Establishing Baselines for Pricing Efficiency Improvements

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A critical step in quantifying pricing value opportunities is to establish baseline metric values.  Establishing baselines provides you the means to compare and benchmark improvements in your pricing processes accurately.

As I discussed in a past posting, "A Simple Framework for Focusing on Pricing Value Opportunities" there are two main categories of value opportunities 1) Increased Pricing Efficiency and 2) Improved Pricing Effectiveness.  For now let's focus on establishing baselines for increasing pricing efficiency and we'll leave the second category for a future post.

There are four primary pricing process improvement metrics that may be applicable to your price management initiative:

• Approval cycle time
• Price change cycle time
• Invoice accuracy
• Price administration costs

Approval cycle time (i.e., to approve a price quote, contract or agreement) is typically defined as the time from submittal of the request to its eventual approval or denial.  Improvements to your approval cycle time in some instances may lead to increased revenues through higher win rates.

Price change cycle time is defined as the time it takes to implement an overall price change to a base/list price or to implement a mass edit of net prices.  It includes both the analysis efforts to determine how much to increase and actual administration efforts involved in implementing the change.  Improvements to price change cycle times can lead to margin improvements by capturing those higher prices (in the case of price increases) sooner.

Invoice accuracy improvements provide three types of benefits:

1. Happier/more satisfied customers
2. Lower administration efforts via less credit memos to write and process
3. Capture of lost revenue from eliminating under-billings

A rule of thumb for estimating under-billing is that for every dollar credited for over-billing there is most likely an equal amount lost in under-billing if you use a net pricing approach and 20 cents in under-billing if you utilize a list-less pricing approach.

Lower price administration cost benefits are aligned to each of the above process improvements for not only the pricing team but also other functional teams such as field sales, credit/finance, etc.

A critical observation to note is that historical performance for these metrics tends to be either trapped in the legacy system you are replacing (e.g., approval cycle times) or requires manual efforts to collect (e.g., invoice accuracy).  Consequently, as time marches forward the data becomes harder to amass while interest in providing resources to manually collect the data wanes.  Effective techniques to benchmark data were discussed in an earlier blog post on Benchmark Pricing Practices to Improve Profits.

For these reasons, it is not only a best practice to establish baselines for these metrics early-on it is imperative.  Without appropriate baselines, your ability to demonstrate the success of your pricing initiatives will be severely limited. 

To learn more about how your organization can leverage pricing to improve profits, please access our OnDemand webinars.