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 OTHER PRICE TOPICS 175 It's worth a discussion of how to go through the whole process of deciding on whether a company should pursue pricing software, what that process of evaluation should be, and how the software should be implemented In reality, the pricing initiative leader will be leader of implementing pricing software For some reason, top consultants not proactively promote any type of pricing software This is probably most due to the fact that consultants don't have software packages themselves to offer and another reason is the overcommercialization of the pricing software vendors Software vendors are quite diligent in the follow-up ofpotential customer inquiries Where Do You Find Out about Specific Software Vendors? It's recommended that the pricing leader review the Web site pricingsociety.com in the section on vendors Many of the top software vendors are listed, with some details on their services I won't get into an open campaign for any specific vendor, but leave that choice up to each pricing person An introductory call to the vendor would be a good start Talk to the software vendor about the specific needs of the company It's most likely the conversation will be the same dialogue around lack of systems, lack of userfriendly tools, and a general desire to store and manage the various data sets in a much more efficient manner Once the introductory call has taken place, an in-person meeting is strongly suggested Restrict the introduction meeting to just the pricing leader and team You want to understand what the vendor's software looks like, so some type of overview on the Internet would be helpful Note that pricing software packages can be modified to fit a particular company that's very expensive, and in reality the basic already developed software should in most cases nicely Who Would Be the Users of the Software? The users of the software, in addition to the pricing team, would the sales force and product marketing The sales force uses the software for doing individual customer price quotes and special exception pricing requests Large-scale contracts would not be executed online by the sales force but rather by the contracting team However, they could certainly use an automated software 176 PRACTICAL PRICING system for completing the contracts The product marketing team could use the software for completing price analysis and looking at key price trends for their particular products What Would Be the Process to Buy the Software? Software pricing can be fairly expensive It really depends on how many different accounting systems the pricing software must attach to in your company Some companies have multiple backoffice accounting systems due to multiple acquisitions, hence attaching pricing can be challenging, but still well worth the effort and money As stated in the beginning of the book, pricing roles have developed tremendously in the last 10 to 15 years to where it is quite commonplace for a company to have some type of pricing function Pricing Team and Resources As pricing leader roles and pricing teams are established in many companies, one of the questions that invariably comes up is, ideally how large should these teams be and what are the roles that have to be filled? Generally most companies will have some type of contracts analysis team in place long before a pricing leader or strategy program is ever in place Most of this is due to practical considerations around the fact that contract bids and renewals must be prepared, executed, and approved and out the door on a fairly regular basis The overall quality of the analytical work on these contract activities can vary considerably depending on the history and place of this contracts team in a company Some contracts teams have been placed historically in the finance team, so there was a fair amount of rigor around the financial implications on contracts to some extent However, even if the contracting roles were located under the finance organization, it doesn't necessarily mean that there was anything in the way of value added pricing With the addition of the pricing leader role and the undertaking of a full-fledged pricing strategy, the overall makeup, design, and organizational placement of the contracts team changes Additionally, certain other pricing resources would normally be added to complete the pricing resources Some companies have added a pricing leader role and changed the reporting structure to have contracts report to the pricing leader, but have made no changes beyond that OTHER PRICE TOPICS 177 What Are the Required Roles with a Pricing Team Function? The first role would be the pricing leader role itself Ideally this individual would have extensive experience in previous pricing roles in designing pricing strategies, pricing products, and executing contracts, as well as having a very solid capability to work with sales, marketing, and finance on an everyday basis Additionally, this individual must have the ability to make presentations, provide concise recommendations to the executive level, and have a strong ability to influence and be seen as an independent arbiter on key pricing issues In terms ofwork background, it would be ideal ifthis