A Simple Framework for Focusing on Pricing Value Opportunities

Considering the challenging economic conditions facing companies today, it is not surprising that more and more companies are turning to pricing help them improve margins. As you evaluate potential areas to focus on, you should keep in mind that at the most basic level, price and margin opportunities tend to come in one of two categories: 1) Increased Pricing Efficiency and 2) Improved Pricing Effectiveness.

Pricing efficiency opportunities include:

• Lower price administration costs
• Improved invoice accuracy eliminating lost revenue from under-billing and credit processing costs from over-billing
• Reduced quote approval cycle time increasing win rates
• Faster list price change or contract mass-edit cycle times resulting in faster cost-recovery/margin capture, and
• Soft benefits such as approval documentation for SOX compliance

Pricing effectiveness opportunities include:

• Upgrading or exiting low or unprofitable customer and/or products
• Reducing unwarranted price variation
• Utilizing segment-driven, optimized target prices to increase price without sacrificing volume
• Increasing recovery of value-added service costs
• Improved price increase effectiveness or more effectively managing price erosion

The value of pricing efficiency opportunities tend to range from additional 0.25% to 1% of sales improvement to the bottom line while pricing effectiveness can provide a 1.0% to 3.0+% improvement. In our experience, companies typically focus on one of the two categories as the impetus to initiating a pricing project. The initial value capture activities tend to focus on that particular category.

For example, a leading process manufacturer focused on improving invoice accuracy as the primary driver of a pricing initiative (a pricing efficiency opportunity) while another manufacturer focus on segment-based optimal pricing and guidance (a pricing effectiveness opportunity). Regardless of their different starting points, both of these companies realized significant value on their pricing investment.

Of course, the best approach is to capture value from both areas and to plan out a phased "roadmap" that focuses on the initial low-hanging fruit and eventually moves to and through additional opportunities over time using analysis and value capture playbooks while improving pricing processes.

As you think about your pricing initiative, the efficiency / effectiveness framework can serve as a simple but valuable one to define your pricing roadmap.