How Pricing Discipline Improves A Business’ Pricing Performance 🍀
With a little more pricing discipline, your business can make remarkable gains in revenue, sales and profitability. For example, if you made just a few minor yet strategic adjustments to prices across a product portfolio or customer base, you would raise profitability by 20% or 50%. So why don’t more companies get more disciplined with their pricing and invest in better people, systems and pricing strategies?
Unfortunately, most businesses still don’t make pricing a priority and their standards slip. We see, for example, way too many instances of businesses losing money daily with bad pricing decisions. Simply because their approach to pricing is the opposite of disciplined.
Our research indicates that around 30% of retail and FMCG companies commonly slash prices by 20-50% when they should have held back and stood firm.
The real shame about an undisciplined approach to pricing though is the negative impact on customers. Principally, customers becoming conditioned to expect frequent promotions and even ask for more discounts.
The situation is so bad for some Australian retailers now that companies such as Meridith and Moore, JeansWest, Collette, Harris Scarfe, and Seafolly are all in the jaws of death situation financially. And undisciplined pricing is a major contributing factor to their financial woes.
In this article, we will continue to discuss what pricing discipline is. We’ll also find out why more businesses need to take a more disciplined approach to pricing. In addition, we will provide you with case studies of two companies that accelerated the ROI on pricing by improving their pricing discipline.
We argue that a world-class pricing team can help businesses to lay down the groundwork for a new pricing capability; including the right strategies, models, tools and operations – while enabling the business to unlearn bad price practices by establishing more pricing discipline.
At Taylor Wells, we believe that any business can enhance its pricing performance. As long as the company approaches pricing in a structured and disciplined way.
At the end of this article, you will gain insights into the significance of pricing discipline and how a more disciplined approach can help you drive more revenue and margin in a much shorter time frame i.e., within the first 3 months.
What is pricing discipline?
Price discipline refers to the requisite set of pricing capabilities, rules and standards that enables a company to realise optimal prices and revenues for its products and services. Prices that represent the true value offered and the value perceived by customers.
Price discipline can be summarised as follows:
- Pricing rules stating the highest discount levels for any given order size;
- Price approvals if sales deviate from list prices;
- Tactical pricing guidelines and price levels;
- Price options for different customer groups;
- Metrics on the maximum willingness to pay and the differential value to customers of the product and service offering;
- Clear target prices before sales personnel negotiate with customers;
- The self-confidence to walk away from deals that are not profitable;
- Evidence on the best walkaway point;
- How well price deviations are monitored and managed (i.e., price overrides and exceptions)
When the price a company sets varies greatly from what it actually gets (i.e., final invoice prices), this is often a sign that the business has very little pricing discipline. When there isn’t a disciplined approach to pricing, erratic discounts eventuate and the business ends up with multiple price points for the same item in the system. Which, in turn, leads to price complexity and an overcharge/undercharge situation for many of its customers, both large key accounts and smaller customers.
Real-world Case Studies on Pricing Discipline
1. Leading Distributor of Printing Paper
This business is a leading distributor of printing paper, packaging, and facility supplies globally. In 2009 the business wanted to utilise pricing modelling software to reduce undisciplined pricing practices. Prior to this time, they found that, despite many efforts to improve pricing, their pricing was still inconsistent and undisciplined.
In short, they were leaking margin through excessive discounting and volume-based rebates that were largely unmanaged. Their new goal was to take control of their pricing and implement a more disciplined approach to implement price changes for over 800,000 SKUs.
At the start of their pricing journey, the business found protecting their newly developing price lists was extremely difficult. Teams were not adhering to price lists and were negotiating off list. And, that there really weren’t any controls and guides in place to preventing teams from corrupting new prices with excessive discounting.
As a result of not keeping to list prices, over a short space of time this major paper distribution business found that their capability to negotiate with customers was compromised. Their “pocket prices” were significantly lower than their “list prices.” They were losing their hard-earned margin.
They realised that managing price performance was soon a core management function. However, it was their “price waterfall” analysis that really showed them where and who (which sales rep) was leaking the most profit on a daily basis. As here they could see the direct impact of discounts on EBIT.
To control the situation, the company decided to build tighter discount controls via a price governance system. They also invested in better price systems to monitor and track improvements, discounting and risk. The combination of a value committee and careful modelling, analysis and tracking gave the sales and pricing team consistent and customised pricing at the right time. What’s more, it also removed arbitrary and unstructured price adjustments aka rogue discounts and more visibility of the P&L i.e., the impact any price changes had on profitability.
