How would you like to achieve the financial benefits of a major company shake-up…
* without severance costs
* without any people/organisation issues, but…
* with an immediate impact, ‘a quick win’, that flows straight through to the bottom line?
To achieve this miracle, you only need to look at one of the most basic activities of any company – your pricing strategy. Back in 1996 I was shown some research by a very bright bunch of consultants, which indicated that CEOs didn’t give enough attention to exploiting revenue opportunities, especially in pricing strategy.
This left a significant profit upside remaining untapped. Another piece of research showed that opportunities to re-engineer profitability, mainly by better cost and process management, might have peaked. I’m sure that situation is no different today.
* Re-engineering has disappointed, with no more than two in 10 companies achieving breakthrough improvements in performance. When did you last hear someone use the word Re-engineering? It’s yesterday’s news.
Today’s first step is to look for price roadblocks in the organisation, notably…
* Responsibility for pricing strategy left to sales departments (‘I have never seen a salesman yet who wanted to increase price’)
* Little or no Finance Department involvement in price decisions
* Senior management remoteness from the detailed market circumstances, making it difficult to challenge sales views
* No system/mechanisms to assess easily more aggressive pricing strategy opportunities
* Limited data on true net profitability to company or customer of individual services/products
The logical start is to see whether any of these or other price roadblocks exist (they almost certainly do). Eliminate the nonsenses, which is what they are; then you can go ahead with introducing new and more aggressive strategies. You need further management change to take advantage of your opportunities, though. That means:
* having sufficient management time to check whether all the pricing strategy options have been fully considered
* understanding the pricing relationship to competitors and what drives it
* examining pricing strategy opportunities and developing insights on an individual product line basis, rather than across a range
* improving management’s ability to challenge sales-led pricing decisions
* instituting greater effectiveness and rigour when pricing strategies are implemented
* installing the information base and systems needed to do all this
The consultants stressed three main groups of pricing strategy…
* Customer information management is the first – find out everything about the customer that reveals how much of a price rise the traffic will bear.
* Exploiting structural advantages, meaning strategies like Direct Line’s ability to win lowest costs and turn them into lowest prices - and highest growth.
* Innovation and leadership. Here you want to improve the ‘total value proposition’ – by superior technology, better speed to market, higher customer satisfaction, innovative customer value, etc.
One reason for reluctance to raise prices is the fear that sales will be adversely affected. A simple calculation, though, will show you that you need a fairly massive increase in sales to offset a major price reduction, whereas, the other way round, the loss in sales can be quite large before you reach breakeven point on the deal.
Get your reluctant sales people in and demand to know what sales drop they fear will follow a proposed price increase. Then work out what the effect of that percentage fall would be on the bottom line – you may be very agreeably surprised.
Great advice - incentivise your sales staff
Excellent advice there. I for one have fallen into the trap of concentrating on increasing customer numbers and controlling costs rather than looking at pricing strategy.
One way of getting buy-in from sales is to pay commission on margin rather than revenue. Introducing this reward mechanism ensures that sales don't sell unnecessarily on price, rather they begin to set the price of the service/product based on the value of to the customer. They will then only discount when absolutely necessary to get the deal.
Another way of achieving benefits is to look at the sales ledger. A deal is often considered 'done' when the contract is signed. It shouldn't be! A sale is not a sale until the money is in your account. Allowing customers to benefit from long credit terms because the company doesn't operate an effective credit control function is a common problem. Cashflow is key to profitability. In addition the longer an outstanding debt is left unchased, the greater chance that it will never be paid, and then a sale becomes a cost to the company. In the same way that investing in marketing can dramatically increase your sales, investing in credit control can dramatically increase your cashflow.
Jeremy Milligan
Director, TAK-Outsourcing Credit Control Services
www.tak-outsourcing.com