An Alternative to Million Dollar Software

More and more large and medium-sized corporations have either implemented or attempted to implement a sophisticated suite of pricing software that includes an analytics engine. Unfortunately several of these companies have abandoned millions of dollars in software investment due to usability (user experience) and/or utility (ability to generate margin improvement opportunities) problems. Regardless of the cause for these struggles, organizations should step back and examine alternative processes outside of expensive pricing software to reach analytical goals. Recent advancements in Microsoft Office and Excel may allow you to do much more with much less.

Next Level Pricing specializes in creating analytical frameworks that allow companies to identify millions of dollars in margin improvement opportunities - without spending millions of dollars to find them.

For more information please contact us anytime.

Next Level Pricing buys ad space on the MDRT Airstream

Next Level Pricing recently purchased its first ad space with The Million Dollar Road Trip (MDRT) – a cross-media marketing business promoting, celebrating and inspiring the American entrepreneurial spirit today. Brothers Walter and Patrick Hessert are in the midst of a 365 day journey criss-crossing the country living in, and selling ad space on, their 23 ft Airstream. A small Next Level Pricing logo on the right (curb side) of the Airstream is currently making its way through the Southwest – along with the logos of dozens of American businesses.

For more information on Walter and Patrick’s mission, please visit their website.

How Recovering Costs Can Destroy Your Share Price

Conventional wisdom tells us that a 6 cent increase in costs requires a 6 cent pricing increase to maintain margin - unfortunately for companies interested in maintaining their margins raising price to match costs won't be enough to keep investors happy. As more and more chemical, pharmaceutical, and other manufacturers stress their high margin %s as a justification for higher multiples in their stock price, Wall Street analysts are paying nearly as much attention to margin %s as overall results.

In this example below, a company has successfully raised priced each year to match increased costs. Their reward? A large drop in their margin % and likely a large dip in their stock price to match.


Understanding how to properly structure price increases to maintain margin is just one important consideration for an organization's pricing efforts. For guidance in this area or to understand more of the challenges to optimal pricing, feel free to contact us anytime.

Why pricing delivers vs. cost cutting measures

Almost any literature you read from consulting firms or pricing software vendors will without a doubt state the case that improvements from pricing have much larger effects than improvements in fixed costs, variable costs, etc. As this has become commonplace more and more literature simply assumes this benefit advantage without exlaining the logic behind such an assumption.

While it is true that $1M in pricing improvements would have the same impact as an equivalent $1M reduction on variable costs, pricing's placement on the income statement provides it with leverage over smaller cost buckets - thus making it much more likely for organizations to have $1M in pricing improvements available to them vs. $1M in cost reduction.


As the above diagram depicts, this sample organization would need to cut variable costs by 2.9% to have the same impact as a 1% increase in price. Fixed costs would likewise require a 4.3% reduction to have a similar impact. Organizations looking to take their profits to the next level need to understand cutting costs will only take you so far - as pricing has the ability to take you 3-4x further at similar levels of effort.

Next Level Pricing white paper published in The Pricing Advisor

Next Level Pricing's recent white paper on key questions to ask/answer before considering a pricing software implementation was one of three articles published in the August 2010 issue of The Pricing Advisor, A Professional Pricing Society Publication. For more information on the Professional Pricing Society, please visit their website at www.pricingsociety.com

New White Paper: Why Professional Athletic Organizations Are Vilified For Maximizing Their Revenue (And Other Entertainment Options Get Away It)

Our latest white paper examines the root causes of resistance to price increases professional athletic teams face. Unlike airlines, hotels, and cruise lines who are able to price their inventory based on supply and demand, athletic teams are generally locked into fixed ticket prices for a given year - then suffer the wrath of fans when they're increased during the offseason. There are a variety of root causes behind this rage, some legitimate and others somewhat misguided.

We'll publish the entire paper our current and prospective client base enjoys a preview. Until then for a copy of the paper that breaks down the root causes of resistance and outlines a plan for teams to maximize their revenues while minimizing consumer discontent, please contact us anytime.

New White Paper: Questions to Ask Before Implementing Pricing Software

As touched on briefly in a previous blog post, Next Level Pricing's most recent white paper focuses on several key questions organizations should ask before implementing pricing software. In addition to helping an organization understand if software is appropriate for them, the white paper helps organizations decide which kind(s) of software are appropriate for them, and which vendors are the best solution provider to meet their needs. The white paper is currently pending possible publication in an industry newsletter, but anyone interested in an advanced copy can e-mail us anytime.

