Pricing and Profitability Management E-Book

Julie Meehan

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 497

Veröffentlichungsjahr: 2011

Beschreibung

The practical guide to using pricing and profitability management to build a better business A comprehensive reference for any business professional looking to understand the capabilities and competencies required for effectively managing pricing and profitability, Pricing and Profitability Management explains how to determine the right approach, tools, and techniques for each of six key categories (pricing strategy, price execution, advanced analytics and optimization, organizational alignment and governance, pricing technology and data management, and tax and regulatory effectiveness). Exploring each category in detail, the book addresses how an integrated approach to pricing improvement can give a sustainable, competitive advantage to any organization. The ultimate "how to" manual for any executive or manager interested in price management, the book presents a holistic, comprehensive framework that shows how integrating these pricing categories into a cohesive program leads to impressive gains that cannot be achieved through a single-pronged approach. * Presents a comprehensive framework for more effectively managing pricing and profitability * Identities the six key categories of pricing and profitability management * Shows you how to gain a competitive edge by managing pricing and profitability Taking a comprehensive view of pricing, companies can position themselves to tap a vast source of shareholder value--the ability to set and enforce profitable prices, not just once, but again and again in response to marketplace changes and evolving business needs--and this book will show you how.

Leseprobe

Contents

Cover

Title Page

Copyright

Dedication

Foreword

Acknowledgments

Chapter 1: Introduction to Pricing and Profitability Management

Pricing: The Critical Lever for Raising Performance

Common Obstacles to Pricing and Profitability Management

Understanding—and Leveraging—the Human Side of Pricing

An Integrated Approach to Pricing: The Six Core Competencies

Beginning the Journey: Key Questions to Ask

Chapter 2: Conducting a Pricing and Profitability Diagnostic

The Case for a Diagnostic

How to Execute a Diagnostic

Consolidating Findings and Identifying Opportunities to Improve Capabilities

Challenges and Considerations

Chapter 3: Developing an Effective Pricing Strategy

What Comprises a Successful Pricing Strategy?

How to Make Value Your Focus—and Why

Formulating a Value-Based Pricing Strategy

Designing and Integrating an Effective Pricing Structure

Identifying and Using the Principal Pricing Archetypes

Critical Challenges Faced by Pricing Strategists

Tips for Moving Forward

Chapter 4: Price Execution

What Is Price Execution?

Using the Best-Practice Pricing Process Framework

Setting Policies to Reinforce Pricing Processes

Tips for Moving Forward

Chapter 5: Advanced Analytics and Price Setting

Building a Transaction-Level Data Set

Conducting Transactional Profitability Assessments

Integrating Cluster Analyses to Segment Customers, Products, and Services

Assessing the Competition: Value Equivalency Analytics

Demand-Based Optimization Modeling to Improve Price Setting

Tips for Moving Forward

Chapter 6: Achieving Effective Organizational Alignment and Governance

Five Key Components for Aligning a Pricing Organization

Aligning Sales to Support Pricing and Profitability Goals

Identifying and Empowering Pricing Leaders

Designing Robust Organizational and Governance Structures

Implementing Change Management and Adoption Processes

Evaluating and Managing Pricing Talent

Making the Organizational Commitment to Change

Chapter 7: Pricing Technology and Data Management

What Is Pricing Software?

The History of the Pricing Software Market

Building a Business Case for Pricing Technology

Selecting Pricing Management Software

The Pricing Software Development Lifecycle

Future Trends in Pricing Technology

Pricing Technology Selection and Implementation Recommendations

Chapter 8: Integrating Tax and Regulatory Policies with the Pricing Strategy

The Convergence of Tax and Pricing Strategy

How to Integrate Pricing and Tax Functions—and Why

Managing Pricing and Compliance Costs to Maximize Returns

Navigating Regulatory Environments When Making Pricing Decisions

Where to Go from Here?

Chapter 9: Pricing as a Sustainable Competitive Advantage

Why Taking a Holistic Approach to Pricing Matters

Bringing it All Together: A Case Study

Emerging Trends in Pricing and Profitability Management

Lessons Learned: Getting Pricing on the Executive Agenda

Appendix: What Is Value and Why Is It So Difficult to Measure?

Index

Copyright © John Wiley & Sons (Asia) Pte. Ltd.

Published in 2011 by John Wiley & Sons (Asia) Pte. Ltd.

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To Don, Jack, Charlie, and Theresa

Foreword

Several years ago, I was asked to lead the transformation of an organization with a record of success that spanned a century. In an effort to continue and to grow that success, we embarked on a comprehensive program to transform some areas within the company. One of the most important was pricing. The leadership team knew we could improve our pricing, and that the value this would create was larger than any other improvement initiative we could undertake. As a result, I had the opportunity to work closely with several of the authors. I have personally applied what you are about to read, and can attest to the value it will create.

