Management in an Economic Crisis

Companies do not live on sales alone – they live on profit. Therefore, the senior financial manager must take control of pricing and ensure the strongest profit lever is used not to destroy margins but to protect them as much as possible. The experienced FD understands that the following elements must be at the core of their organisation’s pricing strategy, especially during the current crisis.

• No return is more immediate, or certain, as a return on investment with improved pricing processes. The quickest win is to squeeze more wine from the same grapes. Policies that have long been undermined or ignored must now be enforced, exceptions managed, terms enforced, systematic errors detected and removed, unconditional discounts reduced, and a clear policy of controlling and measurement installed.

• Price wars only have one winner: the customer. Price wars lead to margin erosion across entire industries. Only if your cost structure is clearly superior to your competitors should you consider overly aggressive pricing. Many managers still pursue market share over profit and the current economic crisis will only reinforce such wrong headedness. The smart FD will work on shifting the mindset of senior managers through war gaming exercises, etc. to achieve consensus on a smarter trade off between volume and profit.

• FDs must push their marketing counterparts to be more quantitative in their assessment of whether pricing is truly aligned with the value-to-customer the company delivers. Most companies have a sense of how they stack up against the competition on particular features, but they have not quantified their overall value advantage by product, nor have they translated this into an optimal and deserved price premium.

"Now is the right time to invest in an in-depth understanding of customer needs and how this differs across existing and potential segments."

• Very often the solution to pricing problems lies in the implementation of alternative pricing structures that align pricing closer to the value the product delivers. Especially in B2B, where creating such a win-win situation sends a clear message to clients that they will only pay for the value they receive. Pharmaceuticals paid for based on their efficacy or tyres billed by mile rather than per unit are prime examples of such smart pricing moves. In many industries surcharges have been implemented for specific aspects of the offering (e.g. cargo/logistics, express mail, airlines, online retail) and contribute significantly to the overall profit.

• FDs must also drive the need for segmentation and differentiation across the organisation. Now is the right time to invest in an in-depth understanding of customer needs and how this differs across existing and potential segments, reflect this in development budgets for new products and services, as well as in the way products are sold and priced for specific customers. They will find that there are significant differences between customers in perceived relative importance of different purchasing criteria that need to be fed into the sales process.

• FDs must put all their weight behind plugging the biggest profit leakage hole, pricing implementation. There are several obvious areas to start looking for quick wins: Firstly, measure the percentage of escalated quotes that are simply approved without any modification of prices requested by the field. We frequently find that 80-90% of them are approved with no standard sign-off criteria or documentation in place. Secondly, take a look at the systems, which can often be the cause of pricing inefficiencies. In one project we found that the systems could not generate invoices with more than 20 line items, which affected 10% of our clients’ contracts. For years invoices had been sent with just the first 20 items while all additional products were delivered for free. Thirdly, analyse the distribution of discount levels given. You will almost certainly find an accumulation of discounts given at percentages ending with 0 or 5. The fourth main area is sales incentives, which are often heavily biased towards volume or revenue and rarely reflect profit/margin performance at all or strongly enough.

FDs are usually not involved in the pricing process of their organisation, although they are closest to being able to assess the impact good or bad pricing has on the P&L. Now is not the time to be bashful, but rather to step forward and use their budgetary power to ensure that appropriate price targets are set during the budget process and that budgets are allocated to those areas that will yield big pricing returns. The financial heads of an organisation must lead their company to better pricing.