Sodhi Pricing Associates

Improving Your Bottom Line

The Tide is Going Out

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“When the tide goes out, we find out who’s been swimming without a bathing suit,” wrote Warren Buffet to his shareholders about the housing crunch rooted in the credit debacle that continues to batter the US as well as the global economy. If one picked a mere two examples out of dozens of known blunders, managers in any industry can draw lessons to preempt such outcomes. Countrywide Financial Corp.’s Fast and Easy mortgage program resulted in a $893 million loss in the first quarter alone because of overly optimistic underwriting without due diligence[1]. Société Générale, the venerated 144-year old French institution, has lost €4.9 billion[2] to rogue trading[3] resulting from process controls so weak that a relatively junior employee could evaporate all this wealth. The discipline in transaction pricing in most companies follows, to varying degrees, the dynamics of Fast and Easy underwriting (which is also a pricing process). Sales teams when pushed to generate volume turn around to push for short-cuts in how business is conducted with customers. Sound familiar? While a few ill-advised (out-of-spec or badly specified) pricing transactions go unnoticed or ignored, in a repetitive process such actions represent the tip of the proverbial iceberg that brought down the Titanic in waters as frigid as our current economy – inflation in a recessionary environment. Therefore, senior managers charged with safeguarding earnings need to closely monitor their company’s pricing processes as well as cause and effects of their actions. Many companies are pro-actively reviewing their pricing strategies in light of the shrinking economy. Nowadays, my conversations with business leaders focus on the importance of quality of pricing operations to ensure successful execution of pricing tactics as well as strategies. Announcing price increases to cover fuel or raw material cost inflation is risky if such actions are hardly practical due to weak internal processes. Why invite the ire of customers and undue attention from competitors when stakes are so high! Smart companies who align their pricing operations with strategies for the economic downturn will enjoy competitive advantage. In any case, no conscientious manager who cares for her customers and shareholders deserves ruin or embarrassment when the tide goes out. References 1. The Wall Street Journal, Countrywide Loss Focuses Attention on Underwriting 2. The Herald Tribune, Report Pinpoints Faults at Société Générale 3. The Wall Street Journal, The Loss Where No One Looked

Quality in Pricing

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It is common among B2B companies to pursue sales and market share by dropping price. Typically there is little consideration given to pre-analysis or process. In times of economic slowdown, a top concern in the US currently, sales and marketing teams in companies are even quicker to reduce transactional prices. Companies who constantly manage the quality of their pricing operations should find themselves more profitable and better prepared than their competition to take on a recession, inflation or stagflation. Obviously, when price actions do not follow the established guidelines or the guidelines are weak to start with the result is eroding sales and profit for the company. Opportunistic buyers spot pricing changes, even small ones, rather quickly and start demanding same or richer across-the-board discounts often pitting competing vendors against each other. This draws companies into the downward profit spiral – price reduction for “select” buyers without proper fences spurs awkward price negotiations with an increasing number of customers. Price variation arising from inconsistent processes such as lack of compliance to guidelines is analogous to a “defect” in the manufacturing process when widgets are produced out of spec. The solution, similar to manufacturing, is well-defined processes and quality control in pricing operations.

Message about Six Sigma Pricing

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Pricing is the #1 worry for business leaders but companies can have far more control over pricing than they may realize. Many companies have developed solid sales strategies—but without equally good pricing operations, those strategies by themselves will not add anything to the bottom line. The goal of pricing operations is to consistently control price deviations in transactions and contracts over time and across customer segments. We discuss a breakthrough approach to the pricing discipline in our book, Six Sigma Pricing: Improve Pricing Operations to Increase Profits (FT Press), one that can systematically eliminate pricing-related leaks driving new profits straight to the bottom line without alienating customers. Six Sigma Pricing is not simply an application of Six Sigma to pricing operations but rather a way to overcome inter-function issues that make improving pricing processes so challenging. The book follows the Six Sigma framework with examples of each DMAIC (define-measure-analyze-improve-control) step from a real company doing a major pricing project: * How to identify pricing “defects” * How to gather and analyze relevant pricing data and pricing-agreement processes * How to identify and preempt failures of control; implement modifications that don’t create onerous approval processes * How to sustain and extend pricing improvements into the future.