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©2015 PROS, Inc. All rights reserved. Confidential and Proprietary.
How to Build an Efficient and Effective Pricing Organization
Tonya DeWeese Senior Vice President, Sales Excellence
May 2017
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Abstract
• Companies in every corner of the world grapple with how to structure their pricing organizations to maximize their revenue and profitability – and to deliver the results they’ve committed to their senior leaders. For each one, it varies according to the company’s culture, products and customers. In this session, we will deliver specific insights along with information and a framework for developing a pricing infrastructure or Center of Excellence.
• Participants will be guided with tools and reference materials that will help them prepare for the structure, measures and size of their team, along with a future roadmap for creating a highly effective organization.
Attendees will learn:
• The best organizational construct based on their business model
• The most common metric and KPI’s to ensure focus
• Challenges that may be impacting success
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Strategy and Governance for Pricing
• Strategy
• People
• Process
• Tools
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Topics and Discussion
•Establishing a Center of Excellence (COE) • What are the key questions to consider? • Most effective structure based on business characteristics • Overview of Best Practices
•Benefits and challenges with each model
•Defining measures within and beyond the COE
•Assessing your current maturity and desired future state
•Q&A throughout
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Key Questions to Guide the Decision
What level of centralization / decentralization?
Where does pricing functionally report?
Where does the expertise need to live?
What roles / how many resources devoted to pricing across the globe?
What processes / communication / cadence across pricing stakeholders?
How does Pricing Strategy support the overall Corporate strategy?
Who owns the KPI’s that are affected by pricing actions
• Revenue Yield
• Win Rates / Renewal Rates
• Customer Retention
• Margin
How should pricing investments be allocated across the business?
How should the new capabilities change the roles and responsibilities for price determination and execution?
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Pricing Organization Best Practices
1. Pricing as a Profit Center
2. Start with a strong pricing leader
3. Pricing Center of Excellence (different types and approaches)
4. Cross-functional Pricing Council
5. Right level of centralization / decentralization
6. Specific roles for Strategic, Tactical, and Execution activities
7. Healthy “tension” between Sales & Pricing
8. Clear definition of roles and accountability
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What does a high caliber pricing organization look like?
7
• Fully defined accountability and authority for pricing decisions
• Managed as a “profit” center vs. “cost” center
• Collaborates with Sales, but with healthy tension
• Develops internal pricing thought leadership
• Constantly generates pricing improvement opportunity ideas
• Shares pricing best practices and tools
• Creates a sense of urgency around developing pricing excellence
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What are symptoms of an ineffective pricing organization?
8
• Confusion between roles, responsibilities, and accountability
• Pricing initiatives fall through the cracks
• Pricing decisions are reactionary rather than opportunistic
• Inconsistency across segments, geographies, customers
• Too many “exceptions”
• Fox in the hen house
• Excessive discounting
• Diminishing returns from pricing improvement initiatives
• Struggle to move past “low hanging fruit” opportunities
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Pricing Group as a Profit Center
Incremental Potential Benefits of Pricing
Center of Excellence
Benefit
Should be commensurate with potential benefit (upside)
• People
• Processes
• Tools
Cost / Investment
“… 1% increase in price translates to 8-11% increase in profits … “
Net Positive Profit Impact
Less
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Strong, Active Pricing Leader
● Strong
– Experienced Executive (SVP)
– Interacts with C-Level peers
– Runs a large Profit Center
– Chief Pricing Officer
● Active
– Raises awareness
– Achieves senior management support
– Continuous stream of margin improvement ideas
– Facilitates cross functional dialog
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Pricing Organization Scope / Roles
• Sets global strategic objectives • Establish price strategy and positioning • Identify strategic opportunities & trade-offs • Coordinate pricing topics in context of company goals and objectives • Raise awareness • Manage pricing center of excellence • Facilitate cross functional dialog & senior management support
• Implement pricing strategies / policies • Drive pricing improvement opportunities • Take macro pricing actions • Track performance metrics and market changes • Train and communicate to organizational stakeholders • Produce tactical price recommendations • Produce policies and guidelines
• Communicate prices to customers • Evaluate / approve deals • Process exception requests • Conduct / facilitate deal negotiations
Stra
tegi
c Ta
ctic
al
Exec
uti
on
CEO / COO / CFO
Pricing Leader Chief Pricing Officer / SVP Pricing
Strategic Pricing Roles
Tactical Pricing Roles
Pricing Execution Roles
• Pricing managers • Pricing analysts
• Price administration • Deal desk • Sales / Customer Services
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Centralized vs. Decentralized Pricing Organizations
58.2% 29.8%
12.0%
160 Centralized
82 Decentralized
33 Other
Source: Deloitte / William Richard Survey “Is There a Career in Pricing?”
