• December 14, 2008

What Six Sigma Pricing Is and Is Not

What Six Sigma Pricing Is and Is Not

398 548 Sodhi Pricing Associates

How can six sigma apply to pricing strategy – Six Sigma is good only for repetitive processes?

How can quality tools change the way companies (should) look at their pricing organization which is often distributed in marketing, sales, supply chain, finance and other functions?

What is Six Sigma Pricing?

I look for the nearest soapbox whenever I get these questions. Actually in anticipation of such questions, I had included the section, What Six Sigma Pricing Is and Is Not, in the first chapter of my book. Everyone interested in pricing agrees with two points, a) the need to align business objectives, pricing strategy (as part of business strategy) and pricing execution, and b) that pricing depends on and affects other elements of the business. But most business people tend to think of pricing as one rather-complicated activity rather than as a series of steps or processes resulting in pricing strategy or execution. This simple fact is the key to answering the questions above and unraveling many pricing quandaries.

Pricing strategy involves senior managers who are typically unavailable to oversee the execution done by multi-functional and multiple-level teams. The frequency of reviews or follow-up for different pricing actions also varies, for example, operating plans are developed or reviewed annually or quarterly, sales/ reviews/ price reviews can occur weekly, while transactional discount requests are managed hourly. In essence, pricing operations, as is the nature of operations, are repeatable processes. For instance, processes for designing and running promotions, choosing contract terms by customer segment, designing price floors and corridors etc. are all repeatable processes. If these repeatable processes are executed by tightly-knit multi-functional teams who follow standardized steps in using analytical tools, following guidelines, and reporting results, the ensuing price discipline does not only help price realization, but also helps in making better-informed strategic decisions.

My consultancy, also named Six Sigma Pricing, helps companies in improving execution capabilities with evidence based redesign of pricing operations. Although we use six sigma and lean tools, some steps need to be adapted given the organizational complexity around pricing which does not exist in traditional six sigma projects. As we did in the book, we are the first to assert that Six Sigma is NOT for designing pricing strategy although I personally have substantial experience in designing pricing strategy.

My work with several companies and over a hundred green-belt projects supervised by my co-author, Dr. ManMohan Sodhi, prove that Six Sigma Pricing can help overcome organizational complexity through better alignment between people, processes and systems. Whether a company has in-house Six Sigma capabilities or not, this toolkit identifies problems as well as causes, prioritizes actions so managers know where to start picking low hanging fruit instead of going after impossible goals, enables ongoing round-table discussions between executives and organizational layers of various functions, and finally helps improve and track processes that ensure improvements become permanent.

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