Lee Nyari’s article in this issue, Deciding Your Path to Pricing Success, describes two distributors that took different approaches to successful margin improvement projects. In these examples, both companies relied on outside consultants.
I’ve seen similar stories of success – but also know of some engagements where very reputable pricing consultants have worked with good distributors and the pricing projects have either produced little benefit, or the entire approach was unwound after it was implemented.
While it’s tempting to blame the consultants, when pricing projects fail it’s often the distributor’s fault. Here are some common reasons pricing projects fail:
Unclear goals. If you want to price for volume growth, you’ll get vastly different recommendations than if you’re working to squeeze earnings out of your existing P&L. Too often, I hear executives ask for both – and while there’s normally some slop you can clean up to grow margins without hurting your sales, the reality is that your firm is subject to the laws of price elasticity of demand like every other distributor. Also, be realistic about the timing – good pricing projects focus on implementing long-term process changes that drive gradual improvements over time. Striving for large, short-term gains is unrealistic and unhealthy.
Insufficient executive sponsorship and involvement. Often, the pricing initiative is sponsored by the CFO or CEO. They need to be involved, of course, but if sales leadership is opposed to getting a third party involved, the project is likely to fail regardless of the quality of work or ideas.
Pricing requirements that are too complex. Complicated pricing requirements create algorithms with loads of variation in system-recommended prices. This is as bad as variation introduced by sales and customer service people. It’s maddening to your associates and mystifying and frustrating to customers. Simpler objectives with processes for people to override prices within defined constraints work better for most distributors – at least those who rely on outside and inside sales as their primary method of demand generation.
Lack of good change management. Any program that affects prices creates a huge emotional response in your company. Your change management plan should be detailed, thorough and prepared before the pricing consultant arrives – people have strong opinions on price and will get more emotional about it as soon as they hear you’re considering a project to improve margins.
So the answer to the question “Are pricing consultants worth the price?” is based more on the distributor than the consultant. If you address these issues and prepare properly, you’ll likely have a great engagement and good, lasting results. But if you skip these steps, you can do more harm than good – to your margins, morale and company.