COMPLETING THE PRICING MATURATION PROCESS
George Cressman is founder and president of World Class Pricing, a consultancy specializing in helping clients build world class pricing managers. George has nearly 30 years of experience in the chemicals industry, having held business, sales, and marketing management positions at DuPont, Monsanto, and Union Carbide.
In January, George joined us to deliver an excellent webinar on The Right Path to Pricing Maturity. It can be watched On-Demand at leveragepoint.com/resources/
Q: How long does it take to go through the pricing maturation process, and what kind of resource investment is required? Also, how does this differ between large enterprise and mid-market companies?
George: Pricing Maturity is the ability to actively manage price realization to achieve above average industry profitability. There are four stages to developing maturity in pricing practices, as illustrated below.
Don’t expect to work your way through this maturation process in a short timeframe. If you set out to go after this, and you think about building a path that’s around a year long, that’s probably not going to work for you. Typically, companies that I’ve seen move through these four stages (Manage Price Discrepancies, Manage Pricing Process, Manage Value Delivery, and Manage Pricing Linkages) successfully, can do stages one and two in 12 to 18 months. Then, stage three—when you’re first building that value-based approach—can often take as long as two or three years. Stage four, particularly because there’s an issue around integrating across and building linkages across functions and successfully building good databases, can take the same kind of timeframe, two to three years. So companies that do this successfully often take seven to eight years. It’s important to recognize that significant cultural change is happening across the company. There’s some old research studies that point out that really large cultural changes can take as long as 12 years. I have a client who has spent almost 10 years in this process; probably two years ago they finally got to what I would call mid-stage four, and were really churning the profitability impacts of that. So I would say if you’ve achieved four stages of performance in five years, that’s spectacular. More on average, I would expect anywhere from seven to nine years to get to mid- to late-stage four.
Stages one and two require relatively low investment. Firms can typically do those kinds of steps with less than $100,000, and often the embedded marketing staff can manage the development effort without additional staff. It’s important to realize that stages one and two are about discovering the pricing issues, and this should not be “outsourced” to new pricing managers. The marketing, sales and business management teams need to discover their pricing issues and thus be prepared to invest in improvement. However, in later stage two, dedicated pricing managers are usually required.
When you reach stages three and four, now we begin to talk substantial investments. My experience suggests that putting in place dedicated staff outside of the business team is a mistake in stages one and two because the business team usually does not “own” the pricing problem if they have outsourced the work. In stage three, the need for better pricing management is demonstrated, and the business team has bought into improvement; thus, this is the time to begin putting dedicated teams in place. In relatively large firms investment might be in the range of $3-5 million. In smaller or mid-size firms, typically you could move a little bit faster, but I still would expect that five years is a minimum, again because of the cultural changes. And those numbers could be, typically at mid-size firms, about half of what I suggested for larger enterprise-size firms.
There’s a lot of buzz around pricing software today. And what I’d like to do is separate out the kinds of software that are out there today. And I’m going to start with the very large integrated systems. These major software systems typically go for $1M plus. And my bias is that those very large integrated systems are really appropriate when you get to stage three. Early on in a company’s pricing maturation journey, the investment and the time taken in building a very large, integrated software solution is not worth the effort. You can typically get a lot of return and a lot of organizational involvement in stages one and two simply by using fairly simple spreadsheet kinds of analyses, simple plotting techniques, things that you really don’t need major software to do. When you reach stages three and four though, then we begin to think about cross-organizational impacts; we begin to think about larger investments with understanding customers. Here’s where large, integrated systems of pricing software are most appropriate.
The alternative to that is software which helps you think creatively and effectively about customers. I’ll point out that I’m not an employee of LeveragePoint and receive no commissions from them. But on the other hand, I think the LeveragePoint software, in helping you think effectively about your customers, and in assessing value delivered; that’s where the LeveragePoint software can be very effective and helpful. So my bias is that things like LeveragePoint are most appropriate beginning at stage one and working all the way through stage four.