Friday, March 18, 2011

Pricing is a Business Process, Not Just a Function

Companies across the globe are realizing the value of pricing and doing whatever they can to reap the benefits from an increased focus on pricing.  However, it is truly the leading-edge companies out there that recognize the fact that pricing is not just a business function, performed by those that need to be involved.  Pricing is a complex business process that must have the correct support and guardrails around it.  You would not implement new SOPs without training, support, and feedback… why should pricing be any different?

True, leading-edge companies already have this figured out as they are investing in pricing for the long-haul.  You should be no different.  If you bring thought leadership to your customers through your products, why stop there?  You need to look at the support mechanisms, training programs, and business policies that must be enacted in order to have a successful pricing initiative.  This is not simple and it takes various business units agreeing to change for the mutual benefit of the company.  After all, if it were simple, you, as would have most companies, would have already figured it out and pricing would not have the immense returns that I have seen time and time again.

For example, one company I worked with forecasted profit improvements of $10 million (or 4%) in the first year after a project.  They had a complex algorithm designed to monitor and track results directly related to improved pricing process.  Well, like almost any initiative, delays crept in and the economy took a turn for the worse.  During a re-assessment period, they downgraded their expected returns to only $4 million in the first 7 months after go-live (due to the 5-month delay).  After only 6 months, they had tracked nearly $9 million in incremental profit!  Incredible!  These results were due to their constant drive for improvement, but also understanding that they needed trained, dedicated pricing resources to help find, articulate, and act upon pricing opportunities, with increased profitability in mind.

Simple question, what are you currently doing to realize ROI in 6 months and even 12 months?  Pricing initiatives have that return, and have proven this fact time and time again.  But the desire and determination must be there and it will not be simple.  However, with the right people, processes, and software in place, finding 150 basis point margin improvement in 6 months and sustaining that gain is not far-fetched.  In fact, it is probably understating the true gains.


  1. When I was in an operational role some time ago for some B2B enterprise software, we implemented pricing processes, which resulted in our team winning a quality improvement for measurable results. This included processes for establishing pricing, reviewing it periodically, and changing pricing over time.

    As you point out, over time, we found that pricing is integral to many other business processes, such as software licensing and license models, software product structure, maintenance, product lifecycle management, discounting, entitlement management (back-office systems) and deal structures. As processes improved, so did education and socialization of the processes and methods.

    Ultimately, this more structured approach lead to more a more agile business as the organization could systematically move to newer pricing and licensing models to gain competitive advantages in the marketplace.

  2. Chris - what were some of the impediments you encountered during your transition to pricing being integral to the organization? I've typically encountered the usual "pride in ownership" and "silo mentality", but I'm curious what else you might have faced and what you did to overcome these roadblocks.

  3. I received the following question from LinkedIn: "I work with so many companies where sales and marketing people caucus on price and meeting comp. Very few spend time on creating value and therefore on getting better compensation (price?) What do you notice when you work with clients?"

    Simply stated, my experience has taught me there is no "standard". For most companies, and this is especially true in larger companies that I've worked with, pricing was one of many job responsibilities a product manager or sales manager had. Therefore, many "caucuses" as mentioned above, occurred related to pricing, but very little could be done. Call it "Silo mentalities", "turf protection", or whatever, but those who realized change was needed could, in actuality, do little to affect change. In these type of situations, it took a groundswell of momentum to enlist upper management to appoint someone in charge to change pricing (it's amazing when a CEO, CFO, or similar says "jump", everyone asks, "how high?"). When this happened, change was on the horizon. But for those going through the early days of building that momentum, the days are long.

    That being said, I have seen that within organizations, smaller groups that do have the right amount of power can make and implement the necessary changes to improve pricing strategies. However, it will take a leader with the right vision and the wherewithal to seek out pricing improvement opportunities.