Insights & White Papers

It’s the Principle of the Thing: Go Lean On Pricing for Improved Profits

Data & Analytics

By Brad Holtzman

The mandate for improved profitability has become more intense over the last five years thanks to external pressures and internal demands. But where will this profitability come from? Waste and reduction in virtually every area have left few stones unturned. The last hold out often turns out to be sales and marketing.

Lean Principles have long been the standard approach for cost reductions and process improvements for the back of the house.  Many organizations have a constant flow of these types of projects and initiatives to reduce cost, reduce waste and ultimately improve profitability.  Why should sales and marketing be exempt when this approach has demonstrated to improve production and costs?  With correct application, surely Lean Principles could be applied to every function within your company. So what’s keeping that from happening?

Let’s take a quick look of how sales and marketing functions.

Across many industries, the sales and marketing teams often assume a position that appears to be diametrically opposed to the internal efforts. Often, compensation is heavily weighted toward selling more units rather than ensuring a stable and consistent margin per sale. This creates an unhealthy environment where poor pricing methods and outdated pricing strategies result in over-discounting or defective prices. The trimming and cost reduction efforts performed nobly by the operations team evaporate as the savings are quickly passed back to the customer via deeper discounts.

One can see how that leads to frustration and conflict between disciplines.  However, if we look closer, it also puts a spotlight on the solution: Why not use the same principles that created those internal reductions to the pricing processes?

Consider your pricing process; does it promote thought, accountability and responsibility tied to true market conditions? Or does it promote just the opposite?

Too often we see a pricing strategy that has been in place for decades; marketing publishes meaningless list prices, sales managers prescribe customer discounts and salespeople circumvents everything by issuing their own prices. In a worst case scenario, sales sends a request to the quotations department looking for them to apply the lowest margin acceptable to come up with a final price. Sound familiar?

Lean Principles on Pricing: A Snapshot

  • Create a baseline

  • Measure the critical components of price (KPI’s)

  • Create targets and take action for improvement.

  • Integrate lean discipline into your management of the process.

The solution begins by asking the right questions. It’s time to interrogate your transaction data until it yields the information you need. Your historical pricing data is the foundation for building an effective pricing method. The ability to analyze past customer and product purchasing behavior will improve your understanding of how they will react to new stimulus in the future.  This reveals the very factors that push and pull price elasticity.

Optimal pricing requires knowledge and tools to continuously improve the negotiation of price so that the order is secured without undervaluing your product and services.  All of these conditions need to be presented in a way that is meaningful and applicable to the people closest to the customer. That would be your sales and marketing team.

Ultimately, the goal is to reduce the defect rate (over discounting), eliminate wasteful motions (people doing more work /redundant work than necessary) and stop wasting time (severe work stoppages/slowdowns occur because one group is waiting on another group for information, quotes and customer analysis reports).

Lean Principles have worked across all disciplines of business. There is no reason why it won’t improve pricing as well.   Start your Lean journey by simplifying and optimizing pricing guidance, assuring rapid and measurable deployment and providing a flexible and cost effective approach.  Liberty has helped many companies improve their operating income, grow revenue and improve compliance through proven approaches by leveraging data, utilizing analytics and improving processes. We welcome the opportunity to help company leaders make informed business decisions and realize results that enhance the value of their organizations.