individual star ted out in some type of finance role, either budgeting or planning, along with perhaps some time spent in a marketing role or a sales operations role The ability of a company to find someone with the above described characteristics is key; however, for the most part companies have not been able to find individuals with these credentials for a very simple reason They don't exist Remember, pricing roles are very new jobs in most companies, so someone who has the career background to be a perfect fit for one of these pricing jobs is most probably not going to exist Additionally, companies make tactical errors when going through the hiring process and organizational establishment process for pricing roles and teams When considering the hiring process, if this would be the first time a company has hired one of these pricing leader roles, there must be some way of getting a job description, putting a salary grade or rank, and a job tide on the role Many times these initial decisions about the role are made based on inputs from a consultant firm that may be in house at the moment working on aglobai pricing strategy Companies will always ask, how I sustain the initial work that has been done by the consultant? What the consultant will tell you is, "create a pricing leader position." However, that's about all they will tell you How to Find the Best Possible Candidate for the Pricing Leader Role? The first realization is that this role will not come cheap, you want someone really good, don't think you're going to hire someone at 178 PRACTICAL PRICING a pricing leader level (basically a pricing manager) for little money and this individual is going to fix every pricing issue the company has The number one recommendation I would give to any company is to invest some dollars in the pricing team positions It will pay off considerable dividends year on year The pricing leader role should ideally be titled at a vice president level with base pay approaching $200,000 plus a very solid bonus One important fact for the folks in human resources who have to grade or create a title compensation level is that this role will be unlike any other role you have in your company This is not a product marketing or finance or operations role It's a role created to drive a globally consistent value add pricing strategy Go out and spend the extra money to hire someone with a background who can make an impact on the company Else, from what I've seen, you'll have aseries of individuals in the roles who make little if any impact Should you hire one of the consultants you may have just engaged with? Interesting question and to a large extent depends totally on the particular individual you might be entertaining, but overall I would not recommend this for several reasons If this present consultant is really that good, then most likely they would have a fairly bright future ahead of them at the consulting firm and the anticipated earnings they might make would most probably outstrip anything the general industry might pay Additionally, consultants tend to be very good at a top-level strategy; however they are not as good at specifically implementing that strategy nor understanding the particular issues a company may experience Look instead for one ofthose bright, up and coming individuals who have a top undergraduate and/or graduate degree and are exceptionally bright That's a good solid basis to start with Mostly likely this person would be at a senior manager or director level in a marketing, finance, or perhaps operational type role They will have developed quickly in the company and probably be moving through different roles every 18 to 24 months In conclusion, this person must be seeking and desiring asolid, strong overall career in the particular company Should they have pricing experience? Yes, it would be hard to put someone in the role who has no experience whatsoever with numbers and is not attuned to how a marketing team operates But there are a lot of ways to get this type of experience One could have some time spent in a divisional controller roIe, which would certainIy give the individual exposure to finance as well as OTHER PRICE TOPICS 179 the day-to-day operational issues that go on in an operating division You might also have some potential candidates in your marketing function Again, there must be some basic competence and interest level in what I'll call numbers Pricing is basically, at the end of the day, a lot of data Some marketing folks who have a natural interest in numbers, and it's usually very obvious in their marketing work-they present fairly good numerical information on any product they might be pricing, would tend to rather well in a pricing job So, in a word, most probably every company has someone or some sm all group of individuals who could reasonably well perform the pricing leader role Who should the pricing leader report to? A large part of why these present pricing leaders are failing (yes, they are mostly failing) is that the pricing person does not report to a key decision maker Being in charge of driving a large-scale initiative like pricing through an organization is a very large, complicated, and challenging project Having this pricing person report fairly low in the