Chapter 8: Pricing Strategy Implementation Strategy and Tactics of Pricing, The, 5/E

Embedding the Strategic Pricing in the Organization – Page 158* 60 percent of sales and marketing managers are frustrated by their organization’s ability to improve pricing performance over time* 75 percent were unsure what they should be doing to drive more effective execution of the organization’s pricing strategy Several factors account for the majority of this challenge: 1. “Come off the tracks” because there is often no clear ownership of, and responsibility for pricing outcomes 2. Conflicted motivations of decision-makers translate into inconsistently applied pricing policies. Compensation plans that reward managers on revenues alone encourage adhoc discounting and reactive pricing 3. Managers often do not have the necessary information and tools to make profitable pricing decisions

Embedding the Strategic Pricing in the Organization cont:* - Pages Organization – covers the entire structure of the pricing function Motivation – involves using principles, data and performance metrics, incentives that encourage the right behaviors by both the organization and individuals. Managers must be motivated to change old ways in favor of more profitable behaviors* (Page 159 – 160) Sales people need to shift from negotiating price to selling value Operations need to shift from improving the efficiency of current operations to designing a service operation that delivers differential value to customers* (Page 160)

Organization – Page 160 Reorganize the pricing function to better understand the new strategy 1. Create small pricing committees within each business unit 2. Form a corporate-supported pricing council composed of members from the pricing committees at the business unit Organization Structure: Establish formal reporting relationships for mangers responsible for managing the pricing process The key is to ensure that structural choices are aligned with the strategic goals and activities of the business* Expert resource – internal consulting resource supporting the divisions with specialized skills such as data analysis, project management and building a business case for change

Organization cont: Page 162 Functional coordinator – pricing here is viewed more tactically with greater emphasis placed on how the decisions are made than on what the decisions are Commercial Partner – is a role when it is given authority over both pricing decisions and processes Figurehead – occurs when the pricing organization owns the right to make key decisions, but does not have the power to enforce those decisions in the market place. This type is all too common because it enables other functional areas to control pricing without having formal authority. Centralized pricing - enables the company to invest in developing a core of expertise that can be leveraged across markets Center of Scale – pricing decisions are made and managed at the corporate level. Data is collected, and enforcement of processes in support of the pricing decisions

Organization cont: Page 163 Center of Expertise – pricing function provides a vehicle for sharing best practices and supports the development of more effective pricing strategies. This group will often have specialized skills Dedicated Support Unit – each business unit has a dedicated pricing group that is only loosely aligned with corporate pricing. This is functional within industry like basic materials and information technology

Decision Rights – Page 164* Formal structure is necessary to allocate decision rights to managers both within and outside of the pricing function that will participate in the pricing process Failure to formally allocate pricing decisions rights leads to more inconsistent pricing and greater conflict as managers attempt to influence pricing decisions. Decision Rights define the scope and role of each person’s participation in the decisions-making process “Input rights” – allocated to individuals to make decisions should only belong to one person or committee “Make and Ratify rights” – ensure that senior managers can make a productive contribution to the decision-making process “Notification rights” – to be allocated to individuals that will use or be affected by the pricing decisions

Pricing Process* – Page 165 & 166 The final step for organizing the pricing function involves the creation of a clearly defined set of pricing processes. Strategic pricing spans all of the activities that contribute to more profitable commercial outcomes Negotiation process might not be considered part of the “pricing” function, but it is one of the most critical determinants of transaction profitability. Define new pricing processes include:* 1. Define Major pricing activities – opportunity assessment, price setting, negotiation and contracting 2. Map current processes – visual depiction of the processes 3. Identify profit leaks – where are they occurring 4. Redesign process – revise process and to account for current decision-makers input

Motivation – Page 166 Establishing clearly defined processes and decision rights ensures that pricing strategy choices will be made in a consistent and repeatable manner. Two categories that have historically proved to be useful: 1. Customer Analytics – to spot changes in customer or competitor behaviors in time to develop an effective response. It is essential to monitor trends in market data in order to spot treats to profitability and opportunities for improvements - Customer profitability measures are created by assessing average prices paid by specific customers and combining them with cost-to-serve measures allocated at the customer level. 2. Process Management Analytics – Lord Kevin once noted “if you cannot measure it, you cannot improve it”. The goal is to identify types of customers or transactions that are discounts and trace the source back to the pricing process in order to “seal” the profit leak.

Price Bands – page 172 & 173 Price banding is a statistical technique for identifying which customers are paying significantly more or significantly less than the ban of “peer” prices for a given type of transaction. Five steps to a price band analysis:* 1. Identify the legitimate factors 2. Perform a regression of price levels or discount percentages 3. Use the analysis to estimate the price or discount that this customer would have gotten if given the average discount offered by all sales reps 4. Plot the actual prices customer pay and compare them to the peer prices along the regression line 5. Brainstorm possible causes of the random variation and identify correlations to test those hypotheses.

Performance Measures and Incentives – Page 175 Few things have the ability to motivate individual behaviors more than performance measures tied to compensation and incentives. The first and most challenging barrier, involves ensuring that performance measures motivate the right behaviors Companies should settle on a limited set of metrics that are tied closely to profitability and then hold people accountable for their performance against those measures The key to aligning sales incentives with those of the company is to link compensation with profitability Paying for profitability provided mutually beneficial sales incentives Once the company aligns sales incentives, salespeople will begin clamoring for the other things they need to succeed

Performance Measures and Incentives cont: Another challenge to the design of a plan is the lack of alignment among performance measures across the organization The need to document current objectives and incentives for all of those that have been granted decision rights in the pricing process

Managing the Change Process – Page 178 Organizational structure, decision rights, processes, and incentives are important levers that provide managers with the opportunity to make pricing choices in different and more profitable ways Facilitate adoption of the new approach including clear leadership for senior management and demonstrating successes through trail projects One of the most important actions that leaders can take to encourage adoption of strategic pricing is to truly “talk the talk and walk the walk”. Management must seek high-profile opportunities to demonstrate support for the new strategy

Managing the Change Process cont: Senior managers need to signal their support of a new pricing strategy using the following steps: 1. Mandate a comprehensive training program 2. Build in regular progress 3. Seize opportunities to communicate support for the new approach 4. Ensure other senior manages are actively involved in the decision making process A challenge that must be overcome when designing a demonstration project is how to define a baseline for measurement One of the major benefits of demonstration projects is that the leaders of the project often become internal champions for the change effort.

Chapter 8 Pricing Strategy Implementation