Chief Pricing Officer

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

One particular phrase in Obama’s inauguration speech really struck a chord with me and the folks I work with at SignalDemand. Obama declared he would…

“restore science to its rightful place”

To our ears, that sounded like a ringing endorsement for the work we do.

Science isn’t limited to the R&D labs - it should be at the heart of business. Applied science can provide the concrete evidence and predictive models required for making strategic, high-impact business decisions when thousands of variables and millions of potential outcomes are involved - way beyond the realm of standard business software or spreadhsheets. The field of wholesale pricing is a prime example and it’s a white hot area on the cusp of reaching its potential. It’s encouraging to hear that the new administration plans to refocus on science.

So, do you think he’s going to do it? Cast your vote by commenting below on whether Obama will “restore science to its rightful place.”

Great story in today’s Wall Street Journal about SignalDemand customer Cargill and how the company’s using information to make informed decisions to beat the recession. Cargill reported strong earnings on Tuesday for Q4 ‘08, beating earnings from a year ago by 25 percent. Those are really impressive numbers, especially given the sharp drop in commodities prices during that time.

What’s most striking about the article is how forward-thinking the company is when it comes to buying and selling product. It’s very reminiscent of Michael Lewis’ fantastic book Moneyball about how Oakland A’s General Manager Billy Beane was able to exploit market inefficiencies in order to field an inexpensive, but competitive team. Here’s a great example:

For instance, this past fall when global credit markets froze up, Cargill got wind of ships full of soybeans stranded in ports because buyers ran into financial trouble, people familiar with the trades say.

Cargill’s traders knew they could profit by buying the stranded beans at low prices, then shipping them to Cargill’s own factories to be crushed into vegetable oil.

That’s just plain smart business right there. Of course, SignalDemand is also one tool Cargill uses to get more and better information - in particular to help the company balance demand, supply, cost and product mix decisions. SignalDemand’s software analyzes Cargill’s historical pricing, USDA Market activity, sold positions, inventory and supply constraints, and develops detailed pricing and demand elasticity models for each of the markets in which Cargill sells its products: spot, mid-, and long-term. The system enables insight into the trade-offs between each channel, giving the pricing team  the confidence to make informed decisions about pricing. You can learn more about it here.

Cargill CEO Greg Page told the WSJ that information and informed decisions are key to the company’s success:

“When we do a good job of assimilating all those seemingly unrelated facts, it provides us an opportunity to make money … without necessarily having to make directional trades, i.e., outguess the weather, outguess individual governments.”

Congratulations to Cargill on its outstanding success as well as its ability to use smart pricing and informed decisions to stay on top of the competition.

As mentioned previously in the CPO blog, the 2008 SIGNALS event’s keynote speaker was best-selling author and Duke University professor Dan Ariely. Of course, as the economy and election aftermath take center stage, it would make sense to see the behavioral economist’s commentary all over the media:

Business Week:  “Homeowners cling to false optimism about own home”
Scientific American:  “Who has a better sense of humor – Liberals or conservatives?”
The New York Times: “Eyes Off the Price”

But whether we’re talking about the housing slump, politics or the gas pump, his observations show us that the human and emotional sides to pricing are very real. In the BusinessWeek article regarding real estate pricing, Ariely says, “To a homeowner, a low, but realistic, listing price is ‘like someone calling your kids ugly.’” And in relation to that weekly fill-up, he slyly notes, “Perhaps it would be better if gas station attendants filled the tank for us, as they used to, so we did not stand at the pump watching the rising price of our gasoline.”

As he highlights the emotions surrounding our sense of pricing and what we feel that things should cost, I am reminded of what this means on a larger scale: Manufacturers dealing in millions of widgets, barrels of oil, or bushels of wheat aren’t immune to the pitfalls of what is essentially irrational human behavior. But if they are to compete in today’s economy, they have to make the effort to stay above the fray.

Price optimization science – integrating as much historical, economic, and market-based data as possible – is essential to achieving this. The key word here is science: Every price should be as informed as possible and framed in the most current and relevant context available. And while there is always going to be an emotional component to the prices that humans negotiate with other humans, the goal should be – especially for complex and many-tiered industries – decreasing the weight that those emotional factors play.