organization will not provide the amount of prestige that will be required for this person to be taken very seriously by others in the company If you're at a director level or one vice president of fifty vice presidents, you won't necessarily stand out as much above your general peer group The pricing leader role must be seen as someone who is well placed organizationally in the company The pricing leader should ideally report to the divisional president This will put them at the same table with marketing, finance, operations, and the like and while they might not have the same size team as some of these other leaders, this person's reporting line will carry considerable weight in the company Every person on the marketing, finance, and operations teams will be forced to pay attention to this person and the role they are performing What Are the Additional Team Resources Required to Support a Pricing Function? While pricing teams generally not need to be exceptionally large, they are most certainly larger than one-person teams The team will require a function to set up, regularly update and report on both your competitive marketplace, historical key pricing trends, as well as update everyone monthly on the key pricing initiatives This type of role can adequately be titled at a manager 180 PRACTICAL PRICING level (lone person) and get very good results for this additional resource investment Next item in resourcing would be the contracts functions For the most part a contracts function most probably is already in place It will however be a matter of role development to get the contract folks up to speed on their new role as part of the valued pricing function versus general sales support Big change this, and many if not most of these folks will not be able to make the transition over to the new structure, but this is one of the unfortunate prices that must be paid as companies advance in development A very competent and professional contracts leader (usually manager level will do) must be in place These individual usually have finance backgrounds, who over time have moved into some type of operations role The term operations generally refers to all the folks who work in a division on the day-to-day issues involved in running the unit Not necessarily the finance team, but sales contracts, sales compensation, and so on Many of these roles have a sales "bent" to them but they are needed to keep the sales force on track and motivated to make their revenue goals In short, they support the sales force The contracts manager must have experience dealing with the sales force on a daily basis on issues dealing with contractual obligations You're looking for someone who can balance the benefit of the short-term contract with the longerterm implications of the overall type and profitability of accounts that the sales force is signing They must have an ability to negotiate with the sales force on specific account issues without always appearing to give way to sales on each and every issue More important, though, must be the ability to the data analytics around key contracts to fully understand the market issues and profitability risks on large opportunities Last, a small analyst team of perhaps two to three headcount should be put into place to the many different analyties required to maintain and sustain a pricing strategy These would include monthly dashboards to measure the price impact to revenue growth as weIl as understand key priee analytics Also, a competitive database would need to be maintained All in all, a prieing team would not be enormously large, but to the job in the correet manner requires an annual expenditure ofbetween $700,000 and $900,000 If the revenues of a eompany are large enough (assuming in the hundreds of millions USD), this would seem to be a small expenditure toward pricing excellence OTHER PRICE TOPICS 181 End Note Is pricing excellence really possible? Yes, most definitely An ability to manage price is something all companies should be striving toward The Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) payoff can be quite large if you figure a minimum percent annually of revenue However, the field of pricing and its ability to positively impact the management of price is in development Additionally, the internal politics and bad legacy practices around price are two of the biggest issues keeping pricing development from moving quicker Sometimes you have to walk before you run The idea that a company can employ a top consultant who will show them how to fix every issue in pricing needs rethinking Companies are slowly but surely coming to the realization that developing and implementing a successful pricing strategy that adds annual impact to the income statement is going to take real work from everyone involved Pricing excellence is much more than just mastering theory, it's taking that theory and going through the process of involving everyone in the firm who is a stakeholder in pricing It may take a few more years to fully develop, but my hope is that this book can begin to show that pricing can and will be a revenue growth engine for every company Appendix Pricing as a Career-True Stories from the Trenches Along with the development of the role itself, it has been the