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Highly Centralized Pricing Organization
CEO
Pricing Leader Chief Pricing Officer / SVP Pricing
Strategic Pricing Roles Tactical Pricing Roles Pricing Execution Roles
Pricing Center of Excellence
Business Unit
Business Unit
Business Unit
Prices
Customers Customers Customers
Prices Prices
Pricing Council
Finance
Sales
Product Marketing
Operations
Geographic / Product Business Units
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Highly Decentralized Pricing Organization
CEO
Pricing Leader Chief Pricing Officer / SVP Pricing
Pricing Center of Excellence
Business Unit
Business Unit
Business Unit
Prices
Customers Customers Customers
Prices Prices
Strategic Pricing Roles
Tactical Pricing Roles
Pricing Execution Roles
Strategic Pricing Roles
Tactical Pricing Roles
Pricing Execution Roles
Strategic Pricing Roles
Tactical Pricing Roles
Pricing Execution Roles
Dotted line reporting structure Geographic /
Product Business Units
Pricing Council
Finance
Sales
Product Marketing
Operations
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Hybrid Pricing Organization Example
CEO
Business Unit
Business Unit
Customers Customers
Prices Prices
Tactical Pricing Roles
Pricing Execution Roles
Tactical Pricing Roles
Pricing Execution Roles
Pricing Leader Chief Pricing Officer / SVP Pricing
Strategic Pricing Roles Tactical Pricing Roles
Pricing Center of Excellence
Pricing Execution Roles
Guidelines & Policies
Global Strategic Accounts
Tactical Pricing Roles
Pricing Execution Roles
Strategic Pricing Roles
Exception Approval
Geographic / Product Business Units
Pricing Council
Finance
Sales
Product Marketing
Operations
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Where Should Pricing Reside
Sales Pricing & Margin
Should be a healthy tension between pricing and sales
Balanced Sales & Margin Growth
Pricing often succeeds when reporting to • Finance • Product Management • Strategy • CEO/BU Head
Pricing reporting to Sales could result in the “fox guarding the henhouse”
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Where Pricing Resides
10.2%
17.5%
33.1%
39.3%
Sales Finance Marketing Other
Source: Deloitte / William Richard Survey “Is There a Career in Pricing?”
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Centralization vs. Decentralization
Favors Decentralization Favors Centralization
• Highly variable market conditions and competitive behavior across geographies and segments
• Low degree of variability in products, service, competitive pricing, and so on, across broad market geographies
• Individual contracts negotiated within local markets
• Little connection between list prices and invoice or contract prices
• Active price reporting and comparison through third parties
• Close connection between list prices and invoice prices
• High discretion in pricing available • Small amount of available discretion in pricing
• Field sales incentives more fully aligned with profitability
• Field sales incentives largely based on volume / revenue performance
Source: The Price Advantage, McKinsey & Company
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Balanced Measures and Scorecard
Characteristics Strategic Tactical Execution
Objectives Visionary, large impact on Businesses
Projects, significant impact on results
Efficient and effective execution of processes
Time Horizon Long term – at least 1 year, preferably multi-year
Medium term – at least one quarter
Weekly, daily
Accountability Executives and Senior Managers
Middle Managers, Program Managers
Managers, Supervisors and individual contributors
Work Processes Covers many Covers fewer Covers limited (1-4)
EXAMPLES: • Margin Yr vs. Yr • Revenue Growth
• Price increase effectiveness
• CTS Recovery %
• Cycle time • Exceptions to Guidance
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Metrics Definition: Common Metrics
Pricing improvement Price realization
Pocket price premium versus market prices Improved product mix Reduced price variance List price yield % Reduction in price waterfall elements Price trend versus historical price levels
Pricing efficiency Reduced cycle time to quote
Reduction in costs associated with review and quoting of deals Improved time to generate list prices Reduction in cost associated with generating list prices % of quotes auto-approved
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Less common metrics Improved forecast accuracy Reduction in percent of total revenue from underperforming products or customers Cost to Serve (CTS) Recovery % Reduction in leakage due to input cost change