I have more than a passing familiarity with pricing, from both my academic background and my career in business management. There are literally dozens of books on pricing theory, and I have read a fair number of them. Most address specific aspects of pricing; while helpful in addressing specific challenges, they do not provide an integrated, holistic approach to setting and managing price. If we were truly going to transform our organization, we needed an approach that incorporated theory, but also gave us a pragmatic and realistic roadmap for applying advanced pricing capabilities as quickly and efficiently as possible. This approach also had to take into account that the business would not stop while we determined the future. We needed a roadmap that told us where to start, gave us the right tools and techniques needed to improve our performance, provided a sequencing that both built capabilities and delivered early results, and most importantly, told us how to do this in a way that the organization would accept and adopt as quickly as possible. We also needed to know the challenges we would face and how best to address those challenges, as well as how to manage expectations both internally and externally, with internal stakeholders as well as with our customers and competitors.

We knew when we started this program that we would be changing, in some cases radically, how pricing is executed, and who would set and execute price. Traditionally, pricing has been managed in pieces across various parts of the business, and this cross-functional integration is an ongoing challenge within any organization. With pricing, sales often sets base price and provides insights into customer behavior and competitive intelligence, marketing determines promotions, segmentation, channel, and brand positioning, operations determines cost, and supply chain drives cost-to-serve. Finally, finance sets hurdle rates, expected ROI and ROA, and holds the organization accountable for results. There are endless variations on the model I just described, depending on your specific circumstances. A key concept explored in this book is “how do these pieces all fit together? How should they fit together, and how do we align the organization to achieve and retain a high level of integration across pricing activities?” You will find the answers to these questions, and more, within this book.

When we started this journey, we were a relatively unsophisticated organization in terms of setting and managing price, especially in our field organization. Giving it tools that allowed them to understand and learn about the behavior/characteristics of its particular clients (willingness to pay), to understand the drivers of profitability (cost to serve), and to rank each different client (relative value) was especially valuable to us. I believe it attracts and identifies the “naturals” in the sales force that are at ease making analytically-based decisions, and also fosters the development of true business acumen in these same individuals. That by itself will be of significant benefit to the organization, and as the results become apparent, those talents become a core component of the organizational culture.

Another significant benefit comes with creating a framework and an environment where the organization can create experiments and learn. As an example, having an explicit methodology for testing various promotional and discount activities, and then using that information for developing better future pricing policies is a great way to get your people to think about what they are doing when they pull the various levers in sales and marketing, and how those actions can affect segmentation, willingness to pay, and so on. This is particularly valuable in exposing how apparently dissimilar, unrelated activities can and will affect other parts of the organization, and again, the customer in terms of driving behavior, both intended, and almost more importantly, the unintended consequences that often occur when potential pricing actions are not fully evaluated in terms of “what if” scenarios. The cultural impact of creating a “test and learn” environment should not be underestimated; removing the fear of failure will create a level of engagement and thinking that is not common in most organizations today.

Truly effective pricing requires a level of integration and analysis that has been and continues to be rare in most organizations. Driven by deep analytics, both from a price-setting and a price-execution perspective, companies now have access to information in a form and at a level of granularity that not only enables this integration, but demands it. This book is a practical guide, outlining why the integrated, holistic approach is essential, how to align disparate functions so that integration happens as planned, and most importantly, how to make that integration sustainable within your organization.

The benefits that will be achieved by the application of these concepts are significant. When we started our program, our expectations were high, but not unreasonable. In reality, we have achieved many, many times the benefits we initially expected, totaling literally hundreds of millions of dollars. In addition, these benefits are recurring, and there is a first-mover advantage from adopting the integrated approach outlined in these pages. Integrated price management capabilities are iterative; the more you do it, the better you become at it. Companies who adopt these capabilities before others in their industry will create a sustainable competitive advantage through their ability to manage price, even in the midst of continuing economic uncertainty, and the growing complexity of the global economy.

There are several things this book is not. This book is not a comprehensive guide to cost management. Cost management has been an established discipline for decades, and this book would need to be an order of magnitude longer to include even an overview of leading cost management techniques. While the authors go into great detail in understanding costs associated with specific transactions, the techniques required to manage cost effectively are not covered in detail. What is covered is the ability to determine what value a customer creates for you and how your costs in attracting, serving, and retaining that customer align with the value they create for you as a customer. This is not only the value of higher margins; business leaders today need timely information for making strategic tradeoffs. As an example, when should I place brand or marketplace considerations on par with economic value? What if market share is how the analysts evaluate us? What will that cost us, and what can we expect in terms of a payoff, again, not just in margin, but across strategic considerations?

