#1: Data: The Achilles Heel of Price Optimization Projects…
One of the critical ingredients and perhaps the “Achilles Heel” of a price optimization project is the accuracy and completeness (in that order) of the underlying data supporting the effort. I put accuracy before completeness as companies often start with a sub-set of data and focus on specific aspects of improving their gross margin optimization as they simply don’t yet have or more likely are not ready to tackle some aspects of the process. Regardless of how a company decides to “eat the elephant” of price optimization (read one bite at a time) it is critical that the data supporting each step is accurate…or…one will get false readings, people will lose faith in the process and the project comes to a halt and never gets out of the starting blocks.
Along with death and taxes, we can also count on the fact the huge amount of data in ERP systems supporting price optimization is always in a constant state of change. We have seen the traditional “let’s buy some pizza and get this data cleaned up” kind of project fail every time as it is too short sighted. Tomorrow everything changes. So…the turtle wins the race by making data clean up part of the daily process to support the real goal of using the data to support a pricing optimization project.
#2: The Right People on the Bus…
This next point may sound so obvious that it borders on ridiculous, but after spending over 25 years offering technology solutions to increase efficiency, gross margin or fix problems in the supply chain…this issue seems to raise its ugly head more often then many others
The challenge with Pricing Optimization initiatives seems to start with having the “Right Person Driving the Pricing Bus”. Assume for illustration purposes that every company has multiple buses (Accounting Bus, Operations Bus, etc) all working together in perfect harmony and precision being directed by the central dispatch office (Executive Management). A bit corny but I will blame (give credit to) Jim Collins of Good to Great fame for the basis of the analogy.
Here are the challenges I have seen on this topic:
1) Company thinks this is an IT or Product Data Management project. The person they put in charge knows how to push buttons, create reports, etc. but does not have the “sales and pricing experience” to know WHY and sometimes WHAT to do with the data or analysis specifically in regard to improving gross margin.
The project ends up being a lesson in data analysis with no real action.
In other words, this person knows HOW and hopefully WHAT to do it but not WHY…
2) The person put in charge understands the sales and pricing aspects (the why part of the equation) but does not have analytical skills or does not understand how to apply technology to the challenge of increasing gross margin. They may even buy a sophisticated tool to give them answers, but then disregard the results because they don’t understand how the optimization suggestions were calculated.
Again, the end result is no real action toward the end result
In other words, this person knows WHY and hopefully WHAT to do but not HOW to do it…
Finding one person with all the of the above qualities (WHY, WHAT HOW) to champion the project OR (2) people (tag team Pricing Bus Drivers) that bring these types of skills to the table (and at the risk of stating the obvious – have a good working relationship) are critical to the success of a pricing optimization project.
#3: Smaller Meals – and I am not talking about how to lose those extra pounds from the holidays…
At the risk of over-using a simple cliché, metaphor or simile (I can never remember which one to use) like “It is a journey not a destination”…pricing improvement (which really means gross profit improvement) should be taken on in small meals, take some time for digestion and then move on to the next meal. I often find companies won’t event start a project (with executive management backing) as it seems so big and daunting. They risk not taking advantage of a project that could yield the highest return of any initiative they might implement. They continue on with management, operations and sales having the same data free conversations about improving gross margin with no real processes developed that create specific actions to make it happen.
In respect for my friends who have are on the front lines of pricing management, Gross Profit improvement is complex. Managing and optimizing the multiple dimensions of costing, rebates, pricing and the art & science of sales can be intimidating. Find the folks who have been there, have been successful (I have seen guys pick up 3 to 5% increases in gross margin using professional pricing management techniques) and use this knowledge to improve your company’s bottom line.