The High Cost of Pricing Variability

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Unwarranted pricing variability is a significant contributor to lower profitability in B2B companies - often resulting in companies leaving millions of dollars of profits on the table.

Senior executives across organizations have the strategic objective of reducing or eliminating unintended variation in their business, yet they often ignore variation in pricing.   In the words of a Chief Operating Officer for a global manufacturing company, "today we accept a degree of variation in pricing that would get a plant manager fired...."  When managed effectively, pricing variation has the potential to deliver significant profits to the bottom line and give companies the competitive advantage they need to succeed in today's markets.

To manage pricing variation, business-to-business (B2B) companies must understand its causes.  Take an example of a typical B2B company with the following attributes:

• Has 20,000 SKUs (stock-keeping units)
• Products sold through four distinct channels
• Products sold to 30,000 customers across 30 industries
• Products sold in 30 countries across four regions

In combination with hundreds of pricing decision makers such as business unit leads, sales executives, and pricing managers, these attributes can cause significant pricing variation.   As illustrated in the graphic below, the outcome is large variation in margins for customers with similar characteristics, ultimately resulting in significantly lower margins.

In a typical B2B company, many different factors drive pricing variability, including:

• 1. Sales performance - variability due to inconsistent negotiation outcomes
• 2. Analytic insight - lack of understanding of key drivers of profitability
• 3. Process execution - ineffective pricing and lack of processes to ensure compliance with pricing policies

Addressing these drivers of variability effectively and consistently is critical to improving profitability.  Over the next several posts, we will explore each of these three areas to discuss best practices to address them.

To learn more about managing variability, you can also access our OnDemand webinar on Reducing Pricing Variation to Improve Profits. 

Visit http://www.vendavo.com/ to learn more about pricing.