Experts like Ariely throw very valid questions into the mix, and the marketplace of ideas is the better for their contributions. But how can we mitigate the irrationality in our own pricing behavior? Information is key in that battle. With everything available to us at the push of a button, it’s almost foolish to not use as much data as possible to make decisions – be it to guide our decision making, or to prove or justify a hunch or gut feeling. Information can help us better rationalize the choices we make, and it’s key to helping us make pricing decisions that make sense, both today and tomorrow.

Need more proof that pricing is more important than ever? Well, how about this headline from the Associated Press: “Food Prices Remain Stuck at High Levels.”

The American Farm Bureau Federation (AFBF) released its quarterly survey of retail food prices and found that even though gas prices and other costs of production may have dropped slightly, manufacturers are still feeling the pinch of rising production costs. Of the 16 items surveyed in the study, 11 went up in price, while only five went down. The overall price increase for these 16 items was 10.5 percent. Among the products that went up: pork chops, sirloin tip, ground chuck, cheese, apples and potatoes. The reason?

“We continue to see increases in several staple food items due primarily to the long-term effects of high energy prices in the food sector. Sustained high costs for processing, hauling and refrigerating food products are reverberating at the retail level,” said Jim Sartwelle, an AFBF economist.

Regarding the top gainer in this quarter’s survey, Sartwelle explained, “Acreage planted to potatoes was down nearly 8 percent this year. The combination of a smaller crop and some production losses in the field has led to higher-priced spuds in the produce aisle.”

The reality for food producers is that price spikes are here to stay - at least for the foreseeable future. So, what to do? Producers and manufacturers need to find a balance between maintaining profits without passing too many costs off to consumers. With proper insight into prices across channels, customers and product lines, producers should be able to make smart decisions about where margins can be maximized and where demand can be shaped with price in order to drive profitability without across-the-board price increases.

Everyone agrees that pricing decisions shouldn’t be made lightly, especially given the clear evidence that price has a significant and immediate impact on profits. Also, the consequences of pricing decisions affect the entire business process flow - pricing influences demand, which impacts production and purchasing requirements. So who is the Chief Pricing Officer? Who has the power to determine price strategy and execute on it?

In reality, it’s not just one person.

Here’s what happens at any given company where products are made and deals are negotiated to sell those products:

• A team of pricing experts do number crunching for a particular product, often using myriad spreadsheets
• Executives might weigh in when it comes to strategic initiatives like category management
• Marketing or sales generates a price list to hand out to sales representatives
• Sales reps line up deals at the best prices they can negotiate
• At smart companies, there is a person or team dedicated to analyzing prices secured across products, channels and customers

Depending on the size of the company, the number of people influencing the pricing across a company’s product portfolio could range into the thousands. But, what does this mean? Well, given the impact that price can make on a company’s bottom line, every single person involved in pricing and selling should be considered a CPO.

Without a central source of knowledge, that small army of CPOs could have a disparate, sometimes contradictory, and ultimately adverse affect on overall price strategy - and subsequently, on company profitability.

What if each CPO used the same accurate information and application as a baseline for decision-making? Who is the CPO in your organization?

I look forward to your comments.

So, we talk a lot here about food prices and what they mean to manufacturers and the folks at the start of the supply chain. But what about the folks at the other end, like you and me? As most people know first hand, food prices can be one of the biggest drains on families’ budgets – the bigger the family, the bigger the drain, and the lower a family’s income, the bigger bite food takes out of the monthly budget.

The United Nations’ Food and Agriculture Organization estimated that international food prices are up more than 60 percent since 2006, including a staggering climb during the first three months of 2008. Beyond the obvious bad news, other economic dangers stem from high food prices – a reverse “trickle-down” effect. Food and housing are a family’s two basic costs, expenses that cannot be forgone or significantly trimmed back – everyone needs to eat and needs a roof over their head. As those costs increase, consumers stop discretionary spending: restaurant visits slow down, people stop buying big ticket items, and generally stop spending money. Those at the bottom of the economic ladder also need more support, providing further strain.

Food prices are all encompassing, affecting broad swaths of the public and creating depressed conditions at the very base of the economy – consumers. Combine this with extreme pressure from the financial markets, and the country’s economy is squeezed from almost every angle.

This is a very simple illustration of why food producers need to intelligently determine prices. Smart prices throughout the supply chain benefit everyone in the long run.