January 22, 2013
I’m something of an avid runner and committedly log all my running activity. Looking back at 2012 it was a pretty successful year. I ran 100 miles in each and every month (my start of year target) and I ran PBs at 1500m, 5k, 5m, 10k, Half Marathon and Marathon. I have a training partner Rob who had the same target and achieved an almost identical set of PBs at the above distances.
What’s all this got to do with pricing? The answer: ensuring you’re looking at the right measures.
Almost all runners will tell you race performance is the most important measure of their performance. In pricing terms this would likely be some kind of measure of profit. Different businesses use different measures for measuring their profitability but here at Vendavo we like to use “pocket margin,” which is the margin once various revenue reducers and costs are taken into account.
So what is the equivalent pricing measure for training mileage? Well I had a couple of thoughts, here are mine and Rob’s training mileages in 2012:
The importance of setting targets
If you look at my experience it could be said to resemble a “target price.” This is the price at which a business positions its product or services for its sellers to achieve and is commonly a “stretch” goal, representing the upper percentile of prices realized for a given product in a particular customer segment.
Setting a target price and then using a measure such as target price yield (price achieved/target price) to measure their performance would push them to achieve that higher price even when it is hard, rather than mindlessly giving customers the floor price in an effort to maintain volumes or chase revenue.
For me the figure of 100 miles per month did exactly that, it was an achievable yet stretching target and having the target meant I structured my training to hit it, even when that meant dragging myself off the sofa into the rain.
For Rob though, the mileage target worked more like he was chasing revenue. Why? Well, what the numbers I have given you don’t show you is that in 35 miles came on the final two days of the month, 50 of his May miles on one day, and 40 of his August miles on one day. In addition since his mileage dropped there hasn’t been a discernible drop in his race performance.
Focusing on better deals
How might it be possible for a business to achieve the same as Rob, i.e. positively impact pocket margin (PBs) without increasing revenue? Well, one possibility would be that they decided to stop focussing just on revenue and start looking at measures that better evaluate the quality of the deals being done. For example, they could decide to stop doing business with, or raise prices of, customers that had negative or low pocket margin. It is possible that the effect of this might be that some of those customers leave and revenue falls but if they weren’t contributing to, or worse were negatively impacting, profitability what is the point in making the effort to service them?
So as we look forward to 2013, why not spend a few minutes considering whether the measures you use to evaluate your business performance are really helping you achieve your goals?
Time for a run.
– Nick Seagrave