Tag Archives: Price Execution

What Six Sigma Pricing Is and Is Not

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How can six sigma apply to pricing strategy – Six Sigma is good only for repetitive processes?

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.


Massive Scope Minute Decisions

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“Massive scope minute decisions”, the NBC commentator aptly described the heart-warming tai chi display at the opening ceremony of the Beijing Olympics. 2008 dancers leapt, swirled, and landed perfectly every time as each performer simply coordinated movements with their immediate neighbor. How come corporations can’t act with the same simplicity and precision especially when they need to protect their earnings and cash flows? According to a recent global survey done by McKinsey & Co., 34% of companies facing [product] innovation and 44% of those facing a pricing change found out about the competitor’s move when it was announced or actually hit the market. An additional 20% of the respondents facing a pricing change didn’t find out until it had been in the marketplace for at least one or two reporting cycles[1]. This situation needs to be and can be corrected by improving processes and internal coordination for gathering competitive price intelligence.

While researching pricing increases related to raw material inflation, I noticed an interesting pattern at Continental AG, the leading global tire company, which seems to be treading (no pun intended) very carefully. Since mid-2007, the price of petroleum crude, a key raw material for the tire industry, has doubled and the company had no choice but to raise prices. Here is the schedule of their price actions announced over one year along with my observations[2]:

a) Europe: No price increases in any segment throughout 2007
b) North America: 6% in passenger and light trucks only effective Oct 2007 (Notice no large trucks!)
c) Europe: 3% in summer tires only effective Jan 2008 (Limited scope – deferring to summer in snowy Jan)
d) Europe: 3-4% in car tires only effective Jun 2008, (Notice no trucks)
e) North America: 8% in OE truck tires only effective Aug 2008
(Notice no cars)

Apparently, Continental sliced and diced markets for execution by segment, season, and geography based on known or perceived customer and competitor-related risks. Assuming this strategy addressed raw material inflation, what should they and other companies do to realize their price increases to full extent?

Companies should monitor discount activity for any sporadic increases at appropriate levels of granularity – market, brand, product line, sales territory etc. Higher than usual discounts following a price increase typically suggest, a) sales people are holding back, b)customers are pushing back, or c) the competition is being opportunistic. During my early years in pricing at a global airline, I learned the necessity of following competitive changes not just for price and booking levels but also frequency of service, routes served, type of plane, and passenger capacity. By organizing public data and feedback from frontline employees, managers can spot trends in competitive price actions. For instance, managers can gauge competitive threat by monitoring the level of consistency in price execution over time which helps validate their own company’s discounting practices. Such market intelligence supports price realization efforts and helps prevent price-related customer attrition without giving too much away.

Let’s never forget the 4×100 meter men’s relay at the Beijing Olympics. The US men’s team was a favorite to win a medal but got disqualified in the prelims for dropping the baton. Actually, this was the fifth instance for the US men’s team to drop the stick in the last 12 global championships. The root cause is that the US athletes do not practice enough as a team. So it was “not bad luck but bad execution”.[3] Somehow, it always comes down to coordination and simple processes whether it is performing at the Olympics or in the corporate world.

Notes:
1. The McKinsey Quarterly, How Companies Respond to Competitors: A McKinsey Global Survey, April 2008
2. Company announcements in Europe and North America over one year
3. Comment by USA Track and Field CEO Doug Logan

Gentle, Responsive and Effective Organizations

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It is July 4th – Independence Day for the United States. It just feels right to talk about uniting employees for the greater good of their companies. The sizzle of barbecues is somewhat subdued this year with the number of jobless exceeding 8.5 million in the United States. As thousands more worry about pink slips, stress levels and finger-pointing within companies are on the rise. In tough times, the foundational character and strength of an organization is put to test. As a pricing professional, I can never forget the angst of having to follow lackluster decisions made without the right analysis or due process. I have witnessed major gains lost to complacency and individual interests. I have also watched conscientious employees dive into impossible problems acting like patriots serving the mother country. How can companies empower and enable their employees to think about the good of their company aside from stock options and big salaries?

Several years ago, I heard about the motto of Ritz-Carlton Hotel. “We are ladies and gentlemen serving ladies and gentlemen”, is an age-old credo at the Ritz which has helped them adopt and share best practices across all levels of employees worldwide. While it may sound like a corporate myth, Ritz lives its motto guided by 20 Basics which are truly fundamental ideas. Here are a few:

#7. To create pride and joy in the workplace, all employees have the right to be involved in the planning of the work that affects them.

#8. “Each employee will continuously identify defects throughout the Hotel.”

#20. Never lose a guest. Instant guest pacification is the responsibility of each employee. Whoever receives a complaint will own it, resolve it to the guest’s satisfaction and record it.

The Ritz-Carlton hotel chain has one of the highest employee and guest satisfaction rates in the hospitality industry. They have also won the Malcolm Baldridge award more than once. I will let you guess if this bolsters their luxury image, top-line and bottom-line. Any corporation can choose to be like the Ritz by instilling among employees a sense of pride in continuous improvement and genuine courtesy towards their colleagues and customers.