This book is also not intended to explain the theory of economic value. Theory, while required as a base for charting your course, does not give you practical advice for dealing with hundreds of salespeople, thousands of customers, and hundreds of thousands of transactions. The challenge addressed by this book is not the development or further evolution of pricing theory, but the pragmatic translation of theory into tactics, in a way that drives results for both you and your customers. A consistent theme within this book is how to identify and quantify the value you create for the customer, the value specific customers create for you, and how to align your organization and capabilities so that every interaction you have with the customer creates value for both of you. At its best, the holistic, integrated approach to pricing will enable you to identify and implement pricing programs that drive value for everyone in your value chain, from you, through distributors and retailers, and on to end customers.

As I stated earlier, I have seen firsthand the value created through this approach. It is challenging, and will require your organization to change long-standing beliefs, roles, and operating models. While challenging, the value that will be created more than justifies the risks and effort required to make this real. Simply put, this works, works quickly, and creates tangible, measureable and significant improvements in both revenue and margin. Done well, it will also improve customer relations, and drive you and your customers into a much closer and mutually beneficial relationship.

Decades of research has shown that investing in improved pricing capabilities has a higher rate of return than any other improvement initiative you might launch within your organization. This book is a comprehensive guide to making that investment pay the highest possible rate of return as quickly as possible, while also giving you information you never previously had for making strategic decisions, and in time to make those decisions matter. You, your people, your customers, and your shareholders will all benefit. If you are responsible for the financial performance of your organization, it is imperative that you read this book.

Juan José Suárez Coppel Chief Executive Officer, Director General, Director and Chairman of the Board Pemex-Exploration & Production Petroleos Mexicanos

Acknowledgments

The authors would like to thank the following individuals for their contributions to this book:

Abhinav Agrawal

Louis Amoroso

Vlad Bolsakov

Matt Carpenter

Robert Ceccarelli

Leandro Dalle Mule

Joe Dworak

Rich Eagles

Susan Fitzgerald

Kim Frazier

Parvathy Hariharan

Maggie Laird

Alice LaPlante

Anthony Lazaro

Dave Pan

Nelson de Sa e Silva

Ranjit Singh

Rob Sproull

Brett Thompson

Steve Tom

Jeff Wannamaker

James Weaver

In particular, the authors would like to thank Elizabeth Whitehead for her tireless (but fruitless) efforts to make us better writers.

Chapter 1

Introduction to Pricing and Profitability Management

The moment you make a mistake in pricing, you're eating into your reputation or your profits.

—Katie Paine, founder and CEO of KDPaine & Partners

There is an old joke about a businessman who loses margin every time he sells his products. A customer asks, “How do you make money?” The businessman answers, “I make it up in volume.”

A company that routinely sells products below its margins would hardly seem likely to remain in business for long. Nonetheless, many firms follow this approach today. In some cases, this approach is an unintentional move, which results in the company losing money on every transaction. In other cases, it reflects a carefully considered decision to maximize profitability across a portfolio of product offerings. However, in other instances, this approach is adopted by business leaders who simply misunderstand which of their products and customers are actually generating margin and the factors that truly determine their company's profitability.

The field of pricing management has been growing steadily in recent years. If you mention the subject in a group, many people will assume the ensuing discussion will be limited to price setting. But the discipline involves much more than just prices themselves. Pricing management is a strategic competency that involves people, processes, technology, and information. Its reach extends into virtually every corner of an organization (i.e., marketing, sales, IT, operations, finance, accounting, and executive leadership). Effective pricing management is capable of changing the way a company views and operates its entire business; it helps ensure the overall profitability of an enterprise and it can affect the bottom line profoundly. This book is intended to serve as a comprehensive introduction to the discipline and a reference work for business leaders, managers, and students who want to deepen their understanding of and sharpen their capabilities in this critical function.

Pricing: The Critical Lever for Raising Performance

Why make pricing improvement a focus for an organization? The answer is simple: the benefits are enormous. A study has shown that 90 percent of pricing investment meets or exceeds return on investment (ROI) expectations.1 Put another way, for any dollar invested in performance improvement, the greatest return comes when it is invested in pricing.

Figure 1.1 reflects one version of an often-replicated analysis.2 All versions lead to the same conclusion: pricing is the most powerful lever available to raise performance. Despite this, the evolution of pricing management has, until recently, been slow. Although it has long been recognized as one of the traditional four Ps of marketing, systemic and structural challenges prevented pricing management from achieving the same level of sophistication or having the same capacity to improve performance as it has now. In its early days, practitioners focused on revenue/yield management and operated almost exclusively in the airline and hospitality industries. But recent developments have led companies to appreciate the breadth and critical importance of the discipline. We discuss three of these developments briefly in the following.