July 5, 2016
Is the debate raging in your organization of how to decide which will be the primary key indicator that measures the performance of your pricing project? At the outset it seems to be such a small, inconspicuous element in the overall process. A tiny decision. Yet, you soon realize that this has significant and lasting consequences.
I am asked for advice on this topic all the time. Nobody finds it easy.
Pricing owners the world over struggle with this question as they embark on a new pricing initiative: what is the fairest way to measure the contribution and effectiveness of the pricing organization, your project, your new tool, or your proposed process changes. They all require investment and management wants to know how you are going to measure the return and prove the value.
The first problem is that measuring other parts of the organization’s performance seems an easy decision: Sales sells “stuff” and is generally measured on revenue; Marketing develops “stuff” and is generally measured on margin. Revenue and margin—two key measurements the whole organization monitors. They complement each other and support a healthy conflict within the organization.
The second problem is that while Pricing sits in the middle of Sales and Marketing, you cannot use either revenue or margin to measure performance. They are already taken. They also don’t offer a direct link between what you are trying to achieve with your pricing initiative and the delivered output or benefit.
READ MORE: Keeping Up with Your Competition Part II
So what is the answer? My council is consistent, with a little tweaking depending on the industry in question.
You need to develop a set of metrics (Project Value Scorecard) that reflect the process improvement, as well as business improvement. In general, you are going to derive a benefit from the project by just having the whole organization thinking about how to improve pricing, but that’s difficult to measure. So, you start with simple user adoption as a proxy for process improvement:
Track activity metrics like:
- Number of Log ins
- Time between log ins
- Time spent logged in
- Number of quotes being processed through the solution
- Percentage of Manual Price Records in your ERP system vs Total
Pricing Projects are normally about changing the culture of pricing, so there must be movement in the mindset from:
- A cost focus to a value focus
- Cost-plus margin to reference minus discount
- A price floor to a target price
This offers the key to selecting the right measure of the value of your pricing solution. It has to be about the target price performance and its importance to your organization. You need to incorporate Marketing’s expertise in setting the right target prices. You need Sales to execute on the Target Price, using supporting analytics, guidance, and peer group comparisons to improve overall pricing performance. In other words, you want to measure the “Target Price Realization Percentage.”
Target Price Realization Percentage is a solid measure for your pricing project. You can calculate it and there is not much debate around how its calculation is defined. It singularly captures the benefits of deploying a multi-module pricing solution that supports your end-to-end pricing process.
Once you have decided on using a Target Price Effectiveness Measure, you need to make it central to your business metrics. Include it on your business dashboard and ensure it becomes part of your everyday language used to discuss business performance. In doing so, you will have tangible proof of the impact your pricing project has on the organization.