Pricing Operations

Six Sigma Pricing
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What Six Sigma Pricing Is and Is Not

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…

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Who Owns Pricing?

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The Pricing Czar is dead. He lies in state with other forgettable organizational models propounded by consultants and academics. The idea behind this model, an all-powerful person could enforce unquestionable discipline, simply does not fit with human nature. Historically, people have given in to autocracy but have always revolted against it to find themselves in better or worse shape. Companies play out their own version of the Russian revolution where heads roll, thankfully, without the blood and gore. As a new pricing manager, I had once aspired for czar-hood to centralize the pricing function for my employer. Thanks to painful experiences and good as well as bad advice, I learned that an institutional “democracy” is the only prudent but not the easiest path for a pricing professional. The ongoing challenge for pricers is how to organize multiple functions and layers into successful pricing institutions. One reason pricing processes in a company are complex is that they involve almost everyone in the company, or at least that is what everyone in the company thinks. Having varied groups with different views and incentives, sets the stage for pricing processes to be different across different companies depending on where the pricing function is located and to who it reports – pricing, finance, sales, or product management. Since pricing involves the customer, it involves the front-line groups, sales and customer service. Then there is marketing, which itself is a big and diverse group including marketing communications, brand managers, product managers, and marketing managers. Moreover, the senior managers invariably tend to lean on the decision process when the prospective customer is large or even potentially large. IT is involved as a support role because they create and/or maintain the enabling systems and reporting. Also involved is the pricing administration group and possibly, a multi-function pricing strategy group. The clout and effectiveness of the pricing function depends on where the pricing group is within marketing, sales, finance, and strategy or if it is a standalone group and with a clear control role. Many companies demarcate pricing strategy from tactics by having marketing own list price and sales own the discounts and hence the net price to customers. Oversight or control of realized prices is the responsibility of the pricing or finance group. While this explains roles at a high level, most price-related actions generate emotion because roles and responsibilities remain unclear and get constantly re-defined in the what-who-when of action plans. For pricing professionals who care for process improvement, turf battles should not be an agenda item. Instead, they should gain influence as “community organizers” who proactively look into pricing issues, identifying root causes, and supporting and getting support from different groups by showing evidence how they can gain from it. This sounds utopian yet quite practical within the scope of a full-time job. Even tenured employees in established organizations can map pricing processes and analyze data to understand pricing issues. My book, Six Sigma Pricing, has a tool-kit on how to frame issues and overcome them without alienating colleagues and customers. Collaborative actions to achieve shared goals align people with business strategies and pricing execution. The Pricing Czar is dead. Long live the Pricing Organizer!

