Measuring Pricing Performance

Few things are quite as powerful in business as being able to “show me the money”. Pricing is no exception. Setting up a good system of pricing performance reports will help you achieve a broader impact and rally your leadership team around the potential opportunity and wins.

Pricing Performance – More Than Margin Lift

Before we begin, it’s critical to understand how the objectives of the pricing organization align with the business strategy. The “lore” of pricing is filled with heroic stories of multi-million dollar margin lifts from pricing programs. “Increased gross margin $50 MM” sounds glorious on a press release. What that soundbite doesn’t acknowledge was the fact that the selling team did nothing else and revenue growth crawled to a total halt.

A better approach is to try to understand your organization’s perspective on margin growth vs. volume growth and support it appropriately. Consider for a moment, that all three of the following are perfectly reasonable asks of your pricing team (which I’ve personally implemented):

  • “We’re in trouble; we need 200 bps of margin lift to remain funded. Find it, starting with the unprofitable customers. Unleash the Hounds!”
  • “We need to revenue growth so a strategic acquirer will want to buy us; pad margin where you can, but no drama and no risking volume”
  • “We just added a new machine and it’s empty. We need to fill that machine up to absorb our fixed costs; see if you can cut some deals”

Each of the three goals represents valuable progress towards your organization’s strategic goals. Only one of these will yield a heroic margin lift.

Pricing Performance – Correct Behaviors

If we step back for a moment and look at pricing performance as a journey towards a better pricing process, we can identify a few things which the organization should be coached to do better – on a consistent basis. For example, it doesn’t matter if your chief commercial officer has their pricing toggle pointed towards margin, volume, or no-drama… there are still certain behaviors that we want to drive across the entire cycle.

Here are a few of my favorites – most of these fall into basic blocking and tackling moves:

  • When we announce a price increase, we intend to fully implement it
  • Sales representatives will price new business within pricing guidance
  • We will limit price concessions and insist on something in return where possible
  • Pricing mistakes and customer deductions are tracked and addressed
  • We will expire and re-price items without significant activity
  • Customers with special deals and no volume will be repriced

From a pricing transformation perspective, these are not dependent on the grand strategy for the business. These activities need to become part of the organization’s pricing DNA – to be executed consistently across the business cycle.

This is where you should focus your pricing performance analytics.

Pricing Performance – Portfolio Reviews

Your Finance organization is generally more than happy to provide you with a view of the change in total margin. Unfortunately, you will quickly discover that there are nuances in accounting (accruals, reversals, averaging, reserves, etc.) than can make this operationally challenging to use. Pricing performance reporting works best when it is simple and can be easily traced back to an accountable parties: ideally customer / item pairs.

A simple but efficient report is to compare, at the customer –  item level:

Comp Pricing Performance = (Current Price – Prior Price) x Current Volume

Which will show you the margin you could have earned if you had maintained your price. Or for price increases, the additional margin you earned. If you are a wholesaler, it is appropriate to offset this amount by any changes in cost you experienced in the process.

A certain number of accounts and products will not have comparable results. It is appropriate to group these into peers:

  • New customers (by default, new items)
  • New items at existing customers
  • Lost items at existing customers
  • Lost customers (by default, lost items)

It is appropriate to compare these sales, as individual groups, with your pricing guidance and similar business. Comparisons against similar business in prior years may also prove insightful. Certain trends will become apparent, which can be used to drive appropriate coaching conversations.

This report also gives you a way to look at the overall “dollar margin” mix changes within your book of business. There are certain natural rhythms to how the margin on your business shifts. Margin on your lost business will tend to be higher than new business, unless you are consciously exiting old accounts at lower pricing levels. Absent broader industry shifts in pricing, new business tends to be more competitive than existing volume. Once you have established a point of view on what you’re losing vs. winning, in terms of margin rate, that can be used to understand how much you need to be improving margin within your existing book of business to meet your objectives.

Adding prior period volumes to the report will give you additional insight into migration of product mix within an account between the two periods. This is often an important variable in improving the overall value of a customer, particularly since growing volumes may improve your cost to serve.