How to Eliminate Currency Impact from Pricing Analyses

Currencies have been especially volatile over the past two years. While most everyone is aware of the effect currency movement can have on pricing, many organizations struggle to eliminate this effect from their pricing analyses. Many times this is due to commercial teams relying on monthly PivotTable extracts that financial resources pull from ERP systems. Built to satisfy a wide audience, these files generally cater to the masses by providing global data all in USD, in part so global leaders can see roll-ups of regional performance.
Using this data for detailed pricing analytics can lead to problems as evidenced in this example below:


Looking at the year-to-date performance of this customer / product’s price and margin, we see a gradual reduction in price and margin over time. Assuming this customer is priced in euro however; by bringing in the exchange rates finance used to translate data in USD we see a different picture.


In euro we see that pricing and margins have been much more stable, and in fact higher pricing has allowed margin to remain the same. While U.S. based companies or companies with USD-based raw materials might have a problem with USD margins falling regardless of invoice currency, it’s important to remember that for this customer, pricing has increased YTD and further increases may meet a higher level of resistance.

To get around this problem we recommend that organizations produce two waterfalls – one in USD and the other in invoice currency. Having both sets of data available allows users to simply toggle between the two for different analyses, as some analyses like Negative Margin Analysis or Price/Margin Outlier Analysis might be best run globally using a single currency, while others that are more customer-focused are best run in that individual customer’s invoicing currency.

Getting Over Not Having Tech Service Costs in Your Waterfall

Whenever we run a requirements gathering session, one of the first questions we ask is What cost elements would you like to see in your price/margin waterfall that are not included in current margin reports today? Without fail, technical service costs are always the first response. The allure of having these costs in the waterfall is pretty clear, as companies would love to see which customers are consuming the most services and how much these costs reduce profit on those accounts.

The problem is that unless companies are willing to have their technical service resources enter their hours weekly into a time & expense system, there is simply no way to accurately allocate these costs back to specific customers instead of simply using a peanut butter approach (spreading the costs evenly by volume, revenue, etc). Since the thought of having resources enter their time weekly is not appetizing to pretty much every customer, we recommend moving forward with a very simple approach.

Whenever we sit down with a technical service manager, plant manager, or other sales support personnel we ask them to make a list of the Top 10 or Top 20 customers that they seem to spend the most time and resources on (i.e. Which customers require the most on-site support, extra testing, special labeling, packaging, product returns, etc?). We then take this list and calculate the current profitability level for each account (not including service costs).


For customers on the list with low overall or low % margin, a company can then decide whether to stop providing these services, charge for the services, or raise pricing to bring margins up to an acceptable level given the “neediness” of the customer. In the example above, Ted’s Contracting and DC Distribution appear to be consuming a large amount of services given their size and overall profitability.

This process is by no means perfect, but it is a simple way to ensure companies are dedicating services to the right customers instead of spending money on customers that deliver less value to their account portfolio. For more tips on the challenges of properly allocating costs to serve back to customers, please contact us anytime.

The Best Time to Fix Your Pricing Mistakes

Very early on in our career we were meeting with a sales rep to review potential areas for pricing improvement in his account base when something surprised us. We had found a few customers receiving pricing far below levels of comparable customers, and recommended he institute a 5% price increase on 4-5 of his 20 customers to help close the gap because we were confident those customers would not be able to get similar pricing elsewhere given their size. The account manager actually agreed wholeheartedly with the findings but had a request – he wanted to raise pricing for all 20 of his customers instead.

Normally account managers are less than enthused to receive instructions to raise pricing, so we were surprised to hear one volunteer to push pricing everywhere. His reasoning soon made sense though, as he detailed how he had a much easier sell with customers when he could explain that everyone was getting a price increase, not just them. Further pricing engagements confirmed this account manager’s preference – while some have no problem walking into a customer and telling them that their price just isn’t working anymore, the overwhelming majority prefer some sort of cover and would prefer to push pricing across the board at the same time – with our without a publicly released price increase notice.

To get around this problem we recommend that clients add a few steps to their normal price increase progress. Instead of instituting 3% increases across the board, organizations should review each customer/product price and calculate things like how the customer price compares to average pricing for customers their size, how much raw materials or other costs may have changed, etc. Then by announcing a 3-7% price increase, companies have the flexibility of trying to fix previous mistakes by pushing for a few additional % points in those situations where pricing is out of line today.

Identifying areas for improvement is an important step in creating value from pricing, but making sure that these opportunities are seized is just as important. For more information on how to make sure the value you identify makes it to your bottom line, please contact us anytime.

