How To Price Products For Profit By 2-4% in 2021 💵
Do you know the difference between an average pricing team’s pricing for profit capability and a world-class pricing team’s? Do you know how to price products for profit?
Our research shows that an average pricing team generates on average circa .5 to .75 of a per cent over total revenue each year while a world-class pricing team generates on average an impressive 1 – 4 percentage points over total revenue every year. Hence, a difference in pricing for profit capability that is easily millions of pure profit dollars per year.
Anything is better than nothing. However, a world-class pricing team’s superior ability on how to price products for profit can help you bank more profit dollars than an average pricing team with capped potential or downward trajectory.
In this article, we will reveal how world-class pricing teams generate significantly more EBIT than average pricing teams. We will provide you with techniques on how to price products for profit. Also, the key traits and attributes required for pricing for profit. And, why average pricing teams can be cost centres for businesses.
Why is there such a big difference in performance and productivity?
Well, let’s remove the obvious from the discussion straight away. With that in mind, being a world-class pricing team that consistently achieves profit scraping pricing goals has little to do with the size of the team.
We find that some of the best pricing teams in Australia are pretty small in size.
Our research shows that smaller, agile pricing teams of about 3 to 4 people on average generate more EBIT growth, buy-in and influence within their organisations than larger more established pricing functions with 15 – 20 people and in like-for-like industries and verticals.
Which means headcount is not a major driver of pricing team inefficiency (even though a lot of pricing team leads out there may tell you it is.)
If headcount isn’t indicative of pricing team success, then what is the secret on how to price products for profit?
We’ve been asked this question quite a lot by our clients recently, and this is what our extensive research on world-class pricing teams in your industry reveals:
A world-class pricing team generates EBIT in the first 3-6 months of starting a new price improvement or optimisation project.
They have a razor-like focus on how to price products for profit quickly but safely using informed identification of low-risk revenue and margin opportunities.
They tend to have their own diagnostic tools and pricing for profit frameworks. They’ll use these tools to get to the root of the cause of problems quickly. Generally speaking, quicker (and less expensively) than most tier one consultants. They have domain expertise and a unique analytical capability on how to price products for profit. And they also know what can be done to capture and convert them into EBIT.
World-class pricing teams all love proof. They have an evidence-based approach on how to price products for profit. They only commit to a certain course of price action or direction when they have proof of pricing for profit. This means they’ll be setting up price trials. Socialising new ideas, running pilots and experiments to prove the differences between revenue optimisation versus profit maximisation and profit maximising price and quantity level by product and segment. They’ll be using their strong diagnostic capability. Add to this their innovative solution delivery and scientific rigour to help your sales team identify previously unrealised margin opportunities faster than their industry peers.
Average pricing teams, conversely, can take anywhere between 2 to 5 years to show proof of concept for their work. Even longer if there’s a major pricing transformation process. More often than not, there’s been a lack of focus on generating EBIT or achieving real results. Pricing team members turn over quickly. There’ll be high levels of frustration and low morale as the teamwork at cross purposes, fire-fighting lots of issues but never really achieving their goals or targets. There’s lots of activity, but very little EBIT to show for it.
A world-class pricing team can prove its profit value regarding dollars and cents:
World-class pricing teams frame the profit value they generate so their contribution and presence in the business are paying off and worthwhile. (And they’re in no doubt getting the EBIT growth they promised you.)
World-class pricing teams are intensely aware they need to get results. They pay close attention to proving the ROI of pricing. They develop tools and tracking systems to help the business understand the profit value they create using pricing for profit techniques. The expert profit scraping skills are used to extract the incremental impact their pricing intervention has on P&L (Profit and Loss). They know how to identify the incremental effect of pricing of new and existing products in the marketplace at an SKU, customer and segment level. They will develop a market price formula in profit and loss to target profit pricing and generally have the know-how to use a SIX sigma process or controlled experimentation to show the ROI of the pricing function. This includes pricing system implementation and price rises, price tests or larger price simulations and experiments.
Average pricing teams, on the other hand, tend to lack a scientific process in their investigations, including data skills and domain expertise to track pricing performance in all its dimensions. Many pricing teams find it difficult to measure the impact of price change on the P&L. Fewer still know about six sigma pricing and don’t know how to set up and implement price trials and experiments or set up a price data architecture and visualisation tracking tools.
World-Class pricing is highly productive.
World-class pricing teams take the initiative. They don’t wait for tasks to be given to them, they get things done off their own bat. They are constantly trying to improve, learn and adapt the pricing system to industry nuances to increase pricing for profit opportunities.
World-class pricing teams are quite unlike average pricing teams because they don’t rest in the safety of past successes. They demonstrate high levels of intellectual curiosity and tap into the diversity of viewpoints on the team. This helps find the best solution for the problem at hand.
They are keen to capture the price cost profit. Along with profit on selling prices by building a minimal viable product first. There is no point in blowing out costs on new pricing software first. No. They’ll do lots of due diligence into your commercial requirements first. They’ll understand multiple stakeholders’ views and concerns about changing legacy pricing or broken processes. This means they design customised price structures and architecture to ensure the foundation of your new pricing for profit system has traction in the market.
