Now let’s be real. When pricing professionals look at the question, they inherently in their gut know the answer. Or they should. And if they don’t, well, it is a good thing I wrote this.
Price management is one of those concepts that, like most things in pricing, is muddled. It is like a mythical animal that everyone talks about, but no one really knows what it is. Or what it does. Even practitioners often struggle in terms of how it relates to an organization’s improved capabilities. So, let’s set it straight.
Avoiding a Very Risky Practice
All companies require a way to manage prices, and when I use the term ‘manage’, I am thinking about how a company derives, stores, organizes, and ultimately loads prices into systems like ERP. This can be an absolutely painful process for an organization. Stop me if this doesn’t resonate with you: “We manage our prices using Excel sheets spread across the organization”.
This is the most common scenario that I see and is a very risky practice. Why? Well, if you are an organization that operates like this here is a question: how long does it take for you to raise prices when you have cost increases? My guess is that it takes a lot of effort and a lot of time. And time is money – and you are probably losing it under these conditions.
Let’s peel the proverbial onion. So, across the organization, these spreadsheets have a pretty basic form, when you boil it down. If I was to pull one up and we read it from left to right, it begins with a SKU number, the SKU name, the cost, the margin requirement, and the final price. It looks something like what’s shown below:
This is what we call a ‘cost-based’ formula, and it represents a pricing strategy. There are other pricing strategies: value-based, attribute-based, volume-based…the list goes on. I’ll save my thoughts on the best strategies to be applied for another day – the key thing here is that organizations apply strategies across the organization through the use of hundreds of Excel sheets (a conservative estimate) that are prone to error with very little oversight. And as your business grows, so does the Frankenstein way of managing arguably the most important data points (prices!) for your organization.
An Unsustainable Approach
So the issue is that this is unsustainable, and it will reach a point of critical mass. Because you have many independent actors (aka people managing price) that are working on it with their own viewpoints and way of doing things, you end up with prices that are not managed well for profitability, and you also create inefficiencies in processes.
One of the key outputs is that a team downstream, often a ‘pricing’ team, is collecting and synthesizing the data to load into a system. I’ll be honest – I do not like this. Pricing teams at that point are administrative, and not strategic – therefore they don’t add the value that a well-crafted pricing team could.
So what does price management software do? Well, first of all it improves a few key things. First, it creates a single source of truth of data for pricing and allows you to organize and clean that data. This means that a solution will get rid of all the spreadsheets and bring them into one place so they can be managed. There is no hunting for Bob up in the Northeast region to send you his latest spreadsheet so you can spend the next hour manipulating it to load into the system.
Second, it allows for pathways to use these data to improve your pricing to the market. If Bob up in the Northeast is using a 25% margin to price, and Jeff his peer who sells down the street is using a 22% margin – well that is pretty inconsistent, and you are probably leaving money on the table. Price management allows you to manage these strategies more uniformly and with greater flexibility. Maybe you want to move away from cost-based pricing and use a different, more profitable technique. Price management software, again.
Third, it allows for integration into systems like ERP. This gets rid of the time spent doctoring and prepping sheets to load from a central pricing team. And there are no errors, either. Pricing changes are quick and in terms of hours, not months. With the added time, you can turn to more value-added activity to assist the organization in making profitable decisions.
The Foundation of Profitable Pricing
Make no mistake, price management is the foundation from which profitable pricing is built. It is not the sexy thing, however, so it often is just assumed that every company has this capability. NEWS FLASH: they don’t. My recommendation is to invest in this foundation so that the way you manage prices is accurate, agile, and in one system for a single source of truth. And that, in turn, leads to more profitability.