Can you explain your prices? The case for a pricing audit

By Michael Hurwich and Michael Oswald

                How often have you been confronted by your peers to provide an explanation for irregular or inconsistent pricing tactics? The reality is, companies spend much well intentioned time reviewing gross margins across products or categories but little time auditing net prices across accounts resulting in a possible loss of profits and in the very least an unexplainable situation at the managers meetings.

                Many managers are beginning to recognize the value of deploying a systematic review of their company's product/service pricing strategies. Robert Baker, Senior Priding Director from Armstrong World Industries suggests that, "Managers should be aware of or be guided by a set of well-founded principles to control price(s)". Unique discounts should be the exception, not the norm but often due to a lack of analysis, companies will fall trap to regular discounting and price exceptions, leading to money and potential cost lost.

                Proper value-based pricing strategies permit organizations to go after different market segments by delivering a variety of customized product and service offerings.

                Since the early 1990s, there has been a shift from the 'Old World' where one price suits all, to the 'New World' forces fences between different value offerings and pricing tactics.

                Pricing audits ensure that the correct prices are matched against the correct customer segments to ensure that those accounts that acknowledge value are also paying for it.

                At the end of the day, the benefits of good pricing practices can translate into value for all involved. End-users benefit from consistent interactions, pricing standards, and an increased focus on fulfilling customer needs.

                Employees enjoy better execution and satisfaction due to streamlined and consistent processes and better pricing training and value leadership. Shareholders appreciate the higher profits achieved through an efficient pricing process that captures the true value of a product or service.

                What is not so clear to many companies is what constitutes good pricing practices and, more importantly, when and how often a review of prices should be conducted across the organization's products, accounts & channels and the steps necessary to achieve them.

                A pricing audit should be conducted as part of the yearly accounting audit to obtain a barometer to externally measure prices against the marketplace, to internally ensure consistency across like accounts and further, ensure that profitability is maximized. It is a systematic, third party review of an organization's current product and service prices and pricing practices and should encompass every facet of the organization that either impacts or is impacted by pricing.

                While a centralized pricing unit is not necessarily required to accomplish the following steps, a well defined set of 'Rules of the Road' and coordinated activities are critical.

Pricing Audits should typically include the following:

STEP 1.

·         Understanding Your Corporate Goals and Objectives:

The primary reason that pricing strategies often fall short is because they are not aligned with corporate goals and objectives. Further, many organizations today struggle to maintain a uniform view of their goals and objectives.

·         Clear communication of corporate goals and objectives:

Whether it is revenue growth, profitability, market share, return on capital employed, or some combination is necessary to ensure the right pricing strategy is employed.

Remember: goals and objectives drive pricing strategies while pricing tactics flow from a clearly articulated strategy.

STEP 2.

·         Reviewing Current Pricing Practices:

In order to ensure pricing alignment across your company, a review of current pricing practices, discounts and incentives, customer segmentation, competitive landscape, product bundling, tied selling, etc. is required through a multi-faceted approach. This includes:

                1. Interviewing internal management;

                2. Interviewing the sales force

                3. Reviewing pricing across distribution channels;

                4. Benchmarking your company against direct and indirect                competitors; and,

                5. Analyzing historical data.

The Goal: To assess all areas within the organization (systems, marketing, sales, finance, distribution, operations and others) that impacts or is impacted by pricing.

STEP 3.

·         Identification of Opportunities for Improvement:

No matter how refined your pricing process is, pricing practices must be periodically reviewed and fine-tuned to respond to market forces.

                The degree of pricing refinement necessary is related to where your company resides on the 'pricing pyramid'. A well-executed pricing process is fundamental toward achieving corporate goals and objectives of improved operating profit.

                The SPMG 'Pricing Pyramid' example is a useful methodology to minimize ill-conceived decisions in circumstances when a customer is threatening to cut business unless a concession is provided.

                The higher your company resides on the SPMG Pricing Pyramid (http://pricingexperts.net/price-consulting.html) the less likely a pricing audit will reveal any unusual or inconsistent pricing practices.

Conclusion:

                Only through a third-party can companies avoid the internal jockeying for price positioning that often occurs across corporate silos. There are several other benefits of engaging external resources to conduct your pricing audit:

                1. Third Party Objectivity: It is virtually impossible for an employee of a company to provide an impartial view of the company's pricing practices. An outside-in perspective by individuals without a vested interest in the company provides the objectivity and credibility required to make an unbiased assessment of one's pricing practices.

                2. Knowledge Base: External pricing auditors have extensive experience broadening pricing competency with companies across all industry segments. These experiences create a continually expanding knowledge base that allows for the provision of 'Best Practices'. The result is often an immediate improvement through the identification, validation and recommendation of 'Quick Win' pricing process opportunities.

                3. Proven Pricing Methodology and Tools: Determining whether the true value of your product or service is supported by your pricing structure requires a tried and true methodology.  External pricing resources possess both the methodology and tools necessary to develop pricing strategies that are consistent with corporate, marketing and sales objectives. Often, the result is the discovery of hidden weaknesses that go undetected with ad-hoc internal price tweaks.

                While the difficulty of the current operating arena is typical of turbulent economic times, companies are not doomed to suffer the consequences. A pricing audit increases the likelihood for capturing and creating improved profitability versus the competition, enhances customer focus and lessens the possibility of provoking price wars.