By Michael Vargas
How many times do you think that question is asked in medium to large companies that specialize in wholesale and/or retail operations? Probably many times a year. Keep in mind that in this country the cost of hiring, training, paying, and supporting a mid level manager can be upwards to $100,000 to $200,000 per year depending on the level of support and requirements. Will he or she need to travel? Will he or she need to have advanced software? Will he or she need to attend pricing seminars? Will he or she need to belong to the best pricing organizations? These all have a way of raising the cost or having a good pricing manager on staff.
Keep in mind the costs of not having one. Prices are managed by Executives, marketing, purchasing, sales, finance, IT, etc. Who has a hand in determining what is best for the company and/or their department? Who is the final arbiter when the final price needs to be applied in a given situation? How do you know it is the best price? Executives want to raise the price to keep margins up. Sales want to increase sales by lowering the price. Finance wants margins up, while purchasing wants to raise volumes so they can get better discounts. Who can come in and be independent enough to make the decisions to benefit the company and not just individual departments?
But what is the benefit of having a good pricing manager? Pricing has many facets. By having a person that understands all those facets, or at least most of them, can be extremely valuable to any company. Imagine a company that has 40,000 sku’s. What if that company has 200 vendors? Who is going to manage that many items? Who will be able to spend the time necessary to make mass changes and analyze the volume of such a number?
There are many ways a company can create a quick pricing scheme to change pricing to give the biggest impact with the least amount of worry. One of these is a policy called “velocity pricing”. Take the products that are the most elastic (least chance of losing business from a price increase) and raise the prices a moderate amount and you will see a small gain in margin.
On the face of this policy, it sounds great. Imagine plugging the bottom 30,000 items into a quick pricing model, take the results and immediately change the prices in the system. Just like that you spent 4 hours and got a quick return of 300% on your time investment. I can see many mangers jumping at that kind of operation. Do that 3 or 4 times a year and you can see a tidy return on not having the need to hire a pricing manager. But what about the downside? How do you know it is working as it is advertised? After 4 times, you are starting to see a 200% return, then a 150% return, then a 75% return, etc. What could be going wrong?
The problem is that you are investing time on the front end, but not on the back-end. Had you done the analysis, you would have seen you were incorrectly pricing similar items. This was causing confusion with the customers. You also noticed that the lowest of the products were priced so high that they would always stay in the category to be priced even higher. Since the system looked at volume, it would see that these products would warrant a price increase when the opposite was needed drastically.
The direct benefits of having a Pricing Manager are being to have those products that impact your business the most (80/20 rule) would be given the most attention. Those that do not impact your business could be managed on a larger scale. Take the example of velocity pricing (raise price based on volume). Imagine if you had a person that would modify the pricing model to add a modifier to lower the price if the volume was negatively impacted. Also add a modifier if the price exceeded certain market levels. Also, take the time to make the changes similar for items within certain categories. If a 3″ model goes up 2%, then so should the 4″, and 5″ models. This keeps them in order and you are not charging more for a 3″ model than a 5″model.
More benefits is being able to use standard pricing ideas. Regional pricing for certain regions in the country. Certain areas of the country place a different priority on price as opposed to service. Promotional pricing to see which products are best used during sales periods. Paired products to use to increase margins on products that are purchased along popular items. This allows the company to improve margins on items that would normally never see an increase. Tiered pricing based on the size and purchase volume of the customers. This could potentially be the best way to improve margins as well as give the sales staff a great tool to promote more business with many customers. Imagine telling a customer on the cusp of the next level that if he raises his volume another 2%, he could see a 5% discount? Although the margin would go slightly down, your overall profit would go up.
End of life pricing also known as clearance pricing. With many wholesalers and retailers, there are always a list of products that were a great idea at one time, but have since been relegated to the back of the warehouse. These products are costing you money in warehousing, inventory, and lost opportunity cost since you could be buying a better product to sell. Being able to price products that need to be sold quickly can be a big benefit. This is especially true when the number of items grows into a problem with warehouse space or inventory time.
One time pricing opportunities can be a time when you can raise prices when all your customers are expecting a price increase. Once or twice a year, your most popular products are going to see a price increase from your vendor. Since this would be seen across the industry, the customers that use the product the most would be prepared for that increase and adjust accordingly.
Putting a Price on the Benefits
Many times when a Finance Manager or a President is given the question, they want to know the bottom line. What can I expect to gain from a $200,000 investment? If you get a person with 5 or more years of experience, you can expect to see the opportunity to gain all or most of the things mentioned above. If you used tiered pricing the gain would be close to a 1-2% margin gain. Depending on how the margins are set, this could translate to a 1% gain to the bottom line profit. So, if a $200 million company implements this one tool, they can see a $2 million dollar gain in profit. That is a 900% return! Now add the other tools suggested. If all are implemented, that return would skyrocket.
So, if the company is not using any of these tools, or are using some of them without any back-end analysis, then the cost of not having a Pricing Manager is weighing the company down. There should be no reason that a mid to upper level company would not have a dedicated person that managed the pricing. Having a well-trained, experienced person would be invaluable and would make your sales staff, customers, and executives much happier.
Michael Vargas is an experienced Pricing Manager with 11 years of pricing support and 5 years of direct pricing experience. He has worked in various industries, roles, and has contracted his expertise to add over $1 million to the bottom line at a medical devices company. He has been seen many different styles of pricing and has both updated current pricing schemes and created new pricing from scratch. By using his analytical style at improving margins, profits, and sales, he has shown that the right Pricing Manager is all in the person you choose and the flexibility of accepting new and outside-of-the-box ideas.