I’ve attended these events for two main reasons:

1. They are great networking opportunities, especially for a partner of a boutique price and value consultancy.
2. Most importantly, these events allow me the opportunity to hear about the challenges organizations are facing and how they overcome them.  In some cases, I am able to share the successes I have had with my clients as well.

Throughout many of these events, one trend is clearly emerging as a key business priority – pricing excellence, namely a focus on the top line to drive bottom line profitability.  At events these days, this is often the subject of keynote addresses, roundtable discussions, expert presentations, etc.  We’ve jumped on this event bandwagon as well (being that price and value is core to our firm) by sharing success stories of our own and it has certainly attracted attention.

This attention has brought on excitement as:

1. A larger number of businesses are openly acknowledging the improvements in profitability from their pricing efforts.
2. Many business leaders now realize that Pricing Excellence is not just a big company thing, or a business to business thing, but that it works for all sizes of companies, in all industries.

I highly recommend attending events within your industry, not only to gain insight into new ways to improve your businesses profitability, but to also meet folks who have experience in successfully helping companies implement such new ideas.

Feel free to reach out to talk about what is going on in your business and how pricing excellence and Transcend Consulting can help your organization.

Many companies have used flexible pricing, keeping prices in line with demand, to be their main approach. Heavy, often inconsistent discounting is both costly and time consuming. As demand continues to remain soft in many markets, structurally adjusting both your price strategy and ‘price portfolio’ to a changing demand curve is a great way to increase your market share.

According to a recent LinkedIn poll conducted by Transcend Consulting, a majority of respondents did not anticipate any changes in pricing flexibility that are vastly different from the market. Weakened demand brought on by the current recession will place some upward limits on pricing flexibility. However, using your price power in these tough times can have a significant impact on your performance.

Here’s our simple 3-step approach to increase your company’s pricing power:

• Segment customers based on re-evaluated perceived value: As a result of the recession, challenging budgets have shrunk your customers’ paying capabilities. Therefore primary benefit attributes may no longer translate into a willingness to pay premium prices. Understand what your customers want as well as what product profitability requires. You don’t want to fall into the over or under discounting trap. Protect your core products and customers in order to meet revenue and profit goals.
• Downscale your product to meet customers’ budget: Re-think your go-to-market strategy; you may no longer need to supply the same wide variety of products and services as you did when the economy was expanding. Stripping your products down to their core selling attributes and pricing them aggressively may be your best move. There’s no point in having a first-rate product that doesn’t get off the shelf because it’s unaffordable or reaches beyond your customer’s requirements. Examine what your customers (and their customers) require, understand the market conditions and keep an eye on emerging technologies. This will help downscale your product to meet client needs of value and pricing, and maintain or grow your market share.
• Get your sales team on board: It’s important to re-establish the value-sell with your sales force, especially for high-end products. Ensure the pricing for higher end items reflects a differential, which acknowledges the new economic realities. Conduct training programs to help your team understand whether you want to maintain your premium position, match the competition or become a lower cost option for your target customers. Your pricing strategies must reflect your goals — maintaining your market position and increasing sales volume. A driven sales team can help you get there, so think about implementing a meaningful incentive and communication program to make sure your sales team is fully committed and onboard.

As you can see, taking full advantage of your price power is no easy task.  Transcend Consulting specializes in ensuring your pricing processes, tools, and organizational capabilities deliver the maximum profitability. Send an email to Transcend Consulting to receive a copy of our Free Whitepaper.

Traditionally, pricing has considered cost as an exogenous element, both in planning and execution.  Pricing has incorporated this either in a “cost plus” approach, or as a “bottom line constraint” to increased discounting. Rarely, do pricing processes, strategies, technology, etc. fully take advantage of deep knowledge of the firm’s cost structure. Pricing has to capture the cost of operations to a high degree, lest the firm become cash starved, yet meet market demand since you cannot take a percentage to the bank.

So, consider the following in your ongoing planning and execution cycle:

• Variability in your cost structure: Not just the standard statistical measure, but the speed and rapidity of changes.

• Leverage in your product margin: What individual cost elements drive the greatest effect upon your offer margins?

• Timing of cost changes: What is the lead/lag timing of cost changes to when they show up in your cost basis?

• Impact of standard versus actual costs: What is the variance and what drives it?

Pricing considerations:

• Examine the cycle time of cost changes against your quote-order-cash cycle. This can lead to opportunities when planning price increases or revising discounting & bidding guidelines.

• Understand the relationship between cost leverage and price sensitivity for your offer. This can guide where cost recovery is viable. Material content, inventory considerations, and labor need to holistically considered.

• Employ a balance of pricing mechanisms to protect your margin structure. Contract durations, price guarantees for quotes, minimum order size, etc. should be targeted against your most vulnerable cost elements within the sale. Hedging and spot pricing for cost inputs are integral to this planning.