They are not complacent. They are resourceful, practical and nimble and know that the market is tough and changing rapidly and feel their duty to stay current, up to date and positively contributing to making things better. They’ll give you impartial advice on the best systems and tools to buy based on your commercial requirements. They’ll stop you blowing millions of dollars on the wrong pricing strategy or software, and help you buy the right pricing software for your business.
A world-class pricing team solves difficult pricing problems quickly.
World-class pricing teams have a breadth of domain pricing knowledge. Therefore, they think deeply about the impact of changing business models and operations on pricing and revenue models. And, have the right mix of skills, styles, and capabilities on the team to do something about the problem.
They fix problems by learning your business, market and customer base inside out. They develop customised pricing for profit analytics and tools and innovative pricing strategies that increase profits. These include things like: pricing for profit customer analytics and value-based customer segmentation skills.
They engage in customer value discovery in a very scientific way to support current sales and marketing efforts. They’ll identify and measure potential value drivers along multiple dimensions (product, service, company, terms, operations). They also advise you and the sales team on the optimal price points to sell by product, customer group and region; and the absolute best time to announce and publish a price rise to customers without you experiencing any volume or revenue loss.
Average pricing teams conversely tend to be quite siloed and prescriptive with what they do and don’t do. They can be data-focused and see things through a formula for cost price when a profit per cent is given. They also tend to focus on standard price-volume analysis and margin or price cost profit reporting; and often lack the curiosity to analyse high probability margin expansion opportunities for the sales teams, like cross-selling or new business opportunities. As a result, they’ll struggle to achieve their target profit pricing goals. They don’t analyse and interpret key interactions between price, product mix, volume, discounts, customer value, and demand.
A world-class pricing team is a highly regarded member of the executive leadership team.
World-class pricing teams don’t need grand titles and status to get ahead in large organisations. They are change agents. The mindset is for pricing for profit and value. Adapting their thinking, management style, and communications very quickly to achieve complex pricing and profit outcomes for the business.
Company leaders seek their advice on profit scaping pricing options and input on important business decisions (not just pricing). That is because they respect their intellect and commercial acumen. They have earned their stripes and have a track record for pricing for profit. Both your customers and stakeholder will respect them. They speak openly about big issues and care about achieving the best outcomes for the business.
Unlike average pricing teams, world-class pricing teams typically deliver EBIT results for their company in the first 3 – 6 months. This includes pricing for profit, diagnosing key issues, initial hypothesis testing and capturing quick revenue wins (or low hanging fruit) through risk-free price optimisation.
A factor of pricing team success which is more important than size is team mix, composition, and capability (individual, team and organisational).
There is a significant correlation between the results an average pricing team generates and their organisations. Hence, pricing team’s performance is heavily influenced by organisational power structures and cultural norms. If pricing is not considered a priority and is consistently put last on the executive leadership agenda, a pricing team can struggle to achieve profit maximising pricing options.
An organisation that doesn’t pay close attention to its pricing tends to have very limited systems enablement and training support. Therefore, this affects the team and other key stakeholders involved in daily pricing decisions. Additionally, they’ll also show a lack of commitment to any pricing initiate and bailout of price trials too quickly before they’re even up and running. This, in turn, leads to unrealised revenue and margin opportunities. Plus a culture norm that tells staff that new ideas are not accepted or even tolerated in the business.
Rule of thumb on size or headcount for pricing is as follows:
You need at least one pricing manager for every $500M and one analyst for every $100M revenue. Thus, if you have a $500M revenue business you need one pricing manager and 1-2 senior pricing analysts. You’ll also want 2-3 pricing analysts. However, there’s a big caveat. Headcount changes a lot depending on your systems, tools and business culture.
If you have a documented pricing strategy, good systems, and progressive pricing for profit culture (i.e., teams keen to implement advanced pricing principles and analytics), you’ll need fewer people (about half this number).
EBIT growth is not a function of headcount or experience. Experience in pricing is becoming less and less important to businesses transitioning to new models of operating their businesses. This includes new ways of thinking about price and value in your respective industries. Plus, new ways of working in teams to get shared outcomes and results.
The size and composition of your pricing team are commensurate to business strategy (scalability and position in your industry), systems capability and business culture.
What matters is team mix and capability. Namely, drive, persistence to get results, and expert and diverse problem-solving capability.
We discussed five things that make a world-class pricing team generate significantly more profit than average pricing teams. Namely, their ability to:
- Generate EBIT in the first 3-6 months of starting a new price improvement or optimisation project
- Prove their profit value regarding dollars and cents
- Take the initiative
- Solve problems quickly
- Garner buy-in and support for alternative pricing approaches
We discussed how smaller, well-composed pricing teams deliver more EBIT on average than their peers in relative industries with 15+ people on the pricing team.
A key implication here is that world-class pricing teams are very similar to startup teams. And that business should view them as such when they build them or hire new people for a pricing team.
A world-class pricing team consists of diverse skills, styles and capability brought together under shared goals and beliefs. They are not only a price administration resource as many business positions and view them inside the business.
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