In our previous article, we began exploring how the concept of Six Sigma applies to pricing. We discussed Six Sigma as a transfer function (or equation) that theoretically defines the relationship between the output of a system (or process) and its inputs.
Six Sigma methodology is a disciplined approach to drive continuous improvement, based around data, which helps drive results focused on profitable growth.
We’re dissecting this disciplined way of driving improvement across a series of three articles. In this second installment, we’ll discuss Six Sigma as a process of continuous improvement for pricing. It’s important to define your goals and measure what needs improvement. A disciplined, intentional approach to a formal process enables pricing excellence.
Applying Six Sigma Methodology to Pricing
Though Six Sigma originated within the manufacturing industry, the methodology drives continuous improvements in a wide range of business functions, including margin improvements. Let’s review the key steps of the methodology:
Define the problem and the project goals.
Design goals that are consistent with their company’s profitable growth strategy.
Measure in detail the various aspects of the current process.
Measure and identify characteristics critical for pricing success.
Analyze data to, among other facts, find the root defects in a process.
Analyze the current situation as it is and steps along the way.
Improve the process.
Leverage improved alternatives that move closer to the desired result.
Control how the process is done in the future.
Verify that actions taken create the right results.
After you reach the “control” phase, you should look at your data and go through the phases of defining, measuring and analyzing your processes again to improve and control the output.
As a baseline, it’s important to also examine where you are in your current state. If you’re relatively immature in your pricing discipline, you may find that some or most of the points in the first list below (Common Pricing Realities) ring true. Transitioning from a common starting point like these to a Six Sigma pricing approach isn’t an overnight change, but you can see the benefits of making the transition when you compare the characteristics of each below.
- Limited negotiation skills
- Cost-plus pricing
- No analytical tools
- No profitability improvement plans
- Sales rep discount vs. sell
- Pricing tactics that are reactive
- Inconsistent pricing structures
- No growth in GM%
- Ignores reality of market
- No strategy to improve margins
- Negotiating strategy and tactics
- Value-based pricing
- Automated decision-making tools
- Customer profitability improvement plans
- Sales team sells value
- Pricing strategy and leadership
- Consistent and fair pricing architecture
- 2 to 4% growth in GM%
- Pricing based customer sensitivity
- Continuous improvement focus
Define Your Pricing Goals
Before you can begin to set up processes to measure, analyze, control, and continuously improve your pricing processes, define what the problem is without stating the solution. What is the goal for setting up a pricing team?
- What part of the pricing process needs to improve?
- Can you identify the root problems from a numerical perspective?
- How often does the problem occur?
- What will the pricing team structure be?
- Where will the pricing team reside in the organizational chart?
- What roles are needed on the pricing team?
- What responsibilities will each team member have?
- What level of experience and skillsets are needed?
- Do we look internally for team members or source from outside?
Determine your pricing team roles and responsibilities and then create goals properly aligned with your business. Define your goals, the process, and the individuals involved and their roles.
Measure What Needs Improvement
This crucial step lays the foundation for success and requires building measurements and metrics to identify what needs improvement thoughtfully, completely, and in alignment with your business goals.
A company must properly identify anything that impacts pricing performance and measure it mindfully. Identifying “Critical to Quality” components for each person’s role in the process is foundational to correct measurements. It is particularly important to choose wisely which measurement is appropriate for each role and incentives must be tied to these. Few things can motivate people more than performance measures tied to their pay and incentives. Focus on a limited set of measurements that are tied closely to profitability and then hold your team accountable for their performance against those measurements.
Measurements must be simple, possess real business impact, reflect improvements over time, and be compared to business goals and market realities.
Improve Margins by Making Better Pricing Decisions
The Six Sigma methodology seeks to remove the causes of errors and minimize variability in business processes.
Companies improve margins by making better pricing decisions with better processes and tools. All existing processes can be refined. This means, you can always uncover part of the process to improve and generate more yield or more benefit.
Most people think of tackling a specific project or task with a mindset of getting it done, crossing it off the list and moving on to the next topic on your list. Conversely, a continuous improvement mindset focuses on never crossing it off the list but thinking about how to make it better and better with small incremental improvements.
Automate the Pricing Process Through Six Sigma
We discovered that if you want a process to stay in place over the longer term, you need to automate it. This sounds counterintuitive but consider this thought: if a person has to ‘crank the engine’ to make the process work, they tend to ignore the strategy that goes into it and take care of what’s most pressing at that moment. Leadership then becomes burnt out on handling little urgent issues along the way. Automation solves these issues.
We’ll continue to explore applying Six Sigma methodology to pricing in a future article that explores analyzing the process; then turn your analytics and data into knowledge and action. Stay tuned to learn how to sustain the gains and automate the pricing process through Six Sigma.
We’d be happy to help you, no matter where you are in your pricing improvement journey. Explore more resources in pricing and profitability to inform your price strategy.
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