Practical pricing translating pricing theory into sustainable profit improvement

PRACTICAL PRICING Practical Pricing Translating Pricing Theory into Sustainable Profit Improvement Michael Calogridis palgrave macmillan * PRACTICAL PRICING Copyright © Michael Calogridis, 2010 Softcover reprint of the hardcover 1st edition 2010 978-0-230-61460-4 All rights reserved First published in 2010 by PALGRAVE MACMILLAN® in the United States-a division of St Martin's Press LLC, 175 Fifth Avenue, New York, NY 10010 Where this book is distributed in the UK, Europe and the rest of the world, this is by Palgrave Macmillan, a division of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries ISBN 978-1-349-60385-5 ISBN 978-0-230-10234-7 (eBook) 001 10.1057/9780230102347 Library of Congress Cataloging-in-Publication Data Calogridis, Michael Practical pricing: translating pricing theory into sustainable profit improvement I Michael Calogridis p.cm Includes index Pricing I Title HF5416.5.C352010 658.8'16-dc22 2009019402 A catalogue record of the book is available from the British Library Design by Newgen Imaging Systems {P} Ltd., Chennai, India First edition: January 2010 10 Contents List of Figures VIi List ofTabtes ix Introduetion Initial Priee Assessment 15 Priee Leakage 27 Pricing Resourees 41 Pricing Culture and Behavior 47 Top-Level Pricing Strategy 59 Price Initiatives 65 Developing Your Priee Plan 75 Diseounting and Other Ineentives 95 10 11 Contraets and Tenders 101 Pricing Exeeptions 127 12 Pricing Policies and Proeedures 137 13 Priee Initiatives-Developing and Implementing 143 14 Pricing Analyties and Dashboards 157 15 Priee Training 169 16 Other Price Topies 173 Appendix 183 Index 187 Figures 3.1 Sample Price Waterfall Analysis 3.2 Sales Volume Trend Analysis 3.3 List Price versus Net Selling Price Trend 3.4 Net Selling Price versus Cost Trend 3.5 Net Selling Price versus Gross Margin ($) Trend 3.6 Net Revenue Trend History 3.7 Percentages from Price Increase 32 33 33 34 34 35 35 Tables 3.1 3.2 8.1 8.2 8.3 8.4 9.1 10.1 14.1 14.2 Margin Impact of a Percent Price Increase and Percent Price Decrease Sample Customer Discount Schedules Revenue, Volume, Price, Margin, and Revenue Three-year History Region Revenue, Volume, Price, Margin, and Revenue Three-year History Product-specific Revenue, Price, Volume, Cost, and Margin History Contract-level Revenue, Price, Volume, Cost, and Margin History Sample Discount Schedule Various Price Increase Scenarios to Enable a Percent Growth in Margin Two-year Financial Performance Snapshot Sample Price Waterfall Analysis 36 37 76 77 78 79 96 114 159 163 Chapter Introduction The overall objective of this book is to discuss how companies price their products and set pricing in any type of contract they may sign with a customer It's become quite noticeable through financial profit and loss results in many companies that average sale price (the overall price paid by customers for a company's products) is not increasing very much year over year Companies are judged by their financial results, and each quarter the overall revenue and profitability increase Given the basic formula for calculating revenue of volume x price = revenue, you can see why price is so important in obtaining positive financial results In order to maximize price opportunity, many companies have turned to developing formalized pricing strategies When a pricing strategy is implemented successfully, it can result in consistent, sustainable profit improvement Consider a minimum annual percent-3 percent margin point improvement each year as your benchmark goal This book will provide an outline (called aprice plan) for developing and implementing aglobai pricing strategy with a focus on taking theory and making it more adaptable to everyday business This methodology is called Practical Pricing In this book, I provide, in detail, all the steps and inputs required to build your pricing strategy and function I also discuss what factors derail most pricing programs and pricing leaders and how to correct those issues Finally, I discuss pricing as a career and the recent development of pricing roIes in the past 10 years I also discuss my own tenure in this field of work The writing style I've chosen to use is the one I'm most comfortabIe with and the one I think is most effective from a reader's perspective; concentration on basic business without overpowering PRACTICAL PRICING the book with equations Where needed, basic analyses required for pricing are included Introduction to Pricing Generally, everyone is usually on board with all the changes needed to make pricing work in a company, right up until something has to actually change This statement, while it provides a somewhat caustic viewpoint, needs to be carefully considered in the