2. A Global Chemicals Company
This global Chemicals Company is a US-based multinational chemical corporation and one of the three biggest chemical producers in the world. They have a great pricing capability now, but prior to reaching this point, the company did what many businesses do. They thought they could solve all their pricing headaches by buying a new pricing system.
The pricing journey for this business actually started by buying various data tools to manage information and huge data. However, in terms of price improvement, this investment made limited margin gains for them.
In fact, in the first few months of the project, the business encountered challenges in integrating pricing information into processes and internal operations. And their price models oftentimes compromised with data integrity issues.
After this, the company’s faced problems stemming from a lack of process. In particular, they didn’t have a pricing team or structure in place to set and manage prices independently of different agendas in the business. This, in turn, was creating significant internal conflicts as decision making was not carefully defined and pricing responsibilities assigned and demarcated.
The project soon slowed down to a halt because teams were not working together. And the role of pricing not clearly understood or even established.
As the new pricing team focused their efforts on developing better pricing processes, executives began to understand that they needed a pricing policy to govern pricing decisions and reclaim control. They could see that the problem with executing pricing was largely down to limited pricing discipline. Teams didn’t have any rules or guidelines to help them make better decisions.
Once they established the rules of pricing, the business went back to its original decision to purchase pricing software. However, it was only really at the end of their journey (or when the framework, strategies, policy, governance structures and people were all set up) that implementing a new price system was appropriate for the business.
The lesson learned by this global chemicals business is that pricing discipline should start at the top and with an A grade pricing framework to drive consistency. After this, changes can be implemented in a team-based matrix structure, including all critical stakeholders, like marketing, sales, finance, purchasing, and operations working together. Once this is all in place, pricing systems can be selected to suit the framework and optimised to drive profitability.
Discussion: How should businesses improve pricing discipline?
Pricing discipline is crucial to protecting the business model and maintaining profitable growth. However, getting a more disciplined approach to pricing does not happen overnight. It’s like being thin and fit at the same time. People know how to become fit but it’s the discipline and time required that trips them up. The same is true for pricing.
For businesses, it’s important that they focus on measuring and improving price performance. At the end of the day, ‘Why issue prices that are loss-making or undersell your offer?’
In many ways, pricing discipline is a sign that a business has everything set up properly. Such as a pricing team, price structures, rebates, controlled and properly set up discount, etc. The opposite is true for companies that are losing money because they have no support or architecture in place.
However, it should be noted that CEO involvement is a crucial requirement. It will guarantee that a new vision for pricing leads to a lasting change to the culture of the company. In effect, the CEO’s role is to highlight that pricing is a priority for the business. And back this up rather than demote pricing to “just another project.”
- When businesses have pricing discipline, they are in a better position to protect margin. Raising the price by 1%, for example, yields substantial gains in operating profit. Compared to a similar improvement in fixed costs, variable costs, or volumes. That’s like 8% on average across the S&P 1000 — oftentimes, companies base their prices on the anecdotal observations of some candid salespeople or the product managers.
- A lot of businesses end up with pricing strategies that leave money on the table by not being able to differentiate markets based on their competitive dynamics and also the supply-and-demand economics.
- Any business can boost its pricing performance. Just as long as it has a structured approach to pricing and they invest in their people, systems and culture.
- A lack of discipline leads to excessive discounts, poor financial results and inefficient pricing execution.
In this article, we cite a 9-point capability framework to embed a more disciplined approach to pricing in any business. We find that pricing discipline is essential to the everyday management of price and revenues in a business. And that to really drive the ROI on pricing, businesses need executive sponsorship and ongoing investments in the right areas. May this be hiring pricing expertise, new systems, better methods or approaches.
We find that businesses with limited pricing discipline tend to struggle the most with pricing. Also, lose substantial margin on a daily basis because of the absence of any disciplined approach. Often, this is because they struggle to convert list prices into moneymaking pocket prices and discount excessively. Sometimes the failure is due to poor systems. Other times, a combination of discretionary pricing practices, poorly structured rebate schemes or limited to no price data or quote tools.
Business with no or poorly set up price structures commonly have issues or delays with their go-to-market strategies and sales execution. Pricing discipline impacts price performance, but sales performance too. Companies can avoid making loss-making pricing decisions by choosing to be more disciplined in their approach to price setting and management and then investing appropriately.
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