slowly developing field of pricing as a career choice for some individuals From my point of view, pricing was not a planned career, it was more or less thrown at me through some business concerns developing in the marketplace during aperiod of price downturn for a company I was working for They required someone or some people who could develop customized prices for large accounts It was not a planned career In fact, I was fairly certain this was the end of my career in general, which was finance Is pricing a field that can be considered a career choice by peopIe or is it more of an accidental role that people "fall" into through aseries of business issues? The development of pricing roles will continue for a few more years, as the overall field has not yet matured You can see that the level of development is still to come, by the fact that pricing roles can be very different in each company, staff the function in varying amounts, and provide little internal support In some respects, it's almost comical that a field that is charged with bringing consistency through a common practice (that is, pricing) can, in fact, be incredibly inconsistent in how the function is set up in many companies I don't believe that pricing can or should be anyone's career choice over the length and breath of a working life There simply are not enough upwardly mobile roles in a pricing department that would satisfy most folks However, whilst I say that (and with some humor), that's exactly what I have made pricing, a career 184 APPENDIX If one were to start mapping out a career path, I would consider pricing to be a sub set of a marketing function Hence, if a career in marketing in various roles (market research, product marketing, competitive intelligence, etc.) would include some stint as part of a pricing team, it would certainly seem to aid in the marketer's overall skill development However, realistically, most marketers don't have that great a grasp or basic desire to deal with numbers all day long, and most in reality don't view time in pricing as part ofthe ladder up The pricing career is still an offshoot for folks who may have been in finance, operations, or the contracts team BasicaIly, it's viewed with interest by people who generally have run out of job promotion opportunities in their current field Pricing is a critical role; however, it usually begins in a company after the consultants have been in to audit present pricing tactics and have provided inputs that pricing is being well managed This leads to the general idea that a pricing initiative leader role needs to be put in place Most likely, this individual will be given the task of supervising a contracts team (although not always) since contracting is in reality a sub set of pricing Additionally, companies staff the pricing leader role with all kinds of different tides, salary, and staffing A pricing director role is the most common role you'll see Iisted for the initiative leader A director is in between a manager role and a vice president role Maybe the best way to view a director role is someone who should be capable of seeing the full picture on business issues from a 1O,OOO-feet level Basically someone who "gets it" and participates in helping the company make solid decisions, in this case around price In other companies, I've seen the leader role listed as just that, a "leader," which is more of a manager level and in some cases (but rarely) a vice president role Sometimes the tide of the role has more to with the historical compensation levels a particular company may have For example, if their pay is relatively low, they might need to post at a vice president level to get someone who brings the needed skill set Companies also provide various levels of staffing around the pricing leader For the most part, any team will be relatively small and many companies have the role as an individual contributor (or single position with no staff) It's advisable to have some headcount support for the leader, as there are many aspects of a value-based pricing strategy and it would be difficult to this role weIl by yourself APPENDIX 185 Is pricing a good career choice? Yes and no It's a developing role with many, many inconsistencies between different companies It can be very frustrating being caught in the middle between all the various powerful people who would be involved in price Pricing is a very personal issue in business, it relates directly to revenue, and decision makers are judged on revenue performance So pricing is key Overall, I would say it's an interesting role for a short period of time It's frontline duty with the sales force, customers, marketing, and the like, and without a clear upward promotional path, it's not recommended as a long-term career choice However, should an individual who perhaps is thinking of a career in marketing or finance want to spend some time in a pricing role, it would be a valuable experience in learning how price operates in the company along with gaining some good contacts How CEOs view the pricing role? Let's say, they've supported the development and implementation of the role and are publicly supporting the pricing strategy initiative their company is sponsoring Yes, but the pricing role while it does or