A Truly Global Pricing Strategy

July 28th, 2006 |   Send this article to a friend!

So you work for a global corporation. Your company has operations in the US, Canada, Europe, Asia Pacific, Latin America, etc. The marketing division for your company states that they offer products and services at competitive prices – but do they really know? And while offering competitive prices, your company also states that margins are realized to the max at a global scale – but can they prove this? What are they basing their marginal goals on? And are these goals consistent across your organization globally?

These can be tough questions to answer depending on the pricing policies your company enforces. Surprisingly, many of today’s global corporations still manage pricing of their products and services independently at a regional level. Even companies that are running a global ERP system have implemented their pricing strategy in this fashion.

For some companies this isn’t necessarily bad. It could have been that it made good business sense at the time to keep pricing controlled independently at each of your regional operations. For example, your organization may have a subsidiary in China that manufactures and sells a product that’s only offered domestically because there’s no market for it anywhere else.

But for most global supply chain companies this isn’t the case. The organization you work for most likely manufactures and distributes products across multiple factories, which are then shipped to distribution centers and/or clients all over the world. If your company operates at this scale, there’s a good chance that your pricing strategy remains separate and potentially inconsistent across the board.

Let’s take for example this situation; as a sales manager, you have just sold a high-powered engine for big bucks from your office in Louisville, Kentucky to a client headquartered in Germany. You call up your colleague, Adolph, at the Berlin branch to relay the good news. However, Adolph tells you that his division recently increased the price for this model engine and has sold it for nearly 25% more to one of your client’s competitors. When you find this out you may be upset for two reasons:

1.) You could have just sold the same engine for 25% more and made a heck of a lot more money, not to mention a higher commission.

2.) Your company may lose a customer (not to mention a friend), because when Adolph’s client finds out your company just sold one of their major competitors the same engine for less, they’re not going to be very happy (and neither is Adolph).

In this scenario, you had no clue that the operations in Germany had increased their price for the engine you just sold. If you hadn’t spoken to Adolph, you would have never of found out about this price increase. The price you used was a figure based on the policies that were established within your local operation. And the policy you referenced was based on the marginal figures and market conditions within your specific region – all of which may not have been consistent with the German policies.

An even worse situation could be that both you and Adolph quoted the engine to the same customer for different prices. For example, a solicitation is issued by a potential client looking for the same engine offered by your company. Both you and Adolph spot this RFP and,

without knowing, you each send your own formulated quote. And because of separate pricing policies, the quoted prices differ. This could definitely raise a few eye brows from a client prospective and puts your company at serious risk of losing the contract.

The problem in both of these cases is that the US and German pricing policies are completely separate, and there’s no procedure in place to communicate any price change between the two operations. This may have happened for many reasons - maybe when the German operation was first established or acquired an initial procedure wasn’t put in to ensure pricing consistency. It’s also possible that competition between the two operations is quite heated and as a result neither division wishes to share any information that could potentially give the other a competitive edge.

If you’re truly operating a global supply chain company you don’t want situations like these to occur. Ideally what your organization wants is a central point of reference where the entire company can obtain an accurate and consistent price - no matter what continent you’re selling from or who you’re selling to. This referenced price should take into consideration several factors such as the line of product being sold, the regional manufacturing and/or purchasing costs, expectations in margin, and selling conditions at a domestic and international level.

This central point of reference cannot be established through implementation of an IT system alone – it takes people to execute this philosophy. Essentially what is needed is a core “pricing think tank”. The members of this committee should be representative of your organization across the globe and have long-term experience within the organization, a strong understanding of the organization at a regional and international level, and proven marketing and financial leadership. The establishment of a “pricing think tank” is a very important first step towards the globalization of your organization’s pricing policy.

But this can also prove to be a difficult task. As I mentioned earlier, competition to sell may be intense between your operations. Thus, sales managers are reluctant to share any information related to revenue and margin to the rest of your internal operations. Though spurring internal competition to increase sales can be effective to a certain extent, there are some negative side effects as a result.  For instance, it steers the focus of your people away from customer satisfaction to focus on financial metrics. While your organizations strive to make better numbers than the rest of the company, it often leads to a communication breakdown between operations and creates an extremely difficult obstacle in the road to building a centralized “pricing think tank”.

So how can this challenge be overcome?

One approach is to change the metrics that are used to measure your company’s performance. For instance, instead of using sales, margins, or revenues to measure and reward operations and individuals within the organization, try customer satisfaction. Redirect the focus of your people to minimizing customer complaints, increasing repeat customer sales, and striving to receive positive feedback from clients. And make it a common effort across all your operations. Setting such an environment may not eliminate internal competition completely, but it will ease the tension amongst your operations.

Once you get past the obstacle of establishing your organization’s “think tank”, your next major challenge is to ensure the lines of communication remain open and a policy is established that enforces the communication of changes to any and all pricing trends through the committee. Also make sure the group establishes a procedure around how to calculate and maintain the pricing information. In establishing global policy, here are some questions your committee should answer:

• Can the pricing information be maintained through a centralized source or should it be segregated by region?  If segregated, how will communication of price changes ensure that these changes take effect across the board?
• Can pricing information and changes be formulated in some fashion?  For example, what factors determine price?  And can these factors be represented in a global calculation?
• How do exchange rates affect pricing?
• What constitutes a price change? And how often can this price change occur?
• Can an IT system be put in place to implement such a strategy?

Now I’ll be the first to admit that establishing a global pricing strategy is easier said than done. And it doesn’t happen over night. An effort of this magnitude will most likely require the need of a strong change management team. And if your company plans to utilize an information technology system to implement this strategy, they will also need individuals that have a good understanding of your business and the application. What I can say is that it is, can, and has been made possible. And in the long run this strategy will open your organization to complete visibility of your pricing policy, increased customer satisfaction, and fully realized margins.

Stay tuned for a future article that will discuss how this global pricing strategy can be implemented using Oracle Advanced Pricing.

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Mr. Thompson is a Senior Oracle Applications Consultant with Lexerd Group Consulting. Visit www.LexerdGroup.com to find out more about our firm.

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Entry Filed under: Advanced Pricing, Order to Cash