Price Improvement: 4 Myths That Kill All Price Improvement Programs
Price improvement: Have you ever joined a company and thought “We are doing such great work here and producing so many valuable products, but why are we struggling to improve the return on invested capital?”
If yes, then you are not alone. Taylor Wells observes countless B2B industrial businesses in Australia are boosting productivity, landing new accounts, and making shrewd acquisitions, even in the face of a ongoing manufacturing collapse. Yet so many of these businesses are still failing to measure up to the value they actually produce for their customers and some are even struggling to break even.
Many of these businesses have found themselves in a profit-margin rut:
No matter how much businesses innovate and improve products and services, they still end up charging the same premium for it as they would for a more standard item. Some automatically cut costs when they find a less expensive way to make a product due to cost plus thinking and not being able to price intelligently.
The sales team may end up discounting to win customers and the business soon finds itself in the jaws of death situation.
Taylor Wells believes this profit rut is largely down to an entrenched commodity mindset.
Unfortunately, to fix up a commodity mindset situation can take up to 2 – 3 years as staff work their way through the company transformation process. In all of this time margin can still be lost if the right price improvement practices are not implemented.
A culture of pricing excellence can however accelerate earnings growth and eliminate the frustrations of sales marketing and finance.
With the right price improvement capability, a clearer link between customer value and sell price can be generated to drive margin expansion outcomes.
In fact, price advice shows you can generate an additional 2.0-7.0% points of gross margin annually by implementing the right price improvement strategy.
Sounds simple enough. Yet, why don’t more businesses do it?
Here’s the hard part: It requires a complete mindset change – unlearning old pricing improvement habits and practices like cost-plus and trialling new, more scientific price improvement methods and analytics.
4 myths stopping price improvement strategies
Listed below are four pricing myths that Taylor Wells feel continue to kill price improvement programs in major ASX listed and Fortune 500 business. Destroy these myths and you’ll remove the main obstacles holding you and your business back from substantial profit improvement and value-based thinking.
MISCONCEPTION #1: “It’s too early to begin thinking about price improvement or creating pricing roles in the business.”
It’s never too early. Changing how you set prices is usually inevitable if you’re operating in highly competitive and disrupted markets, so you’ll need to figure out how you stand.
Delaying the team setup and integration process will only serve to lengthen the coming together of different departments’ people, processes, and systems, and reduce the amount of time you have to improve your pricing and solve complex price improvement challenges.
MISCONCEPTION #2: “We’ll delegate price improvement tasks internally. Then, let’s wait and see what happens before we invest resources to pricing.”
Price improvement is not a set-and-forget exercise. Price improvement is a continual improvement process. It can be a costly mistake to think of price improvement as a discrete task with a clear completion date. It can also be a costly mistake to assign price improvement tasks to people with little to no dedicated pricing experience or skills.
We have seen a number of CEOs delegate pricing tasks to high-performing sales and finance people or part-time project teams only to experience poor outcomes and even margin loss.
Return on investment is extremely low when implementation is not driven by a foundation of expertise.
Well-meaning, but inexperienced teams can often implement price rise strategies that actually create strained relations with customers resulting in credit notes and discounting.
The real issue is the cost of inaction, misdirection, and even incompetence.
MISCONCEPTION #3: “If we do decide to set up a new pricing team, we’ll ease the changes in slowly.”
Slow team setup and integration only increases the depth and duration of the inevitable productivity drop. Fast integration — at a prudent speed — protects productivity.
However, a poor team setup and integration process is only part of the problem. Our research indicates that misdiagnosis of the issues and opportunities available to your business during the pre-integration phase is equally to blame – i.e., identifying your current pricing situation and exactly what internal price management changes you need to make to improve your pricing.
MISCONCEPTION #4: “Pricing and accountancy are pretty much the same thing! Why do we need a pricing team when we have people in finance that can do it?”
No matter how similar two functions may appear to be on face value, there are always differences in leadership, strategy, structures, operations, styles, and capabilities.
Pricing and revenue management is a unique functional area drawing upon sales, marketing, finance, and fundamental pricing principles and price improvement methods.
Price improvement is not just cost plus mark up or cost accounting. Next-generation price improvement, Customer Focused Pricing (CFP) relies on a suite of advanced price improvement methods, analytics, and approaches – very different from commercial finance’s P&L cost and profitability focus.
MISCONCEPTION #5: ”We won’t need to tell the sales team anything about changing or improving our pricing until the time is right.”
The old thinking is that so much is going on in the business that changes to pricing should not be discussed with sales.
Leaders often want to avoid territorial disputes about who owns pricing before it is absolutely necessary.
However, the probability of a successful price improvement program goes up considerably when all pricing and sales elements are considered at the very beginning of the process, including likely risks, challenges, and objections.
Sales are an important part of the value discovery process, and their input and support can help to shape the role, mission and structure of the new pricing team – no matter how challenging their objections, questions or concerns.
MISCONCEPTION #6: “Once the pricing team is on board, they can take off the price improvement program from there.”
Nothing is further from the truth. In fact, this is where the change and integration piece really kicks in. To ensure that the pricing function is set up to succeed post-integration, you want to link the team and price improvement program closely with sales, and other key departments in the business.
Typically, companies want to set up a “transition team” to maintain urgency and momentum post-integration—a temporary but formal group of business leaders, task forces, and teams charged with working with the pricing function to realise the expected outcomes and monitor price improvement progress.
Human resources are important to functional integration, and they play a crucial role in facilitating cross-functional collaboration and accountability for achieving agreed revenue and margin targets.
When businesses assume pricing capability is there (when there may in fact be vital skills gaps), or pursue the wrong changes or tackle them in the wrong order, existing pricing problems get worse, and new ones are created.
Employees having been burned, or sales teams sensitive to being blamed for pricing mistakes, become wary of future price improvement initiatives. Before integrating a pricing function within your business, leaders should analyse three things very carefully during initial price improvement planning:
1. the reason for changing pricing in the first place,
2. the underlying journey involved with price improvement,
3. and the pricing capabilities required to pursue the end goal.
The team setup and integration process should help you broaden your scope – it’s not just about separate processes.
The price improvement process can help you establish a strong vision for change for teams to believe in. The team setup and integration process can be a great way for teams to stop thinking in silos and start working together to ask and solve difficult questions and challenges.
The return on investment in a price improvement program is usually 5:1 or better. The real issue is the opportunity cost of lost margin through inaction or misdirection.
Taylor Wells wrote this article to help you better understand the underlying journey involved in price improvement programs.
For a comprehensive view on building a great pricing team to prevent loss in revenue,
Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?
If so, please call (+61) 2 9000 1115.
You can also email us at email@example.com if you have any further questions.
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