• Actively discuss potential step changes in costs due to capacity/volume shifts, outsourcing, BPM efforts, learning curve effect, etc. This can also create opportunities for lower price/high volume plays to take advantage of these changes. This is especially important in ongoing price reviews.

• Study mid and long term market shifts in customer/industry value curves. Match willingness to pay shifts & changes in competitive reference sets against your forecasted cost curves. Value engineering of a product portfolio may indicated where there is a mismatch.

As you can see, taking full advantage of your costs is no easy task.  Transcend Consulting specializes in ensuring your pricing processes, tools, and organizational capabilities deliver the maximum profitability. Send an email to Transcend Consulting to receive a copy of our Free Whitepaper.

1. The economy has started to show signs of recovery.

2. This year’s conference had more relevant topics and very good speakers.

There were presentations on business intelligence, auditing, budgeting, and risk, but only one on the topic of pricing.  My firm, Transcend Consulting along with PROs Pricing, had a round table discussion on “Managing the Black Hole of Pricing”.  The topic was so popular with attendees, that we were requested to add additional sessions.

It seemed that, not only was pricing a hot theme at the event, but also among company CFO’s everywhere.  In CFO Magazine’s recent Jan 2011 edition, they shared the results from their recent Global Business Outlook Survey (done in collaboration with Duke University) of 848 CFO’s.  Pricing was prominent in CFO’s top concerns, both about the economy, and their own company performance:  “Price pressure from competitors” was in the top 3 macroeconomic concerns, with the “Ability to maintain margins” as the number one company concern.

We had CFO’s and finance leaders from a varied set of company sizes and markets at our roundtable sessions.  While it was clear that everyone understood the effects of pricing on the bottom line, all but a few felt they were able to influence their company’s pricing, or had effective programs in this area.  Their concerns were chiefly around the ability to confidently execute because they felt they did not have the appropriate knowledge and toolsets to:

• Appropriately identify, influence and effect pricing strategies for their organization.
• Successfully partner with the organization in effectively driving price to:
• Improve Profitability
• A win with the Sales Organization
• A win with the Operations Teams
• A win with the Customers

Now more than ever, CFO’s and finance leaders do have the ability to enhance their company’s capabilities in driving the appropriate pricing strategies for their businesses.  Reach out, we’re here to help.

Secondly, indexes can be incomplete. They can focus too heavily on the piece price, not potential total contract cost savings. For example, they can ignore process costs where savings may be garnered through process improvement on the part of the supplier. Additionally, they are difficult to apply for configured products – which configurations are subject to the index – i.e. larger versus smaller sized units delivering greater energy efficiency. They may or may not be related to the actual cost structure the company is experiencing, or the related cash flow components of the company: credit, terms, savings via delivery costs, savings via process improvement, and savings via more efficient labor in services.

Teams examining the use of indexing must stress the value of the relationship and the total cost savings that can accrue when both parties maintain their flexibility. It is critical that indexes do not lock down both parties, precluding additional savings from newer, more efficient solutions from being proposed. Teams must also consider the administrative burden as indexes must be monitored. Typically, there is usually more complex contract language which must be administered. Compliance programs must be established and maintained.

There are other options to indexing. You can propose a total contract cost cap or total guaranteed cost savings in lieu of an index. This can restore predictability at a fair price for both parties. However, if an index is to be used, teams should consider a number of things. First, they must ensure the correct index is chosen. The proposed language should utilize a trigger band in lieu of straight change. This incorporates historical deviation which is unrelated to economic events. It protects both parties’ interests from random swings and can be monitored by tools such as control charts. Teams must also ensure the correct level of aggregation to insulate against effects due to single event or entity. They must choose the index which most closely matches contract cost structure components.

There are certain key decisions involved:

•     Decide if single or multiple indexes are appropriate
•     What are the expected materials and labor cost changes?
•     What is the expected mix between labor and material?
•     Ensure the correct base period is chosen
•     Normally, more recent is better; want to avoid an ‘artificially’ high or low base
•     Incorporate a longer period to ensure volatility is smoothed out.
•     Ensure the measurement period is adequate
•     Quarterly or semi-annual
•     Incorporate a moving average if appropriate
•     Ensure contract length is appropriate to the forecasted cost change
•     Short periods for the supplier are better if persistent deflation is expected
•     Longer periods are better if persistent inflation is expected
•     Ensure adequate provisions are made for cost allowances
•     Seek to preclude change orders, scope changes, and newer process improvements(lowering total costs) from being subject to index provisions
•     Ensure adequate provisions are made to establish conditions under which the index provisions are review, modified, suspended, superseded, or eliminated.