Three Questions to Ask Yourself Before Buying a Multi-Million Dollar Software License

To be perfectly clear, we're not anti-pricing software. We believe pricing software can be immensely valuable and have a tremendous ROI when implemented correctly in the right situations. Many factors will determine if pricing software is appropriate for your needs, but three basic questions should be answered up front to determine if software is a complete non-starter.

How stable are my ERP systems?
Since pricing software generally either receives data from or directly interfaces with your existing ERP systems it's best to review your future plans for existing ERP systems before making plans for software add-ons. If you're planning on moving from JDE to SAP or vice versa two years from now it probably does not make sense to invest time and money on a software implementation that may be turned off and have to be rebuilt or reconfigured just a few months or a year later.

How good is my transactional data?
Even great software can't cure all of your data problems. If business users do not trust the current COGS, freight, or pricing data in your systems today, they aren't going to trust it in the pricing software either. Automating analyses with bad data is a road to nowhere benefits-wise. It's best to first develop data users trust before building a sophisticated tool. If you are unable to get your data under control and users constantly require manual adjustments to data, pricing software is generally not the answer to your problems.

Who are my targeted users for the software?
Different software modules are built with different user groups in mind. Analytics software can be used by anyone from sales to finance to marketing, while many executional modules are based around account managers entering deals into the system for pricing approvals. Many companies do not want their account managers spending time on their computers, they want them spending every possible second with clients. If you don't want account managers using software an execution module probably is not not a good idea for you.

These three are just a few of the questions companies need to answer before making a pricing software decision. For help with any additional questions you have feel free to contact us anytime.

Happy 4th of July!

Kind of ironic that the best day each year to have our office is a day no one is working. Located literally about 300 ft from Philadelphia's fireworks extravaganza on the Art Musuem steps, our office will be back to buzzing with activity next week - whether it's pricing professionals or firefighters watering the ashes is up to the city tonight - have a great holiday!

As always you can contact us, but our whiffle ball bats do not have e-mail capability yet (we assume Steve Jobs is working on it) - so we'll get back to you in a few days.

Happy 4th!

Waterfall Design: Where to Begin?

When designing a price/margin waterfall one of the first major design decisions you’ll face is deciding where to begin your waterfall. For many companies this means list price, for others a “base price” or “gross price” is a more appropriate starting point. Even if list pricing is available it might not be an appropriate starting point, as there are several issues that come into play. There are a few simple questions companies can answer to help them determine if starting with list price is right for them.

Are list prices maintained for all products?
Having list prices available for some but not all products creates a number of headaches. In addition to having to decide how to populate the list price bucket for products with no list prices in place, you now have two different starting points in your waterfall as some start with list and others start with base price. Organizational change is hard enough – unless list price data is especially meaningful for the subset of data with list pricing in place it might be best to have all waterfalls begin at the same point to minimize confusion for new users.

If list prices are maintained – are they real?When companies announce 2-5% or 5-10% price increases, list prices are usually raised the full 5% or 10% respectively. Repeat this twice a year for a few years and you soon have list prices entering a new stratosphere from actual customer pricing. If list prices are more than 2x your average price, it’s best to begin with a more realistic price point as you don’t want to lose credibility with your first waterfall bucket.

Is anyone actually paying list?
If you do have small customers or distribution partners paying list or a standard discount from list, you will probably want to run some form of analytics to ensure prices are moving with list accordingly. In this case including list pricing in the waterfall might be important.

One final thought to remember is that your price/margin waterfall data can be different from your price/margin waterfall analytical graph. If list pricing is important for some business but a distraction to other segments, you can always include list price in your actual data so users have access to it if needed, but begin your waterfall chart with base price as to not cloud the data for other users.

For more information on waterfall development please visit or White Papers section for more detail or contact us anytime.

Analytical Frameworks: Analyzing Negative Margin Business Sometimes Shouldn’t Be As Easy As it Looks

Every customer we’ve worked with has had a process to deal with negative margin business. Unfortunately the process usually consists of producing a list of negative margin business at the customer/product level each month… and that’s about it. We’ve heard tales from customers who reacted to months of inaction by embarking on complete negative margin purges and in the end giving up volume that they actually needed to fill plants. Afraid of making the same mistake twice, customers then did nothing to fix negative margin business for months.

To help avoid this problem we feel that two additional pieces of information are vital to any negative margin analysis in addition to basic volume, price, COGS, and margin data – and they’re usually missing. First, companies need to determine or estimate the % of COGS that are fixed vs. variable, and then subtract fixed costs from margin to determine if the sale was contribution negative in addition to being margin negative – as companies will frequently tolerate negative margin business to absorb fixed costs. Cash negative business, however, should be the ultimate no-no barring extraordinary circumstances. Second, companies should determine the number of customers purchasing that product. Knowing that a customer is the only customer for a certain negative margin business can allow you to consider removing the product from your portfolio entirely.