https://sodhipricing.com/2008/09/who-owns-pricing/

Massive Scope Minute Decisions

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“Massive scope minute decisions”, the NBC commentator aptly described the heart-warming tai chi display at the opening ceremony of the Beijing Olympics. 2008 dancers leapt, swirled, and landed perfectly every time as each performer simply coordinated movements with their immediate neighbor. How come corporations can’t act with the same simplicity and precision especially when they need to protect their earnings and cash flows? According to a recent global survey done by McKinsey & Co., 34% of companies facing [product] innovation and 44% of those facing a pricing change found out about the competitor’s move when it was announced or actually hit the market. An additional 20% of the respondents facing a pricing change didn’t find out until it had been in the marketplace for at least one or two reporting cycles[1]. This situation needs to be and can be corrected by improving processes and internal coordination for gathering competitive price intelligence. While researching pricing increases related to raw material inflation, I noticed an interesting pattern at Continental AG, the leading global tire company, which seems to be treading (no pun intended) very carefully. Since mid-2007, the price of petroleum crude, a key raw material for the tire industry, has doubled and the company had no choice but to raise prices. Here is the schedule of their price actions announced over one year along with my observations[2]: a) Europe: No price increases in any segment throughout 2007 b) North America: 6% in passenger and light trucks only effective Oct 2007 (Notice no large trucks!) c) Europe: 3% in summer tires only effective Jan 2008 (Limited scope – deferring to summer in snowy Jan) d) Europe: 3-4% in car tires only effective Jun 2008, (Notice no trucks) e) North America: 8% in OE truck tires only effective Aug 2008 (Notice no cars) Apparently, Continental sliced and diced markets for execution by segment, season, and geography based on known or perceived customer and competitor-related risks. Assuming this strategy addressed raw material inflation, what should they and other companies do to realize their price increases to full extent? Companies should monitor discount activity for any sporadic increases at appropriate levels of granularity – market, brand, product line, sales territory etc. Higher than usual discounts following a price increase typically suggest, a) sales people are holding back, b)customers are pushing back, or c) the competition is being opportunistic. During my early years in pricing at a global airline, I learned the necessity of following competitive changes not just for price and booking levels but also frequency of service, routes served, type of plane, and passenger capacity. By organizing public data and feedback from frontline employees, managers can spot trends in competitive price actions. For instance, managers can gauge competitive threat by monitoring the level of consistency in price execution over time which helps validate their own company’s discounting practices. Such market intelligence supports price realization efforts and helps prevent price-related customer attrition without giving too much away. Let’s never forget the 4×100 meter men’s relay at the Beijing Olympics. The US men’s team was a favorite to win a medal but got disqualified in the prelims for dropping the baton. Actually, this was the fifth instance for the US men’s team to drop the stick in the last 12 global championships. The root cause is that the US athletes do not practice enough as a team. So it was “not bad luck but bad execution”.[3] Somehow, it always comes down to coordination and simple processes whether it is performing at the Olympics or in the corporate world. Notes: 1. The McKinsey Quarterly, How Companies Respond to Competitors: A McKinsey Global Survey, April 2008 2. Company announcements in Europe and North America over one year 3. Comment by USA Track and Field CEO Doug Logan

https://sodhipricing.com/2008/08/massive-scope-minute-decisions/

Gentle, Responsive and Effective Organizations

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It is July 4th – Independence Day for the United States. It just feels right to talk about uniting employees for the greater good of their companies. The sizzle of barbecues is somewhat subdued this year with the number of jobless exceeding 8.5 million in the United States. As thousands more worry about pink slips, stress levels and finger-pointing within companies are on the rise. In tough times, the foundational character and strength of an organization is put to test. As a pricing professional, I can never forget the angst of having to follow lackluster decisions made without the right analysis or due process. I have witnessed major gains lost to complacency and individual interests. I have also watched conscientious employees dive into impossible problems acting like patriots serving the mother country. How can companies empower and enable their employees to think about the good of their company aside from stock options and big salaries? Several years ago, I heard about the motto of Ritz-Carlton Hotel. “We are ladies and gentlemen serving ladies and gentlemen”, is an age-old credo at the Ritz which has helped them adopt and share best practices across all levels of employees worldwide. While it may sound like a corporate myth, Ritz lives its motto guided by 20 Basics which are truly fundamental ideas. Here are a few: #7. To create pride and joy in the workplace, all employees have the right to be involved in the planning of the work that affects them. #8. “Each employee will continuously identify defects throughout the Hotel.” #20. Never lose a guest. Instant guest pacification is the responsibility of each employee. Whoever receives a complaint will own it, resolve it to the guest’s satisfaction and record it. The Ritz-Carlton hotel chain has one of the highest employee and guest satisfaction rates in the hospitality industry. They have also won the Malcolm Baldridge award more than once. I will let you guess if this bolsters their luxury image, top-line and bottom-line. Any corporation can choose to be like the Ritz by instilling among employees a sense of pride in continuous improvement and genuine courtesy towards their colleagues and customers.

https://sodhipricing.com/2008/07/gentle-responsive-and-effective-organizations/

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

https://sodhipricing.com/2008/06/the-tide-is-going-out/