Tier 2 - Cost

Cost or expense is an area that most feel that they have covered.  They can just move on to the next item on Tier 2.  Well not so fast. Cost when speaking in terms of pricing is not just about Cost of Goods Sold (CoGS), understanding Fixed vs. Variable expenses or being able to understand a P&L.  To truly understand cost, you must understand the effect that Price has on Cost, specifically; Profit Volume Ratios, Break Even Analysis, Capacity and Demand.  A change in price can have a cascading effect that ripples across your P&L and subsequently your profitability.  Having a complete understanding of your cost drivers is an essential starting point on your journey to price optimization.

Change Management

I am deviating already from the blocks on The Pricing Pyramid.  My next post will be about Cost, I promise.  I felt compelled to speak about Change Management.  As I mention in my Philosophy, Pricing is messy and charged with emotion.  In many cases, getting all functional owners on the same page is like herding cats.

Our goal when it comes to Change Management is not to introduce dramatic changes on day 1.  For example, you will not succeed if you propose to change from a price per unit to a price per usage or if you recommend price increases.  Individual functional owners, be it Sales, Operations, Product Management, Finance or any other, will push back and nothing will not get done. The Pricing Pyramid is essentially a roadmap to Change Management and makes it imperceptible.  Each step, each block is essentially another step down the path towards change.  Changing Price Realization by putting controls on Discount is one step.  Having better competitive information stored in a database will lead to more informed decisions on RFP/RFQ’s is another step.  When you have reached the top, each of these steps/blocks, when viewed individually represents insignificant change, but when viewed in totality will make up a completely different way that you view and implement your pricing strategy.

Change Manage requires patience and persistence.  You will need to methodically follow the plan.  If you are able to accomplish this you will see great results.

Now on to Costs….

Tier 1 - Data Analytics

Data Analytics makes up the foundation of the pyramid because it is at the core of pricing.  Whether you are a $15k small business or a $150B Fortune 500 company, Data is created with every transaction and customer interaction.  Client, Product, Financial data is collected at the transactional level and stored in the system that runs the business be it QuickBooks or an Oracle/SAP system.  Competitive Data, Market Data and Industry Data can be gleaned by talking to customers and suppliers.  It is critical that the data is organized in a way that makes it easy to extract and analyze.  We will break data into 2 categories; Internal Data and External Data.

Extracting and organizing Internal Data takes skill.  It could mean sifting through between hundreds, hundreds of thousands or millions of individual data points.  Excel is the most common analysis tool.  With some training, an Excel spreadsheet can sing, providing answers to your segmenting or trending questions.  As you are storing more pieces of data, databases, Business Intelligence tools and financial software become a necessity as these are much better at aggregating large data pools.

Collecting External Data requires patience and dedication.  Each conversation you have will provide you with insight.  It is important to catalog this insight.  You will also need to be proactive gathering this data.  Competitive mining and Industry Trends should be actively researched and logged.  This is time consuming but will reap benefits down the road. 

Do not skimp on this first important step.  Setting up your analytics will be time consuming but when done right should provide information at the push of a button.  Sir Francis Bacon said, “Ipsa Scientia Potestas Est” or in English as “Knowledge is power”.  Data and information make up that knowledge and will power your profitable pricing strategies.

In today’s competitive business climate, creating a profitable pricing strategy has become more important than ever.  No longer can you use a simple formula to mark items up.  You need a comprehensive strategy that encompasses all aspects of pricing.  That is what The Pricing Pyramid gives you.   Employing the methodology used in The Pricing Pyramid, you will see tangible results in the form of a stronger bottom line.

Think of the pricing pyramid as a series of building blocks that when stacked form the pyramid. ”.  Each block represents a stage to be completed towards your strategy.   The Pricing Pyramid consists of 10 blocks over 4 levels to reach the peak; your “Pricing Goal

Visually The Pricing Pyramid looks like this:

In order to even start to build the pyramid, the most critical step is management buy in.  Whether you are a $50k business or a $50M business, in order to succeed, management has to commit to seeing the process through.  If you pick pieces, you will see short term gains but eventually the structure will weaken and your strategy will come crashing down like a house of cards.