How mature is your pricing organization ?

Many European based organizations have only just begun to realize how significant the effect of pricing on shareholder value creation really is. Until now, the focus was mainly on innovation, sales and marketing – and justly so. But in today’s economic environment, value capturing (effective pricing) is increasingly being discussed at the boardroom table as one of the main shareholder value drivers.

The domain of ‘Pricing’ is in full development and many companies install Pricing teams who almost immediately realize successful margin improvement projects. These are the ‘quick wins’ in the discipline of pricing. But we need to go beyond the low-hanging fruit !

The next step proves to be more difficult : embedding pricing knowledge in the organization, thus moving away from pure project-driven pricing. European pricing professionals have come to recognise that a lasting change and full impact on profit optimization requires a comprehensive approach. Crossing this chasm is not an easy expedition.

As a result, many pricing practitioners, management teams and CEO’s are searching for a structured approach to guide their organizations towards higher pricing maturity, leading to profit optimization.
They asked the EPP : where do we start and what are the priorities? Who should we learn from? Apple? Bose? 3M? Bayer? Audi? Microsoft? Michelin? Hilti? The Rolling Stones? Is there a proven path to superior pricing ?

The answer is Yes ! There is a proven pricing maturity development path.

The maturity model concept, as a tool to enhance organizational capabilities, was popularised by the Carnegie Mellon University in the 90’s. Their first Capability Maturity Model (CMM) was developed for IT management, but in the meantime, nearly every management domain has maturity models to draw upon. A maturity model defines a set of structured levels that describe how well the behaviors, practices and processes of an organization can reliably and sustainably produce required outcomes[i].

At the EPP, we have gathered a treasure of time-tested best practices from the leaders in the field of pricing to come to a practical pricing maturity model to support pricing practitioners in Europe. It’s a hands-on, pragmatic instrument and it is our mission to share it with you.

The emphasis of this white paper is to help you identify where you are today in your pricing journey, which areas you need to prioritize and improve to lead your company to the next level of pricing maturity (and profit optimization) – and perhaps most important : how to cross the ‘Pricing Chasm’.

In addition to this, we are currently building the EPP Pricing Maturity Indicator together with PROS (to be launched in October 2012).  It takes the form of a free, in-depth, on-line survey.  The results of the survey present you with a solid indication of your pricing maturity.  For a customized, company-and-industry-specific assessment, we refer you to one of our expert partnersii.

The Pricing Maturity Approach

In the early stages of their pricing development, organizations often focus first on margin improvement projects. These pricing projects (the low-hanging fruits : see frame) bring the desired visibility at board level, but pricing professionals soon grasp that full value capturing is much more complex and challenging.

Improvements do not come from better price setting alone. You have to develop and align your capabilities in all pricing building blocks.

We visualise this by means of the EPP Pricing Framework. There are five core processes : Price strategy, Price Policy & Setting, Discount Policy, Execution and Monitoring – and two supporting building blocks : Organization & Governance and Tools & Systems.

When you have a pricing audit done, they always reveal weaknesses/improvement opportunities in all building blocks. This results in a long list of capability gaps and organizational challenges. As a result, we see top management often struggle to allocate the right priorities in this list.

How do we set priorities for Pricing ?

The EPP Pricing Maturity Model helps you determine which level you are operating on, how to prioritize your efforts, and how to cross the pricing chasm to realize profit optimization.

We consolidated real-life best practices and advice from Pricing leaders, experienced in pricing maturity development across all industries, into the EPP Pricing Maturity Model.

The model consists of 4 stages described in detail in our whitepaper:

Level 1: Price list maintenance

Level 2: Gaining transactional control
Level 3: Achieving full value capturing
Level 4: Deploying full profit optimization

Under optimal conditions, it will take you at least 3 to 4 years to bring your organization from level 1 to level 3. It is essential that you have the full cooperation and support of your most important stakeholders in realizing the change: top-management, marketing, sales, finance (and IT). Do the right things first and never walk alone; if you keep these two key things in mind, the likelihood of success in your pricing journey increases sevenfold!

 A selection of pricing maturity characteristics to help you determine where you are, and where you need to go :

Download the whitepaper for a full account - click here

1.  Price List Maintenance :

Driven by volume, you sell to (almost) everyone at (almost) any price (Discounts galore!).  Wide price bands likely to lead to pricing conflicts, which sees you spending most of your time managing price lists.  Mainly cost-plus pricing.

2.  Transactional Control :  
You realize that strategic importance of pricing needs to be made clear to the powers-that-be.  A number of successful quick win pricing projects lead you on the way to transactional control.  But the challenge here is to bring management to understand pricing is a continuous process, not just a once off project.  This is the Pricing Chasm that needs to be crossed to get to the next stage of pricing maturity. 

3.  Full Value Capturing :  

You have the full support of top management and they are prepared to make some serious changes.  The chasm is crossed or in the process of being crossed. There is alignment between Sales, Pricing, Marketing and Finance about where and how value is created and which market strategy you follow.  Wherever possible value-based pricing in place.  Pricing software is implemented.

4.  Full Profit Optimization :  

You have tailored value communication per end-user to help them identify optimal solutions.  You no longer sell on features, price or even on value components, you sell solutions ! Think of Michelin who bill their trucking or airline customers according to the nr of kilometers traveled, nr of tonnes transported etc using their well-serviced tires... Your centralized pricing team supports and influences  the whole business model, and reports directly to the CEO.

Take the time to download the full whitepaper here : a couple of seconds now, could result in a lasting impact on your bottom line !

i) For the history and evolution of the Capability Maturity Model by the Carnegie Mellon University, see http://www.sei.cmu.edu/cmmi/ . The description of a maturity model comes from http://en.wikipedia.org/wiki/Capability_Maturity_Model
ii) visit http://www.pricingplatform.eu/partnerzone/pricingexperts/pricingexpertdirectory.html for a list of the EPP expert pricing partners.

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