As you can see, indexing contract costs is no easy task. There may be simpler, more efficient mechanisms available as appropriate alternatives. As economic times remain challenging, pricers must be able to accommodate and deal with this tool. Transcend Consulting specializes in ensuring your contracting processes, tools, and organizational capabilities deliver the maximum profitability. Is your contracting execution not as profitable as you know it can be? Transcend Consulting can help you maximize that potential. Send an email to Transcend Consulting to receive a copy of our Free Whitepaper.

• Protect the customer from adverse price actions such as price increases or unanticipated deflation.
• Take proactive advantage of expected price changes. They work by ensuring that price changes for materials and services in the contract are tied to an economic index. As the index changes, buy price changes are enacted in accordance with the methodology established in the contract.

There are a number of steps to including an index:

• Identify the payments subject to escalation.
• Identify which series index will be used as a reference point. There are a variety of CPI (metro based) or PPI (industry / commodity based).
• Identify which index series will be used to escalate the payment.
• Specifythe reference period from which changes will be measured. This can be a single month or an annual average.
  • There is sometimes a lag from the reference month to the date on which the index is released.
• Specify the frequency of adjustment, usually made at fixed time intervals: quarterly, semiannually, or annually.
• Define the calculations or formulas used in the adjustment calculations.
• The typical rule is that payments change in direct proportion to the percentage change in the index between time periods.
• Variationsmay also include:
  • A cap placing an upper limit on changes in any single time period or total cumulative change across the life of the contract
  • A floor which promises a minimum change, regardless of how the index performs
  • Provide contingency language to deal with major changes or revision to index structure and/or methodology.

There are also a number of general employment rules:

• Consider the expected volatility of labor and material cost changes, especially over the projected lifetime of the contract
• Simpler is better. Normally, you do not use more than two: one for labor, one for material
• Typical indexes are CPI, PPI, or ECI (Employment Cost Index)
• Need to ensure the correct NAIC/SIC code is used and at the correct level (4 digit versus 6 digit code)
• It should not be affected by economic fluctuations unrelated to contract performance or by the actions of a single large player in the industry
• Need to specify the correct trigger points to modifying the payment: Percentage change at time of review
• Minimum percentage change
• Use a trigger band: sort of like control limits. Changes outside the control limit trigger a price change
• Provide a means to adjust if the index is continued or rendered useless through major revisions.
• Need to consider adjustment language beyond the original contract period, or for options added to the contract.
• Need to understand the expected changes in both rates of labor and material expenditure, projected and/or actual over the course of the contract
• Need to specify which portions of the contract price are to beincluded in the adjustment.
• Need to detail the role of contract incentives, cost allowances, change orders, and scope changes
• Need to detail events or contract modifications which will result in review and changes in the adjustment process:
• Scope change
• Supplier change
• Delivery change
• Quality change

In our next post, we will review considerations when dealing with contracting price mechanisms. Contracting is a powerful pricing vehicle for a company if properly structured and executed.  Transcend Consulting specializes in ensuring your contracting processes, tools, and organizational capabilities deliver the maximum profitability. Is your contracting execution not as profitable as you know it can be? Transcend Consulting can help you maximize that potential. Send an email to Transcend Consulting to receive a copy of our Free Whitepaper.

Pricing has been among the most difficult aspects to manage efficiently, with discounting, deal structures, customer arrangements, etc., all clouding how effective a company’s pricing approach has been. In reviewing pricing plans, managers are always asking themselves where they stand versus market pricing. So, as you take stock of the coming quarters, here are a few things to keep in mind regarding your market pricing:

Indications Your Are Under Pricing

• Your gross margin is getting smaller on the same or rising sales volume
• Your net profit is going down
• Prices are below your competitors
• Customers talk a lot about how good, or much better run, your organizations is compared to your competitors
• There is a general absence of any complaints about price
• Your price has not changed over a long period of time
• Prospects buy without haggling over the price
• Your are getting many new customers for no apparent reason
• You have a sudden upsurge in business volume, especially from new customers
• Your customers insist on you replace or repair a faulty product, rather than request a refund
• Labor and materials have increased without an increase in your price
• A known price buyer starts buying from you
• Customers buy more than they need and you know it
• Your bad debt collection is increasing
• Your are getting customers who are someone else’s credit ‘cut-offs’
• You know your customer’s gross margin is getting bigger and your product/service represents a significant share of Cost of Goods Sold
• Your request for quotation activity increases dramatically
• Your success rate on new bids increases significantly
• You are tempted to sell at a higher price that you are quoting
• A competitor wants to buy from you because he is having supply issues
• Prospects want you to absolutely have the bid

Indications You Are Over Pricing

• Your competitors’ prices are legitimately lower than yours
• Your gross profit percentage is growing, but sales are not
• You receive a significant number of customer complaints or inquiries about what is included in the price
• Your dollar sales volume is declining
• Your competitor’s market share is increasing
• You are receiving many price complaints
• Warranty claims or adjustments for faulty product/service are actually disguised price complaints
• Independents ask seriously if the price is the retail price
• Sales associates begin trading off commission for lower pricing
• Customers call repeatedly to check on prices
• You have a very tough time explaining your prices

Is your business not as profitable as you know it can be? Transcend Consulting can help you maximize potential through price and value management. Send an email to Transcend Consulting to receive a copy of our Free Whitepaper.

