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The Hidden Cost of Pricing Errors

Mike Slavin< Mike Slavin September 30, 2020

“We should not look back unless it is to derive useful lessons from past errors, and for the purpose of profiting by dearly-bought experience.” – George Washington

If you’re still setting and managing your customer prices with Excel or some other sort of home-grown system that requires a lot of manual input, you’re inevitably making price errors. It’s an undeniable fact. The only question is what is the real impact of those pricing errors? Is it a big problem or a little problem? 

Before the turn of the century, long before I got into the software business, I worked for a large electronic components distributor.  I spent a big chunk of each day ‘signing stuff’ – actual pieces of paper – some of them three-part documents with carbon paper!  At least once a day, someone from the accounting department would stop by with a stack of invoice discrepancies for me to review and approve.

Even though I was new on the job, one day I finally felt brave enough to ask a question.  “It looks like a lot of our vendors make pricing errors – billing us for more than they should that you guys catch.  Don’t they ever bill us less than they should?”  “Oh, that happens all of the time,” They said.  “Why don’t I ever see those,” I asked.  “If they charge us less than they should, we pay what they billed us,” I was told. “We even track those discrepancy dollars in a Gross Profit Improvement Program. Last year it totaled over $85,000.” 

Quantifying the Cost of Pricing Errors and Making Course Corrections

Quantifying the cost of price errors has always been a difficult exercise. But even if you’re not running a state-of-the-art ERP system, there are some nuggets of information out there that you should be able to uncover. The first place to look would be in Accounts Receivable. Take a virtual stroll over to the AR department and see if you can get some answers. If you bill a customer for more than they think they should have been charged, chances are they’re going to short pay. See if the AR crew can run a report for you on pricing discrepancies (they probably use some sort of Reason Code). They should be able to tell you how much they ‘write off’ due to errors. But keep in mind, the number you’ll get is only a starting point.  The real lost revenue number is easily double that amount – because there’s a very good chance those crafty customers of yours are banking the discrepancy when an error leads you to under charge them.

Invoicing incorrectly is one thing, but what happens if you make a pricing error during the quoting process and quote the wrong price in the first place? Quote too high a price, chances are good you’re going to lose the business and may not ever know that you lost because of a pricing problem. Quote too low, you’ll get the business, but you might end up with an unprofitable order. The impact of these types of price errors is tougher to quantify, but chances are the lost revenue dollars in play is significant.

What’s the causes of pricing errors?  At many companies, the biggest cause of pricing errors is that their Excel or manual systems don’t accurately reflect the pricing strategies they were trying to implement and that sales people are using on a daily basis. This forces a lot of tweaking, massaging and overriding of prices by both pricers and salespeople – with each manual touch introducing a potential error. 

Vendavo Pricepoint is designed to help you solve your pricing error problem. It enables you to efficiently set and manage prices while effectively minimizing pricing errors. Business-based pricing rules can be configured directly in the Vendavo Pricepoint user interface, so that your pricing strategies – whether they be value-based, market-driven, competitor-based, cost-based or anything else – are accurately represented in your pricing system. The need for manual intervention, overrides, and other causes of errors is minimized.

See the Vendavo Pricepoint demo.

Exposing the extent of your pricing error problem may be a humbling experience. But coming up with a fact-based estimate of the lost revenue impact can help you justify a solution to the problem.