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?

The September 2008 edition of The McKinsey Quarterly features an excellent article with six tactics for pricing as costs rise and price sensitivity increases. It is clear that as margins grow ever more narrow, price becomes an even more powerful lever for driving profitability.

The article, Pricing in a downturn, points out the importance of monitoring customer-level profitability. My opinion is that with the right insight, it’s also possible to not only monitor, but manage product-level profitability as well…more on that in another post.

Enjoy.