can show a company how to better manage pricing, it's not viewed as critical position in companies today for two reasons First, it's not critical, in that, it doesn't directly generate sales Sales people and all the people who focus around the sales force (marketing) drive sales Marketing however should be creating demand generation for the various products to spike volume Ifworking correctly, marketing helps "create the demand" in the marketplace through specialized marketing business plans that target specific segments of the population for particular products For example, if a company were looking to market a brand new healthcare product, they would focus their efforts through print publications, holding meetings with groups of doctors, and so on for that segment of the population and/or their healthcare providers that would directly benefit from the new product In this way, marketing drives "demand generation" (that is, additional leads for the sales force to target for potential sales) Second reason has to with all the different backgrounds that you can presently find in folks who are currently in pricing roles They differ wildly Their ability to grasp the real business issues and build a truly value add pricing strategy is somewhat lacking in a lot of these pricing folks Pricing shouldn't be presented as theory but as real practice in how best to deal with the day-to-day business issues facing companies in dealing with managing price 186 APPENDIX If you can match pricing theory with real "back of the envelop" quality business decisions, then you've achieved what I call "practical pricing." Any good pricing stories from working in this field for 15 years? Sure, but the stories are more around having a role that's placed smack in the middle of several departments with usually little empowerment, and an attempt to bring major change to an entire company Ifthe support from the CEO isn't there (and they can't be with you everyday), many times these roles are like a General Custer at Little Big Horn You're fighting a noble cause against great odds But in the end we all know what happened to Custer In the next 10 years, I fully expect that pricing roles will really come into much more prominence than they are currently, and the skill set in general will be much more highly regarded than perhaps it is today Pricing has experienced great changes in the last 10 years and is most probably due to see much more change If companies really want these roles to bring about a shift in pricing culture and behavior, a lot of the empowerment political, resourcing, compensation issues, and the like will get resolved and you'll see these roles become quite prominent It would be likely you will see each company with a Chief Pricing Officer position Index account level goals, contracts, 111-115 analysis process, contracts, 108 annual price increases, 65-66 approval trees, 153-154 assessments, pricing analyzing and presenting, 24-25 determining procedure for setting product level price, 18-20 effective pricing and, 17-18 overview, 15-16 setting overall price offer for contract or tender, 20-24 who should conduct, 16-17 awarding, contracts, 123 bidding process, contracts, 120-121 bid pricing See tender pricing bid-team strategy sessions, 110-111 bundling size, 72 commissions See incentive compensation competitive intelligence, 88-91 competitive reviews, 68-69 compliance, contracts, 123-124 confidentiality, pricing exceptions and, 131 conjoint analysis See market research consultants, 9-10 contract compliance, 67-68 contract leakage, 27-28 contracts account level goals, 111-115 analysis process, 108 awarding, 123 bidding process, 120-121 bid-team strategy sessions, 110-111 compliance, 67-68,123-124 contract-specific pricing policies, 110 customers and, 115-117 expiration dates and, 21 large customers and, 66-67 low margin accounts, 24 negotiating large account prices, 115 offer development and negotiation (OD&N),106-108 penalty clauses, 72 pre-bid meetings, 108-109 pre-calls, 22-23 price initiatives, 23-24 pricing training for sales reps, 118-120 profit and loss statements, 23 quarterly business reviews, 21-22 reviewing, 121-123 reviewing contracts, 23 similarly situated, 124-125 SKUs (stock keeping units), 22, 68 vendors and, 117-118 contracts, large customers, and price increases, 66-67 contract-specific pricing policies, 110 cost-plus pricing, 64 coupons, 98 culture and behavior, price plan and, 81-82 customers, contracts and, 115-117 data, price plans and, 80-81 data analytics, deal score, defined, 138 delivery and special services, 71 discount "creep," 98-99 discount inertia, 99-100 discounting, 36-38 coupons, 98 discount "creep," 98-99 discount inertia, 99-100 188 INDEX discounting-Continued effective strategies for, 7-8 incentives, 97-98 overdiscounting, 4-5, 96 overview, 95-96 promotions, 98 rebates,98 revising structure of, 70-71 schedule setup, 97 volume discounts, 41, 68, 92, 97, 162-164 discounting grid reviews, 152-153 Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), 181 effective pricing strategy, 6-9 elasticity, 64 engineering and installation, 71 erosion, 4, 28-29 exception pricing, how to set up program, 129-130 overview, 128-129 sales force and, 129 similarly situated and, 130-131 