Chief Pricing Officer

No surprise, we are in the midst of an economic downturn.  What are the three actions being taken by every company in this recessionary climate?  No surprise:

1.    Control costs, mostly by cutting back spending and reducing staff
2.    Dump customers, keeping only the largest, most profitable ones
3.    Stay the course, hoping to ride out the storm

Not much of a strategy, then again, many CEOs running companies today haven’t weathered an economic storm like this one.  It’s a fair bet that none of the Fortune 1000 executive ranks were managing a P&L during the Great Depression.  So we’re all in new territory, but everyone is relying on the old strategic formula.  Old habits die hard.

The playbooks and management strategies we’ve turned to in bull-driven, steady growth markets, those catchy business book titles from Competitive Advantage to Core Competencies to Quality Circles to Reengineering the Corporation to Customer Focus, need to make room on the shelf for a new breed of thinking.

Here are three business book titles I’d like to see hitting the shelves this year and what they would cover:

The Biology of Pricing: Profits Under The Microscopic

Most managers elect to focus on their company’s core competencies during troubled times.  But do you even know what your core competencies really are?  Forget hosting executive off-sites or surveying your employee base.  Your core competency is right in front of you, in every pricing decision you make.  If you can dig into transaction data, understanding your pricing decisions and resulting margins for each sale, you have the foundation needed to distill what you are really good at, who you are best at delivering value to, and where you should invest and divest your operations.  Look at your price waterfalls, segment your prices and margins by customer and product, and take a look at what’s really driving your company’s profitability.  Don’t forget to include trade spend, discounts and rebates, receivables and bad debt costs in your analysis.  The resulting visibility will guide you in building a strong foundation around your true competencies and will allow your company not only to survive the storm, but to thrive when the economy turns around.

Cost Cutting vs. Precision Pricing: The Enlightened Road to Victory

Cutting costs are easy.  It’s one thing you can control.  But it’s not the most significant lever in the profitability equation.  Price is.  And even if you do turn to cost-cutting, be wary of cutting across the board.  Today’s accounting rules and financial statements often hide the true dynamics between costs and production.  Again, this is where a thorough study of transactional pricing comes in handy.  By digging in to your pricing decisions, you can develop an alternative view to your cost structure that helps you determine which areas of the business are most profitable, and those that are a financial burden.  Cutting is a necessary part of growing a business.  But remember, trimming the sails is very different than tossing the crew overboard.  Make incisions from insight.

Firing Failing Customers

During tough times, most companies will hold onto all their customers and all that revenue, even if it means giving away services, cutting prices or offering additional incentives.  Under the guise of improved customer loyalty, many companies kill their profitability by giving away the store.  What’s worse is how much is given away to the unprofitable customers that should’ve been fired long ago.  Customer profitability is like religion, it is a powerful motivator, but not something easily understood, let alone put into practice.  But now is the time, and it starts with prices.  Transaction level pricing insight is the precursor to understanding customer profitability.  Once again, if you can determine margin contribution on individual pricing decisions by product, customer segment, you’re well on your way to determining which customers to keep and which to fire.  And by all means, fire the bad customers immediately.  They’ll come back when they are ready, and when you are ready, too.

The common theme, of course, is that business success and profits all lead back to optimizing your pricing decisions.  The books recommended should become required reading for managers today.

In these dark times, what business book titles would you like to see?

More and more companies today are investigating pricing improvement initiatives.  No wonder.  Improved pricing practices help companies increase profitability and recover costs.  But doing pricing right takes fortitude, executive level sponsorship, and a strong business case to win over internal naysayers.

My friend Noha Tohamy, a research executive at AMR Research, recently conducted a study of over 219 companies’ pricing practices and issued a Market Services Report entitled “Building a Bulletproof Business Case for Pricing Improvement Initiatives.”  While the report is available only to AMR Research clients, Noha has graciously agreed to allow me to share one of the results of this landmark survey.  It has to do with payback on investment in the pricing management arena.  The results may surprise you.

In today’s economy, companies are cutting back and capital investments are few and far between.  But one area where managers are not throttling back is in pricing practices, including pricing decision-making in price optimization.  One of the main reasons is that the payback on pricing investments has become even more compelling in these tough economic times.  Pricing is the great lever in improving profitability.

Noha’s research reaffirmed all of the benefits that companies typically realize when making investments in pricing initiatives.  According to AMR Research, half of the companies in the study indicated that they have achieved a return on their pricing investments in under a year.  Remember, most enterprise initiatives require multiple years to demonstrate an adequate ROI (if they do at all).

