How can quality tools change the way companies (should) look at their pricing organization which is often distributed in marketing, sales, supply chain, finance and other functions?

What is Six Sigma Pricing?

I look for the nearest soapbox whenever I get these questions. Actually in anticipation of such questions, I had included the section, What Six Sigma Pricing Is and Is Not, in the first chapter of my book. Everyone interested in pricing agrees with two points, a) the need to align business objectives, pricing strategy (as part of business strategy) and pricing execution, and b) that pricing depends on and affects other elements of the business. But most business people tend to think of pricing as one rather-complicated activity rather than as a series of steps or processes resulting in pricing strategy or execution. This simple fact is the key to answering the questions above and unraveling many pricing quandaries.

Pricing strategy involves senior managers who are typically unavailable to oversee the execution done by multi-functional and multiple-level teams. The frequency of reviews or follow-up for different pricing actions also varies, for example, operating plans are developed or reviewed annually or quarterly, sales/ reviews/ price reviews can occur weekly, while transactional discount requests are managed hourly. In essence, pricing operations, as is the nature of operations, are repeatable processes. For instance, processes for designing and running promotions, choosing contract terms by customer segment, designing price floors and corridors etc. are all repeatable processes. If these repeatable processes are executed by tightly-knit multi-functional teams who follow standardized steps in using analytical tools, following guidelines, and reporting results, the ensuing price discipline does not only help price realization, but also helps in making better-informed strategic decisions.

My consultancy, also named Six Sigma Pricing, helps companies in improving execution capabilities with evidence based redesign of pricing operations. Although we use six sigma and lean tools, some steps need to be adapted given the organizational complexity around pricing which does not exist in traditional six sigma projects. As we did in the book, we are the first to assert that Six Sigma is NOT for designing pricing strategy although I personally have substantial experience in designing pricing strategy.

My work with several companies and over a hundred green-belt projects supervised by my co-author, Dr. ManMohan Sodhi, prove that Six Sigma Pricing can help overcome organizational complexity through better alignment between people, processes and systems. Whether a company has in-house Six Sigma capabilities or not, this toolkit identifies problems as well as causes, prioritizes actions so managers know where to start picking low hanging fruit instead of going after impossible goals, enables ongoing round-table discussions between executives and organizational layers of various functions, and finally helps improve and track processes that ensure improvements become permanent.

One reason pricing processes in a company are complex is that they involve almost everyone in the company, or at least that is what everyone in the company thinks. Having varied groups with different views and incentives, sets the stage for pricing processes to be different across different companies depending on where the pricing function is located and to who it reports – pricing, finance, sales, or product management. Since pricing involves the customer, it involves the front-line groups, sales and customer service. Then there is marketing, which itself is a big and diverse group including marketing communications, brand managers, product managers, and marketing managers. Moreover, the senior managers invariably tend to lean on the decision process when the prospective customer is large or even potentially large. IT is involved as a support role because they create and/or maintain the enabling systems and reporting. Also involved is the pricing administration group and possibly, a multi-function pricing strategy group. The clout and effectiveness of the pricing function depends on where the pricing group is within marketing, sales, finance, and strategy or if it is a standalone group and with a clear control role. Many companies demarcate pricing strategy from tactics by having marketing own list price and sales own the discounts and hence the net price to customers. Oversight or control of realized prices is the responsibility of the pricing or finance group. While this explains roles at a high level, most price-related actions generate emotion because roles and responsibilities remain unclear and get constantly re-defined in the what-who-when of action plans.

For pricing professionals who care for process improvement, turf battles should not be an agenda item. Instead, they should gain influence as “community organizers” who proactively look into pricing issues, identifying root causes, and supporting and getting support from different groups by showing evidence how they can gain from it. This sounds utopian yet quite practical within the scope of a full-time job. Even tenured employees in established organizations can map pricing processes and analyze data to understand pricing issues. My book, Six Sigma Pricing, has a tool-kit on how to frame issues and overcome them without alienating colleagues and customers. Collaborative actions to achieve shared goals align people with business strategies and pricing execution. The Pricing Czar is dead. Long live the Pricing Organizer!

It is true that the price of a product for a customer is derived from a list price or MSRP after factoring in discounts, concessions, incentives, rebates or credits depending on the industry. But the process of deriving a price point can be complex because often different functions manage pricing at a strategic or operational level. Pricing strategy is outward looking and refers to the company’s choice of positioning itself with respect to their competitors based on product attributes, quality, and brand etc. Whereas, pricing operations involve mainly internal processes for modifying list prices and control processes to ensure compliance to pricing guidelines at the transaction level.

Six Sigma Pricing is applicable to pricing operations and not for designing or choosing pricing strategies. Clearly defined pricing processes that are well-understood throughout the organization bring greater success in implementing the chosen pricing strategy. Nowadays, whenever I read about the possible slowdown in our economy, I recollect from Robert Phillips’ book (Pricing and Revenue Optimization, Stanford, 2005), “Pricing decisions are becoming increasingly tactical and operational rather than strategic.” Six Sigma Pricing can help companies stay on the path of profitability regardless of the business climate.

* How to identify pricing “defects”
* How to gather and analyze relevant pricing data and pricing-agreement processes
* How to identify and preempt failures of control; implement modifications that don’t create onerous approval processes
* How to sustain and extend pricing improvements into the future.