exception process, defined, 139 executive mandates, pricing and,7 expiration dates, contracts and, 21 failure, pricing and, 4-6 general business goals, 12-13 going rate, 63 gross margin dollar and percentage, defined, 138 historical company data, 91-92 historical pricing functions, 10 incentive compensation, 20, 52, 67, 104,160,162,180 incentives, 97-98 incremental (current fiscal year), defined, 139 incremental (out years), defined, 139 large account prices, negotiating, 115 leakage See price leakage list price increase, 144-148 loss leader, 63 low margin accounts, 24 market research, 7, 72, 86-88 market skimming, 62 minimum order size, 71 net price, 92-94 new products, 72-73 offer development and negotiation (OD&N),106-108 offer development and negotiation (OD&N), contracts, 106-108 overdue accounts, 71 penalty clauses in contracts, 72 penetration pricing, 62 physical characteristics of product, 72 policies and procedures definitions, 138-139 overview, 137 writing documents regarding, 137-138 practical pricing, 11-12 pre-bid meetings, contracts, 108-109 pre-calls, 22-23 price discrimination, 64 price initiatives, 23-24 account and product level margin reviews, 151-152 annual price increases, 65-66 approval trees, 153-154 bundling size, 72 competitive reviews, 68-69 contract compliance, 67-68 contracts, large customers, and price increases, 66-67 delivery and special services, 71 developing, 143-144 discount structure change, 148-149 discounting grid reviews, 152-153 engineering and installation, 71 listing, 144-153 list price increase, 144-148 minimum order size, 71 INDEX new products, 72-73 optimizing product mix, 149-151 overdue accounts, 71 overview, 65 penalty clauses in contracts, 72 physical characteristics of product,72 presenting to pricing committee, 154-155 price waterfall management, 152,153 producing less lower margin models, 72 product mix optimization, 69-70 raw materials cost increase, 70 revising discount structure, 70-71 rushed orders, 71 surcharges, 69 unprofitable products and contracts, 151 price leadership See going rate price leakage calculations/analyses to determine, 29-30 completing calculation of, 31-32 contract leakage, 27-28 discounting, 36-38 measuring and managing, 28-29 overview, 27-28 presenting initial findings on, 30-31 product levelleakage, 28 quick wins, 38-39 reading results, 32-35 price waterfall, 152, 153, 160-164 pricing basics of effective strategy, 6-9 building pricing plans, 13 companies and industries with long-standing historical pricing functions, 10 consistent sales force behavior around price increases, 8-9 consultants and, 9-10 data analytics and, effective discount strategies and, 7-8 exception pricing, executive mandates and, 189 general business goals and, 12-13 market research and, overview,2 practical, 11-12 profit and, 11 reason for failure of, 4-6 recent focus on, 2-4 sales compensation and, pricing committee presenting to, 154-155 problems with, 155 pricing culture and behavior corporate buy-in at executive level, 50-51 executive leadership, 49-50 finance team, 57-58 marketing team, 55-57 overview, 47-49 sales team, 51-55 pricing exceptions analysis, 132-133 auditing, 135 confidentiality and, 131 cost-plus pricing, 127-128 exception pricing, 128-131 how often to meet regarding, 132 organizing meetings for, 131-132 weekly calls, 133-134 pricing plans, 13 pricing resources data and systems issues, 41-42 identifying, 44-45 interviews and feedback, 43-44 pricing types, 84 producing less lower margin models, 72 product levelleakage, 28 product level prices basic pricing types, 84 competitive intelligence, 88-91 historical company data, 91-92 market research, 86-88 price plan and, 82 pricing decisions and, 83 primary business case, 85-86 rationalizing purchases, 84 setting, 18-20, 85 setting net price, 92-94 product mix optimization, 69-70 190 INDEX product-specific price strategies, 62-64 cost-plus pricing, 64 elasticity, 64 going rate (price leadership), 63 loss leader, 63 market skimming, 62 penetration pricing, 62 price discrimination, 64 psychological pricing, 63 tender (bid) pricing, 63 value pricing, 62-63 profit and loss statements, 23 profit, pricing and, 11 promotions, 98 psychological pricing, 63 purchase volume, 20, 24, 30, 60, 61, 64,67-68,71,84,95 quarterly business reviews, 21-22 rationalizing purchases, 84 raw materials cost increase, 70 rebates,98 rerated, defined, 138 reviewing contracts, 23,121-123 rushed orders, 71 sales force compensation and, exception pricing and, 129 pricing and behavior, 8-9 pricing training for, 118-120 schedule setup, discounts, 97 similarly situated, 124-125 six sigma, 4, 5,9, 48 SKUs (stock keeping units), 22, 68 surcharges, 69 tender pricing, 63 top-level pricing strategy cost-plus pricing, 64 elasticity, 64 global pricing considerations, 61 going rate (price leadership), 63 key alignments, 61 loss leader, 63 market skimming, 62 overall goals, 59-61 overview,59 penetration pricing, 62 price discrimination, 64 product-specific strategies, 62-64 psychological pricing, 63 tender (bid) pricing, 63 value pricing, 62-63 turnaround time, defined, 139 value pricing, 62-63 vendors, contracts and, 117-118 volume discounts, 41, 68, 92, 97, 162-164 .. .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