Pragmatic Institute’s Box of the Month is Program Effectiveness. Let’s interpret that to mean how effective is our pricing? Since pricing is such a huge topic, pricing effectiveness is equally huge. We would have to look at every area of pricing and ask how we’re doing. For example, pricing includes setting list prices, negotiating prices with customers, quoting prices to buyers and more.
This is a great place to get finance involved with pricing. Your finance team probably wants to be involved because they want higher ASP’s and margins but they do not have the understanding of the value to the customer necessary to effectively set prices. Yet what they are great at is monitoring, creating reports and insightful thinking. Let’s enlist the finance team to monitor and create reports so they can help us improve our pricing.
The following reports are often very valuable at monitoring pricing effectiveness.
Scatterplot. For a product, plot price on the y-axis and on the x-axis whatever characteristic you believe should drive discount behavior. For hardware products this is almost always quantity. For software it is often deal size, number of seats, number of transactions, etc. You are looking for the outliers, where we seemingly charged too little for the deal. This gives you the ability to do a little research to find out what happened. Maybe we can keep those from happening in the future.
ASP trend. You should absolutely be watching your Average Selling Price. As market conditions change (competitors, technologies, demand), the price that sales is able to win at changes. When you detect that ASP’s are moving down (which they usually do) you will want to figure out why. Did competition change their list price? Are there new competitors? Are we saturating the market? Whatever the reason, this is an indicator that you may have to revisit your pricing.
Win/Loss data. What percentage of the deals that we quoted did we win? Watch the trend. There isn’t a best answer, but we shouldn’t be winning them all or our price is too low. Then dig deeper to find out what are the characteristics of the deals that we tend to win or lose. Is price quoted a driving factor or not?
Audit the quote to revenue path. You will likely find that in many cases the cash you actually receive from your customers is different from the price you quoted. This is free money if you simply clean up the process. We quote, customer places a purchase order, we ship and invoice, they send a payment. The path seems simple, but it’s surprising how often the payment doesn’t match the quote.
Ask finance to systematically collect and report on costs to serve customers. The price a customer pays minus the costs to serve that customer is called the “pocket price”. The amount of money you put in your pocket for that customer. Some companies can determine pocket price for each transaction. Others can do it for each customer. If your company doesn’t have this ability today, start by determining the cost to serve your 5 best customers. Sometimes you find these customers are so expensive to serve and we give such large discounts that we don’t make any profit on them. These are easy customers to raise prices on because if they stop buying from you, you stop losing money. When you systematically determine costs to serve and pocket price the company focuses more on clawing back some of those costs whenever buyers ask for discounts.
Finally, go through every point where pricing is touched inside your company. Can you create a measure to tell if that touch point is effective or not? It’s not always easy, but thinking through the process is bound to make your pricing more effective and hence more profitable.
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