Transforming the Pricing Organization
Sounds pretty lofty and never an easy undertaking – transforming an organization. But, even in this difficult economy and especially because of it, leading manufacturers are doing just that – transforming their pricing organizations to achieve better control over margins and profitability.
A 2008 AMR Research study “Building a Bullet-Proof Business Case for Pricing Improvement Initiatives” conducted by researchers Noha Tohamy and Heather Keltz asserts, “Companies that succeed in improving their pricing practices have typically centralized many of their pricing practices and invested in training their sales organization on fact-based pricing.” A centralized pricing organization focused on using improved forecasting and optimization for more fact-based selling characterizes the companies that, in my experience, have successfully implemented pricing initiatives, as measured by their profit gains (ranging from over $1 million up to $20 million). Moreover they have been able to reduce price volatility.
There are four key elements at play in the success or failure of every pricing transformation:
1. Re-designed and Centralized Pricing Processes
2. Enhanced, Cross Department Communication
3. Effective Training, Integrating Process with Technology
4. Active Executive Sponsorship
Centralized Pricing Processes
In his recent guest post, Dr. Michael Freimer highlights the impact of price volatility and the need for tools and processes to control volatility. Organizations that centralize the pricing function along with implementing better processes and tools gain better insight into customer buying patterns and improve fact-based pricing decisions. For example, a growing commodity processor created a price management function focused on finding margin opportunities through changes in operations, product mix, and timing. The price management function reports directly to the CEO and helps the organization execute their strategy to shift from spot to more forward sales of their commodity-based products. Price managers have the responsibility for conducting detailed analysis of improvement opportunities using sophisticated forecasting and optimization software and communicating the results of their analysis to the sales team. This provides sales with more fact-based and dynamic information that can be used in sales transactions. In the fast-paced, transaction-oriented world of the sale representative, the time to conduct this type of analysis was virtually impossible without the benefit of the price manager’s role.
Enhanced, Cross Department Communication
Enhanced communication with the sales team is another benefit of a centralized pricing organization. To achieve better communication, processes must be examined in light of the desired organizational change. Cross-departmental communication can be facilitated through the use of common tools and by clearly defining the guidelines for how prices are quoted to the customer. For example, one successful meat packer’s pricing team is accountable for establishing the final price quote for each transaction, while giving its sales team visibility to the same forecasting and optimization technology used for price setting so that both groups are consistent in their understanding of market trends. With this visibility, sales representatives have more “pricing courage” and provide better pricing guidance to customers, resulting in improved relationships with key accounts.
Effective Process and Technology Training
Training both the sales and pricing teams on the new processes and tools is also imperative for success during the transformation. Understanding how to navigate forecasting and optimization applications may be fairly straightforward, however, understanding the use of these more sophisticated technologies within the pricing process is less so. Effective training integrates both the process and technology use cases.
Active Executive Sponsorship
Too often organizations assume that by simply communicating a change and providing training that immediate execution will occur. Training is only one aspect of managing the transformation, active sponsorship at senior levels must be present. Executives who support structural and process changes as well as the implementation of new technologies and tools ensure that true transformation occurs. Holding managers accountable and identifying champions for change from among the pricing and sales or buying groups are just two of the roles that executives play in managing the transformation. Additionally, executives and managers must support shifts in the organization’s compensation structure to better align them with profitability goals.
AMR’s research points out the benefits of centralizing the pricing function as well as the risks. Process redesign, implementation of improved forecasting and optimization technology, training and strong executive support represent the strategies for mitigating risk and achieving true transformation. The true measure of the transformation is the attainment of profitability goals – that’s the real bottom line.