Here’s the breakdown from AMR Research:

For the pricing management initiatives you have undertaken to date, what has been your payback period (the time it took to recoup your initial investment and reap the financial benefits)?

Less than six months    17%
6 to 12 months        30%
12 to 24 months    25%
Over 24 months    6%
Not sure        22%

Clearly, the results of Noha and her team’s research underscore that pricing as an enterprise initiative should be on the top of every CEOs list of potential project investments.  If you like to receive a copy of the full report, please contact AMR research at www.amrresearch.com

Thank you, Noha for sharing your team’s work with the pricing community.

Bill Rupp, former executive at Cargill (one of the world’s largest and most powerful food companies, according to a recent Wall Street Journal story on the company’s success) is teaming up with Signaldemand. Bill will join SignalDemand’s board of directors, bringing nearly 3 decades of industry expertise to help raise awareness of price strategy and the power of optimization technology.

As you may know, I’m an advisor to SignalDemand, which provies on-demand price and margin optimization to wholesale manufacturers. Chatting with Bill the other day, he explained that as the president of Cargill Meat Solutions and Cargill Beef (a $21 Billion dollar division with beef as a $10 Billion dollar unit within it) he was part of a company-wide shift at Cargill towards providing customer solutions rather than simply commodity products. He sees accuracy and transparency in pricing as key in achieving both the logistical ability to put together profitable customer solutions and also to engender new levels of customer trust and condidence in contract negotiations.

Here’s what Bill had to say regarding his decision to join up with SignalDemand, according to the SignalDemand press release:

“SignalDemand has pushed the boundaries of what is possible in the commodity manufacturing industry,” Rupp says. “Cargill Meat Solutions has taken full advantage of SignalDemand’s optimization technology in the last several years, which has helped strengthen both the company and Cargill’s partnerships with customers. I am eager to bring my experience to bear toward SignalDemand’s continued success, helping industry leaders solve today’s challenges through improved pricing practices and decision-making.”

If Bill’s decision to join up with an innovative price optimization company is any indication - 2009 will see elevated awareness and understanding of the role of pricer, price analyst, price strategist, etc.

Will 2009 be the year of the Chief Pricing Officer?

Today Businessweek magazine is featuring comments from my friend and colleague Mike Neal (CEO, SignalDemand) on its homepage in reference to the article “Grocery Stores Fight Back Against Food Prices.”

According to its editorial staff, Businessweek’s new online “In Your Face” section highlights readers that offer “smart, incisive comments that move the conversation forward” - and this week the topic is Food 2.0:

The article is a worthwhile read, taking a look at the quickly forming “battleground” over food prices. Here’s an excerpt to give you an idea:

A year ago, when the cost of commodities such as wheat, oil, and corn was soaring, grocers grudgingly accepted price increases from Kellogg (K), General Mills (GIS), H.J. Heinz, (HNZ) and other food manufacturers. The strange thing is, those price tags never came back down, even when commodity prices collapsed in the fourth quarter of 2008. As a result, grocers have little cheer to offer their shoppers at a time of deepening economic gloom. “The prices don’t seem to go down as fast as they go up,” says Jeffrey Noddle, CEO of Minneapolis-based Supervalu, one of the nation’s leading grocers.

Now, the grocers are demanding action. On Jan. 7, Noddle told analysts to expect a “battleground” over the next six months as he pressures manufacturers to adjust their prices. And if they refuse? “In almost every category,” notes Noddle, “you have other vendors to look to.”

The food companies recognize that increases in the price of food outpaced commodity inflation during the fourth quarter last year, which should have resulted in higher profits. However, they argue, previous price hikes didn’t completely cover escalating production and commodity costs….

And for your convenience, Mike Neal’s comments in full:

Every major food producer has been anticipating this impasse. The problem lies in the fact that many producers don’t have the ability to accurately resassess their risk if they were to adjust prices. In order to confidently renegotiate contract prices, food producers must be able to accurately calculate the impact of price changes on volumes and margins, for each product line and customer contract.

Part of that calculation is a prediction of the success of demand shaping with strategic price changes. Without this knowledge and assurance, food producers with long term contracts could be effectively signing their own death warrants if faced with another jump in commodity prices.

Fortunately, technology has caught up with the pressures of the global marketplace and food producers are starting to adopt technologies that allow them to bring a new transparency and confidence to price strategy and contract negotiations. I envision that a new role - Chief Pricing Officer - will emerge from this awareness of the powerful strategic role pricing can play in the enterprise.

All you price professionals out there - what’s your take? Weigh in with a comment of you own on ChiefPricingOfficer.com.

Rip