• Strategy
  • CFO Magazine

Price Fixing

With economic recovery on the horizon, it's time to revisit the wisdom of rock-bottom prices.

Rethinking pricing may seem at first like a daunting, resource-consuming task. “Companies often feel they can do something in pricing, but they don’t know where to start,” says Weber.

A good way to begin is by plucking low-hanging fruit. For instance, a simple bell-curve analysis plotting every transaction and which price the customer paid can show where price is not being optimized — instances in which customers are not paying close to the amount they are willing to pay for a good or service, says Ralph Zuponcic, managing partner of business-to-business consultant Price-Point Partners. The analysis can help answer questions such as, Why are we selling our product to some customers at such a low price? (Move them up the bell curve.) What is the profile of customers willing to pay the higher price? (How can I get more of them?) How can I move the entire bell to the right? (Increase all prices.) The same analysis can be done with profit margin, says Zuponcic.

A company can also audit for “price leaks” — instances in which it doesn’t get the price it is entitled to, says Ryan White, managing partner at consultancy Price for Profit. “If a consumer is in a restaurant with a group of people and they have five drinks and the waiter charges them for six, they’re likely to point it out,” White says. “But if he charges them for four, they’re not likely to tell him. So the error never gets fixed.” Process, data, and software errors (not to mention the human kind) can all cause price leaks. For example, one of White’s clients had an enterprise-resource-planning system that was rounding down prices by truncating the last decimal place. Such leaks can amount to anywhere from 0.5% to 4% of revenue, says White.

Another transaction-by-transaction analysis that doesn’t stretch IT systems or resources is analyzing the net price, which is the price net of adjustments, rebates, and volume or other discounts. Such scrutiny can turn up outliers — the salesperson who always cuts by 30%, the product that never gets sold for list price — fairly easily.

In the B-to-B world, of course, excessive discounting can be price cancer. The goal should be “controlled variation,” White says. Jim Geisman, a principal at Software Pricing Partners, recommends viewing discounting as an investment. “Are discount dollars being invested in the customer segments and products that provide the greatest strategic value to the company?” he asks.

At NetSuite, an on-demand ERP software firm, CFO Jim McGeever controls discounting at a high level and sets floors on the rate per hour that can be charged for professional services. But he also wants to be flexible. Two customers that buy 1,000 seats of NetSuite’s hosted programs may have quite different usage levels, so McGeever’s team can charge less to the customer whose employees only occasionally log on to the system. The company has also worked with customers that are struggling financially by adjusting payment terms.

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