Sales effectiveness % change volume
% of sales meeting quota Change in % of quoted deals won Change in customer attrition rate (number or revenues) Reduced time spent on price admin Volume compliance
Metrics Definition: Common Metrics
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Performance Management: Financial Metrics
•Dependent on availability and quality of data • Bad data erodes confidence
•Does it require IT to access the data you need? • Slows process • Increases cost
•Calculations can be complex • Rigor vs. Acceptance
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Traditional vs. Contemporary Target Setting
TRA
DITIO
NA
L
CO
NTE
MP
OR
AR
Y
Regional Target
SBU Targets
Corporate and Strategic Targets
SBU Targets
Regional Target
Regional Target
Regional Target
Customer/ Product Targets
Customer/ Product Targets
Customer/ Product Targets
Customer/ Product Targets
Customer/ Product Targets
Customer/ Product Targets
Customer/ Product Targets
Customer/ Product Targets
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Traditional vs. Contemporary Target Setting- Roles and Tactics
Regional Target
SBU Targets
Corporate and Strategic Targets
SBU Targets
Regional Target
Regional Target
Regional Target
Customer/ Product Targets
Customer/ Product Targets
Customer/ Product Targets
Customer/ Product Targets
Customer/ Product Targets
Customer/ Product Targets
Customer/ Product Targets
Customer/ Product Targets
Segmented approach – Customers, Products, Geographies
Collaborate and Iterate
Visibility and Accountability
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Pricing Strategy Consideration
25
Sample Pricing Strategies
Cost Plus Market Based
Inventory Based
Value Based
Cost structure and margin goals drive pricing points
Market analysis of competition or other
factors drives price points
Market analysis of customer’s willingness to pay for attributes of your
product drives price points
Availability of inventory for highest value use drives
price point
Source: PROS Research
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Easier and Higher value with centralized --------> Higher value with some level of decentralized approach
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Consider the Go-to-Market Approach
Pricing Architecture
Negotiated Pricing
Non Negotiated Pricing
Have List or Book Prices No List or Book Prices
Easier and Higher value with centralized --------> Higher value with some level of decentralized approach
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Consider Categories of Pricing
Source: PROS Research
Either negotiated or non-negotiated
B2B Pricing Taxonomy
Spot
Commodity-based
Agreement / Contract
List / Matrix
Jobs / Bids / Projects
Special Requests
Make to Order
Consumables
Subscriptions
Contract RFPs
SPA/Q/Rs
Catalogs / Books
Customer / Product matrices
Posted Prices
Primarily Negotiated
Primarily Not Negotiated
Easier and Higher value with centralized --------> Higher value with some level of decentralized approach
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Are you ready? And what does the future look like?
• Level of current maturity and targets for desired end state are key to drive actions
•Prioritize the areas to improve
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Areas of consideration:
• Price Setting
• Pricing Organization
• Data and Tools
• Pricing Processes
• Performance Management
Assessing Maturity – People / Process / Tools
Level of Maturity:
• Rudimentary
• Ad-hoc
• Foundational
• Advanced
• World-Class
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Assessing Maturity
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Assessing Maturity for Effectiveness
Price Setting and Strategic Organization (People)
Data and Tools Process
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Determining the gaps and areas of focus
2.8 2.7
1.9
2.3
1.8
2.3
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Determining the gaps and areas of focus
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Recap
• Establishing a COE • What are the key questions to consider? • Most effective structure based on business characteristics • Overview of Best Practices
• Benefits and challenges with each model
• Defining measures within and beyond the COE
• Assessing your current maturity and desired future state