It’s a Pricing Problem, Not a Price Problem
In an interview with an executive in a large national industrial distribution firm recently, I asked about the factors that have caused his firm to lose business. He became quite passionate and animated, saying:
“I’ve lost more business in the past year due to pricing that any other factor. Because of PRICING, not because of price. With some of the manufacturers whose products we carry, you’d think we were calling to get a quote for building a combination space shuttle and Golden Gate Bridge. It just shouldn’t be that complicated. But some of these firms make it so hard that the sales team just says ‘We can’t get that’ rather than going through all the hoops. That’s lost business. And in other cases, we had customers find what they needed elsewhere before we could get back to them with a quote. More lost business. And since you’ve gotten me started on this, I should add that some of these processes consume so much time that any money we might have made on the sale is more than lost.”
It’s The Process, Not The Price
This individual’s concern about pricing processes is far from atypical. When we studied the factors that create conflict between manufacturers and their sales channel partners, pricing processes was among those frequently making the list. Only rarely did anyone cite price levels themselves as a source of conflict. In today’s business environment, few firms are unable to identify and implement appropriate price levels for the markets that they serve. But these same firms often have problems in administering and communicating price information.
This problem is obviously much greater for firms that are involved in production to order businesses or in engineering service sectors, with each purchase unique along some dimensions, thereby requiring a team of engineering and pricing specialists to develop a quote. But there is a very long spectrum of competencies across firms in implementing such pricing processes. In one industry that we studied, we benchmarked firms whose time to quote varied by a factor of five. Firms whose offerings involve options in terms of product features or services similarly vary in terms of their pricing competencies. Some are easily able to develop tools that allow near-instantaneous responses to customer queries, while others seem to get swamped by even rather straightforward queries about various options. And while far less frequent, we’ve encountered enough instances in which firms that manufacture standard off-the-shelf products score poorly in the eyes of their customers and sales channel partners on their pricing processes.
Several factors, as suggested in the table below, can help to identify the extent to which improvements in pricing processes are warranted. If a firm that sees its own situation paralleling the characterizations in the “red zone” in the table, there is room for concern.
The distribution firm executive whose concerns were reflected earlier in this article made a very significant point: “In today’s complex and competitive business environment, it is just a crime when we shoot ourselves in the foot”. He is absolutely correct. There are so many factors that drive business success that are demanding from one or another perspective. Losing business just because of pricing processes is close to a crime.
The firms with which we’ve worked on this problem were not bad organizations or ones that had deliberately put into place processes to frustrate their customers. Rather, bad pricing processes were much more the product of a sequence of individually well-intended decisions, which over time combined into to create a nightmare process.
And the remedies to the problems that such firms identified and implemented basically involved nothing more than careful attention to detail by a team of industrial engineers and pricing process specialists, with management support to address the issues that were getting in the way of the firm’s success. One individual who managed the transition in an electrical products manufacturer said “There was no rocket science involved here. It just took a careful look at how we could restructure our processes to eliminate the bottlenecks and still reach the right decisions on pricing”.
Two lessons can be shared from several of these initiatives. The first is that 80-20 rules seem to apply without exception in creating pricing problems. That is, a small number of situations (the 20%) generate the majority of conflict relating to pricing (the 80%). Isolating those situations and figuring out how to resolve them alone usually makes the problem go away. Almost every customer or sales channel partner will tolerate an occasional difficulty associated with answering an unusual pricing question. It’s the ones that come up over and over, day after day, that cause the frustration. This isn’t suggesting that you shouldn’t solve all of the problems that are possible; it just says to first focus on those that are frequent and that probably define the frustrations that exist.
The second lesson is that great insights can be learned by “getting into the customer’s shoes (or the sales channel partner’s shoes)”. Over and over, firms with which we’ve worked didn’t understand the problems or frustrations until they tried to work through the process from the other side. Doing so often creates far more than understanding of what the problem entails. The customer’s insights can be a valuable source of ideas as to how to resolve the problem. The industrial distributor whose executive was quoted earlier in this article shared their firm’s perspectives about best practices in pricing, drawing upon their own interactions with literally thousands of manufacturers whose products were in their catalog. Lessons from other environments – and particularly ones that are seen as effective by the same customers who have concerns about your pricing practices – can be a great source of ideas as to how to reengineer poorly-performing processes.
Business success today demands that firms fix all the weak links in the chains that connect their organizations to their customers. Making sure that pricing processes aren’t the source of lost sales and dissatisfied customers is one of the highly-visible and effective means of building strong and secure relationships.
 See Realizing Shared Success in CoDestiny Relationships, George F. Brown, Jr. and Atlee Valentine Pope, Velocity, Second Quarter 2004.