development of any price plan Remember, pricing excellence is a new "phenomenon." This phenomenon will require change, big change Unfortunately, many people in mid-Ievel positions in companies don't react well to change Especially, when it spotlights past poor decision-making in regards to price Any functioning pricing strategy must have three basic elements working simultaneously to be successful: Data or "analytics" that support your pricing decisions Changes in behavior ("the individual") around price Changes in the company culture ("the company environment") around price Driving change in company culture is where the CEO can be a huge positive impact All three areas must be up and functioning effectively to see the margin improvement from price initiatives The changes required can be great and changing behavior and culture doesn't happen overnight Pricing is more than numbers; it has failed in companies for some very specific reasons However, when set up strategically, pricing can be a much needed "critical" revenue growth engine While many companies have jumped on the bandwagon and hired pricing leaders or created pricing teams, for the most part these roles are delivering much less than the desired dollar impact Recent Focus on the Pricing Phenomenon In the last 10 years, some pretty amazing changes have occurred when you consider the development of the pricing function Go back and examine how many specific industries had formalized pricing strategies and functions-top consumer brands, pharmaceuticals, and airlines were, for the most part, the only companies INTRODUCTION actively engaged in creating a pricing strategy Much of this had to with the extreme price sensitivity of their products in a consumer environment (that is, increase the price of a can of diet coke without careful price analysis and you may get a very unpleasant shock from your consumers) Most companies did not have formalized pricing functions Most likely, the marketing product manager would manage the price on an ad hoc analysis and the finance team would some very quick margin analysis But no individual person or team responsible for pricing analysis and ensuring price opportunity was being maximized Many industries had no pricing function, but they survived and even thrived for decades without dedicated pricing resources So, why make the change now? There is constant, constant pressure on CEOs to improve the bottomline and obviously price plays a large role in that improvement But to be honest, that's not the reason for all the sudden interest in pricing Pricing simply became "in vogue." Several top companies (GE, RCA, etc.) and prominent CEOs wanted to better "wrap their arms" around price It was really only after the "fad" introduced pricing into the company that they started to understand how badly they had been mismanaging this critical area At this stage, majority of large companies now understand the pressing need to have a value-based pricing strategy It's not only companies that jumped on the pricing bandwagon Consultants saw an ocean of billable hours and were more than willing to knock on every CEO's door and tell hirn/her how rnany millions of dollars they could have in profit improvement if they only instituted "pricing excellence." But an important fact (and conclusion) is that the pricing function, for a large majority of companies, is new Pricing leader and team roles are still evolving and likely will be for a few more years But go to any of these companies and you'll see the pricing team set up a bit differently These are critical points in trying to understand the positive impact that the pricing leader is able to make on the company This function/role has been established to deal with a critical area-pricing excellence, that is, gaining the maximum net sales price for a particular product or portfolio of products, but it may not be empowered to drive the degree of change required to bring about a value-added pricing strategy The underlying issues affecting price management evolution are critical in understanding what it will take to ensure the pricing function succeeds Simply having an interest in pricing is not quite the same as .. .PRACTICAL PRICING Practical Pricing Translating Pricing Theory into Sustainable Profit Improvement Michael Calogridis palgrave macmillan * PRACTICAL PRICING Copyright © Michael... Cataloging-in-Publication Data Calogridis, Michael Practical pricing: translating pricing theory into sustainable profit improvement I Michael Calogridis p.cm Includes index Pricing I Title HF5416.5.C352010 658.8'16-dc22... applied This pricing book aims to take pricing theory and translate that theory into everyday business practices that can not only correct long-standing pricing issues but a create a pricing strategy