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The Wrong Kind of Pricing Improvement

You can divide pricing process improvements into two big categories: strategic and tactical.

Strategic process improvements are those things that help you achieve better prices. For example, if you improve your segmentation model, you will improve the actual prices that your customers pay, so that’s a strategic process improvement. Other examples would include pricing analytics, value communication, customer research, negotiation training, and a lot of the other things that we talk about a lot here at PricingBrew.

Tactical process improvements are those things that help you do a better job delivering prices to the market. For example, improving your process for updating price lists, your handling of pricing exceptions, policy compliance, etc. All those things can help improve efficiency and possibly save money, but they don’t affect the actual prices your customers pay.

To someone who isn’t intimately involved in the pricing discipline on a day-to-day basis, it might seem obvious that pricing teams should spend most of their time on strategic improvements. After all, this is where the big financial gains are. Everyone wants to be able to achieve those small improvements in overall prices that yield big financial rewards.

In practice, though, a lot of B2B pricing teams spend almost all of their time on tactical things.

How does that happen?

It usually starts innocently enough with the pricing team hoping to pick off some low-hanging fruit. Strategic improvements typically take a lot of time, and the team often has to get buy-in from a lot of different groups within the company to pursue them. Strategic efforts are hard.

So the pricing team decides to start with something easy — one of the tactical improvements that they can handle all on their own without involving anyone else.

When that effort succeeds and actually saves the company some money, the team pats themselves on the back and looks for some more low-hanging fruit.

Over time, however, the strategic functions start to languish because the team is spending all its time on tactical activities. And that leads to a vicious cycle that requires the team to focus even more strongly on the tactical.

For example, we have seen teams that are spending almost no time refining their segmentation models. As a result, their customers and salespeople are asking for a lot of pricing exceptions. So many exceptions are flowing through the department that the team decides to improve the exception-handling process.

But they haven’t addressed the root issue — the inadequate or faulty segmentation model — so more and more exceptions kept flowing in. That leads the team to look for even more ways to improve the exception-handling process.

Eventually, they get trapped in this cycle where they are spinning their wheels faster and faster, but they still aren’t really making any progress on improving their prices.

If you recognize that your team is in danger of getting caught in this cycle — or if you’re already well and truly trapped — there is a way out.

The key is to start focusing more on strategic initiatives. Maybe you start small by just focusing a few hours per week on a strategic change. You don’t actually have to make a huge, overnight shift in the way you do things. Just a small modification will eventually yield some rewards.

Strategic initiatives take time and effort. But with time and effort, they can yield dramatic results that can lead to a different type of cycle. Strategic changes reduce the need for tactical work, which in turn, frees up even more time to focus on strategic efforts. Eventually, you will find that you are spending more effort on strategic improvements, which will ultimately pay off in terms of financial benefits for the company and career benefits for your team.

If you aren’t sure where to start with a strategic initiative, check out these webinars:

If you’re caught in the vicious cycle of tactical process improvement, now is the time to start making the small shifts that will help you focus on the much more profitable strategic improvements.

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