3. Recognize that price realization requires cross-functional discipline.
Traditionally, brand defines strategy, finance establishes margin target, pricing sets prices in IT system, and sales executes in market. In many organizations, these functions operate in silos with limited feedback loops and disjointed wiring elements, such as key performance indicators (KPIs) and incentives. Leading companies design organizational wiring to orchestrate agile and open dialogues between these functions.
How?
- To start, leaders can’t delegate price execution. In today’s era of high costs and supply volatility, organizations may need to establish a pricing steering committee to facilitate ongoing pricing dialogues between cross-functional leaders.
- Leaders may need to review gaps in price realization, prioritize levers to close the gap and participate in the mobilization of aligned action plans.
- Some companies are setting up friendly competitions between cross-functional teams to accelerate teaming between pricing and sales.
- Over the longer term, companies may want to review and pursue structural changes to KPIs and incentives to drive price realization.
Case study
A global industrial chemicals company instituted a broad-brush price increase across its entire portfolio, targeting an average of 5% increase across the portfolio. The company did not evaluate which products and customers were willing or able to accommodate higher pricing, nor did it understand competitive scenarios or how to adjust the rebate process to enable full realization. Consequently, the company realized only about 66% of the expected impact. During a second price increase, only two quarters later, the company instituted an integrated cross-functional pricing execution team to design, track the customer negotiations and validate price conformance. The team’s goal was to institutionalize a formal role to oversee price increases and develop an integrated set of dashboards to track and realize the full impact of pricing increases.
Conclusion
Macroeconomic issues, including surging commodity and energy prices, may mean that inflation, supply disruption and demand volatility are here to stay. Executives need to enable dynamic pricing now and be prepared to adjust pricing nimbly as those variables start to loosen.
Companies can ask themselves a few questions when assessing pricing capabilities, including:
- Is our organization ready for the next round of significant cost increases or market disruptions?
- Do we know what products to select for price increases and which of our customers would walk away from the slightest increase?
- Do we know the true cost-to-serve for our customers so that our sales force can clearly articulate the value being provided during negotiations?
- Are we confident that we have the right discount governance in place so that we can get the highest return on our intended price increase?
If the answer to any of these questions is “no” or “not sure,” acting now to improve end-to-end pricing capabilities can significantly improve financial performance. By conducting routine pricing reviews and enhancing pricing functions, companies can stay one step ahead of competitors with flexible strategies that protect margins and enhance the bottom line.