While basic, this simple report:

  • Can be easily reconciled with your Finance organization’s margin reports
  • Ties back to real-world operational elements (prices, volumes)
  • Supports drill-down analysis to identify specific customers and items where you’ve lost ground
  • Can be easily explained to an executive sponsor

Pricing Performance – Campaign Reporting

Many industries have regular price increase cycles, in which some or most of the leading competitors announce an increase at the same time. These are generally worth supporting (unless you’re going to make a big deal on the marketing front about not raising prices).

Price realization reporting for price increase campaigns comes down to a couple of key metrics:

  • Current Price
  • Recent Volume
  • Proposed Increase (price x increase amount from pricing team)
  • Actual Increase Loaded
  • Post Campaign – Last Transaction Price
  • Post Campaign – Average Transaction Price

Since this will become your primary tool for holding sales representatives accountable for implementing prices, I recommend breaking this out by customer and product / service component to allow you to track leakage.

If you have the time and analytics, a couple of other items which can be helpful:

  • Current Price comparison vs. pricing guidance or an index price (are we high or low)
  • Pricing Segmentation, if available
  • Last changed date (managing the annoyance factor)
  • Audit track on pricing overrides and reversals
  • Actual cost change so you can assess impact on average margin

The mathematical details of the above are left as an exercise for the student, along with the nuances of an industry specific implementation, but this general structure should be more than sufficient to drive pricing accountability into your price increase campaigns.

Pricing campaign reporting should be designed as a process, treating each campaign or group of campaigns as a specific event.

The end goal should be to realize a high fraction of your proposed price increases. A good drill-down report will show you the offenders who are preventing you from accomplishing this.

Pricing Performance – Promotion Reporting

If your business regularly involves running marketing programs or retail promotions, you should maintain a log of offers run and their effect on consumer response. The details will vary by industry, but the following is generally helpful:

  • Where the deal ran
  • Dates (of course)
  • The offer or offer(s) tested
  • Products Featured
  • Ad / Placement Details
  • Any other fine print / terms & conditions
  • Base Price Point
  • Published Price Point
  • Base Sales Volume (generally zero for direct marketing)
  • Period Sales Volume
  • Incremental Units
  • Marginal Unit Cost
  • Marketing Expense
  • Net Profit

This can be analyzed over time to evaluate trends and note any improvements in net profit across events. The pricing performance lift of a change in this space may look like: typical promotion at old price / strategy did $20,000 per event of net profit, now we’re doing $35,000 of profit per event.

Pricing Performance – Special Reports

Can we build upon this? Certainly. However, most of these additional reports are best used for specific situations rather than monthly reviews.

One popular addition for many consulting firms is the “pocket price waterfall”, which identifies the various sources of reductions in net price across different points in the customer service and invoicing process. The pocket price waterfall is often a stunning visual and well worth including in your initial briefings to upper management and the board of directors. It is an excellent way to rally your senior leadership to focus on the most crucial areas where your pricing program is leaking value.

That being said, I’ve found that operating leadership tends to response better to simpler reporting. Once you’ve worked with senior leadership to establish pricing policy and ownership, the next layer of management usually prefers reporting that clearly tells them “who” and “what” isn’t at the required levels. This can be easily translated into action plans and conversations with a sales representative. The easier you make it for a first line manager to have a well prepared discussion with a sales representative about specific actions, the more you will accomplish in pricing.

Another area that is often fruitful is setting up exception reports to audit transactions for a specific issue. This can be helpful if you are losing margin due to a specific process issue or event. For example, it is good practice to check your short pay activity (deductions from pay invoices) immediately after implementing a price increase. Similarly, if you have a situation where sales representatives are getting around management by overriding the price on every specific transaction, this merits an exception report covering this process flaw. These are best used on a case-by-case basis once you detect a process issue. Implement exception reporting to provide management visibility into “who” and “what” for corrective action. But you don’t need to include these reports on an ongoing basis after you are comfortable the problem has been addressed.

Pricing Performance – Bringing It Together

These three reports work together to provide a basic view of pricing performance that easily be explained to your stakeholders.