Session: Strategic Pricing Optimisation
Speaker: Ron Wood, Pricing Insight
How do you calculate prices for your goods/services?
Do you have a pricing manager in your business?
Where does pricing power reside in your organisation?
Is there a disconnect between your sales and accounting staff?
These were some pertinent questions raised by Ron Wood of Pricing Insight. Pricing Insight is a consulting organisation that specialises in pricing strategy. This session would be more relevant to management accountants. Overrall, we must say that the session was quite good and highly interactive. It was in the same round table room as Five Financial Must Do’s session.
Initially, we got started by talking amongst the individual tables, specifically to the person next to you about pricing issues that your organisation was facing. Then Ron went around the room asking different people about their pricing issues and generating some short discussions about it.
What we liked about the session was that he challenged our perceptions on pricing and advocated that we could all find 1-2 points of margin in the the supply chain. The most common strategy is to use a cost plus markup, but this does not always reflect the true cost or even a healthy profit margin.
One of the issues raised by Ron was rebates. There were some people representing FMCG / manufacturing organisations in the room and this was relevant to them. There were two ways to classify rebates – active and passive. A point that we particularly liked is to “incentivise your customers to lower your costs”. i.e. in effect giving your customers a rebate.
Some other useful insights he provided were in relation to your sales force:
- The famous saying of ”look after the top line and the bottom line will take care of itself”. This may have been true in the 70’s when we had high inflation, but this doesn’t work anymore!
- When you have a new sales person, the first 90 days are the most dangerous. As what will they typically do? They want to bring in sales so they simply discount without regard to long term relationships. This can potentially upset the market
- There needs to be a price repositioning and they need to understand the market’s “willingness to pay” and their “capacity to pay”, and it is value that connects them. The sales force often struggles to sell value.
He gave a case study of GE and how they have invested heavily into pricing strategy. In fact, they even have dedicated pricing managers in each department. They were probably the best in the business at pricing strategy. Whereas in other large companies, they simply had $60,000 analyst deciding on pricing strategy. So where does your company sit?
We then did a standup exercise on where pricing power resides in our organisation. The room was divided into a quadrant using the microphone in the room as the centre. The four quadrants were marketing, sales, operations, and finance. We were then asked to stand in the section of the room where pricing power resides in the organisations we represented. Not suprising, most people went into the sales section, just above the finance quadrant. Ron then went around the room asking why people choose their positions and the rationale behind it.
We were then taught a concept known as “value pricing”, which is an economic conversation you have with your customers and to also include a value for risk inherent in the purchase decision. Hence we need to add a margin for risk value. Businesses must learn to sell the total economic value to the customer.
We found from some of the other particpants that there was a disconnect between sales staff and accounting functions. The sales staff simply go out there and win lots of work, offering discounts or services which may not be feasible to perform, and then the accounts and operation staff are left to resolve it. An important point to note is that you dont need to show your sales staff your costs. They do not need to know – otherwise they’ll just discount and sell at the lowest price possible. It is also important to teach your sales staff what is valuable, otherwise they will not understand what to communicate as value.
Overall, we found the session to be practical, interactive, a bit of kick up the backside to rethink pricing strategy!
The Taxabull team is attending the CPA Congress as a guest of CPA Australia.
You can follow us on twitter: twitter.com/austax
Cheers,
Taxabull team
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