At the micro level – every opportunity to sell can be a win or go home situation.  Zoom out a little and that’s not necessarily the case.  Knowing how to understand what is happening at the micro level can have a huge impact on how you interpret the competitive environment, and retool if and when necessary.  What are your competitors bringing to the table, what are they communicating to the customer, how are they differentiating themselves from you, how are you doing that from them.  These all play a role in strategy – Who’s winning or losing and why, so you can determine either how you will keep your advantage or develop ways to gain the competitive advantage.

Another aspect to the competitive landscape – understanding action and reaction at the 5,000 and 10,000 foot level.  When competitors take price actions without changes to product or service it typically means price is being used as a lever to manage capacity, either due to changes in economic activity and/or market demand, or responding to another competitors move on price.  Knowing how your competitors have historically reacted to economic pressures can enable you to make moves to help your organization and can also help predict how competitors will react.

The third aspect to the competitive landscape is – product development.  How have you and your competitors improved or altered the goods or services sold and why?  Do you have insight into what they are developing, why they are developing it?  How does that change the ability to meet customer needs?  How will that effect the competitive landscape in terms of price and volume for your company, for the market as a whole?  Is there a Blue Ocean Strategy out there, waiting for you to deploy it, to alter what the competitive landscape is altogether?

Knowing what your competitors are up and what customers can benefit from, can help you determine the strategic path for your company, from the 0 ft level to the 50,000 ft level.

• Sales and support practices
• Various product options
• Delivery times and methods
• Terms

Customer insight determines which one or what combination is used.  The gathering of customer perspectives (what’s important to them and how well you do at it) helps determine where to focus and how to best serve.

Good customer insight programs provide you the keys to finding the opportunity at hand.  It can tell you which types of customers would like certain improvements, as well as who and how much they may be willing to pay for those improvements.

The term ‘Willingness to Pay’ in relation to a new or existing customer can mean either:

1. A higher price for a particular product or service
2. A larger share of volume for that product or suite of products that you sell

Once this step is completed, one then must understand the following to determine if it’s worth the effort:

• The time and cost to develop and implement that improvement
• The change in cost to serve or change in product cost
• Any changes in the competitive landscape

Stay tuned for next time as we continue this series.

Traditionally, pricing has considered cost as an exogenous element, both in planning and execution. Pricing has incorporated this either in a “cost plus” approach, or as a “bottom line constraint” to increased discounting. Rarely, do pricing processes, strategies, technology, etc. fully take advantage of deep knowledge of the firm’s cost structure. Pricing has to capture the cost of operations to a high degree, lest the firm become cash starved, yet meet market demand, since you cannot take a percentage to the bank.

So, consider the following cost impacts:

• Variability in your cost structure: Not just the standard statistical measure, but the speed and rapidity of changes.
• Leverage in your product margin: What individual cost elements drive the greatest effect upon your offer margins?
• Timing of cost changes: What is the lead/lag timing of cost changes to when they show up in your cost basis?
• Impact of standard versus actual costs: What is the variance between the two and what drives it?

Based on a better understanding of the realities of the firm’s cost structure, you can then undertake the following efforts to get the maximum benefit from integrated cost and price planning:

• Examine the cycle time of cost changes against your quote-order-cash cycle. This can lead to opportunities when planning price increases or revising discounting & bidding guidelines.
• Understand the relationship between cost leverage and price sensitivity for your offer. This can guide where cost recovery is viable. Material content, inventory considerations, and labor need to holistically considered.
• Employ a balance of pricing mechanisms to protect your margin structure. Contract durations, price guarantees for quotes, minimum order size, etc. should be targeted against your most vulnerable cost elements within the sale. Hedging and spot pricing for cost inputs are integral to this planning.
• Actively discuss potential step changes in costs due to capacity/volume shifts, outsourcing, BPM efforts, learning curve effect, etc. This can also create opportunities for lower price/high volume plays to take advantage of these changes. This is especially important in ongoing price reviews.
• Study mid and long term market shifts in customer/industry value curves. Match willingness to pay shifts & changes in competitive reference sets against your forecasted cost curves. Value engineering of a product portfolio may indicated where there is a mismatch.

Uncertain times demand experience. Transcend Consulting is composed of leaders who know how to help you navigate today’s complex, volatile pricing enviroment. Please contact Transcend for a free whitepaper on this topic.