be used to control costs (see Strategic Cost Management),
- lack of structure (i.e. a policy to guide price logic)
Often the biggest obstacle escapes remedial effort because it seems so mundane - failure to document a thoughtful price policy. But absent a framework to guide individual pricing decisions, prices inevitably erode under pressure to provide real-time answers to questions such as:
- Should we lower product prices to respond to price cuts by (competitor) XYX?
- Or grant the price concession demanded yesterday by (customer) ABC?
- Should we continue the seasonal price promotions our customers have come to expect? Will we glean enough "lift" to compensate for the drop in margin?
- If our costs increase, should we raise product prices? Can we?
- What should we do if costs fall - cut prices to maintain volume? Or maintain price to enhance margin?
Without a policy, the answers come from individual judgments that vary by time, person and circumstances. While those judgments always make sense in the short run (at least to someone), few prove wise in the long run. Price concessions intended as isolated "exceptions" to "meet competition" can quickly become "the rule" as they are discovered by other customers who demand like treatment.
Just as water shapes the Grand Canyon, price erosion carves new landscape. Strong brands morph into commodities, sales people become order takers, and previously loyal customers are "trained" to be more price-sensitive. And it doesn't take an eon.
How Snap Vector Can Help
Like other Snap Vector assignments, a pricing engagement is planned in phases so clients can realize value with the least possible investment. Phase 1 of a pricing engagement is usually directed toward:
- confirming that a cash flow improvement opportunity exists,
- prioritizing specific areas of opportunity, and
- identifying whether information exists to guide price changes (e.g. variable and fixed costs to deliver, competitor information, value and price attributes of each market segment, etc.)
These objectives are met primarily through employee interviews, first-level data analysis of available information and customer price sampling.
The scope and nature of Phase 2 depends on Phase 1. For instance, Phase 2 of an engagement to develop Price Policy might require a broad approach drawing from other areas of Snap Vector expertise (e.g. Business Strategy, Customer Depth Interviews, Strategic Cost Management, Supply chain Efficiency, Sales Management.) Pricing engagements with a more limited scope might yield one or more of the following deliverables:
- a revised pricing structure which segments markets operationally - e.g. by unit of charge, price bundling, (or unbundling), criteria for discounts, etc.
- breakeven revenue curves to inform price decisions when demand elasticity is unknown,
- a repeatable price setting review and approval process,
- customer and product profitability analyses to guide negotiations with customers and suppliers,
- collaborative pricing initiatives with customers and suppliers to stimulate demand,
- guidelines and boundaries for acceptable price promotions,
- decision trees to guide how (or whether) to:
- initiate price changes, and
- respond to price changes initiated by competitors, etc.
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