(Click chart for larger image)

Having just one piece of this information missing (i.e. cash contribution status) gives resources an excuse not to review your data and ultimately not take any actions to improve your business. But by providing a complete picture of the situation you can present a clear case for action.

For questions on how to structure this framework or any others, please visit our White Papers section or contact us anytime.

Price Design: Recent Currency Devaluations Highlight the Importance of Proper Pricing Setup

A sometimes neglected pricing best practice is quoting customers in the same currency as your production expenses to protect yourself from fluctuations in currency values. Though some countries in Eastern Europe, Latin America, and Asia Pacific may require invoicing in their local currency, sellers are usually able to minimize this problem by first quoting customers in these countries in USD or EUR but then invoicing them in the local currency using that day’s exchange rate to reduce currency exposure. Companies may actually have more trouble getting British or Western European customers to pay for U.S. produced goods in dollars, as forcing them to pay in USD can be seen as a hassle at best, and downright insult at worst.

Even after a slight recent recovery, the Euro is still down nearly 15% vs. the dollar this year. For companies with U.S. production facilities shipping product abroad, after years of “currency effect” usually being a blessing, it has now finally turned to a curse. Now is a great time to analyze the effect the Euro decline is having on your business at the customer/product level in addition to the macro level – even if you’re unable to pass along higher pricing right now, it’s important to understand this cost at the customer level to avoid having account managers grant additional concessions you can’t afford given your new lower (or negative) profitability on the account. In addition it’s important to understand your new profit levels for any future negotiations, as you can’t wait on the Euro to bring your profit back with it.

For answers on how to make sure your profits are not dependent on currency traders feel free to contact us anytime.

Pricing in the News: The $1.6 Million Mistake

6pm.com, sister site of popular online shoe retailer Zappos, had some trouble with their pricing software that led them to mistakenly cap most product prices at $49.95 for a period of six hours. Honorably choosing to respect all completed deals, Zappos took a $1.6 million dollar hit that could have easily been prevented with easier to use pricing software.

Tony Hsieh (CEO, Zappos.com, Inc.):
We have a pricing engine that runs and sets prices according to the rules it is given by business owners. Unfortunately, the way to input new rules into the current version of our pricing engine requires near-programmer skills to manipulate, and a few symbols were missed in the coding of a new rule, which resulted in items that were sold exclusively on 6pm.com to have a maximum price of $49.95. (Items that are sold on both 6pm.com and Zappos.com were not affected.)

We already had planned on improving our internal pricing engine so that it will have a much easier-to-use interface for our business owners. We are also planning on adding additional checks and balances to hopefully prevent this type of thing from happening again.

For more information direct from the Zappos blog: 6pm.com Pricing Mistake

For more information on which pricing software is right for you, feel free to contact us anyitme.

Recommended Reading: The Price Advantage

Written by three McKinsey & Company partners, we consider The Price Advantage to be the most well-rounded effort on the importance of pricing and how companies can bring discipline to their pricing efforts. Beginning with an excellent introduction to several important pricing concepts (price waterfalls, price/volume tradeoff, etc) the book quickly dives into detail on what the authors consider to be the three levels of price management: industry strategy, product/market strategy, and transactional pricing. As most of our work revolves around transactional pricing excellence, we recommend this book to anyone new to pricing as it provides a great background to not only the levels of price management but also on pricing technology, new product pricing, and a host of other key topics.

The book is available at Amazon and a number of other sites – and well worth the asking price. It’s not often you have the chance to learn for hours from McKinsey experts for $50 (or in our case, $20 used).

Pricing Software: An Introduction

When an organization is ready to make an investment in pricing technology, there are a host of software vendors in the marketplace offering a variety of solutions. Most vendors offer 3-4 software packages that perform related pricing functions and integrate with both other pricing packages as well as an organization’s existing ERP system. Pricing software packages normally break down into four main categories.

Pricing analytics software is designed to increase your visibility into price and margin data through the use of scorecards, dashboards, and common pricing analyses like waterfall charts, scatter charts, etc. The software generally allows customers to design and save custom reports as well – a great way for companies to institutionalize the analysis frameworks that best help them identify opportunities for margin improvement.

Pricing execution software helps companies accelerate and automate their pricing approval workflow. Many execution programs will begin by “scoring” a potential deal based on pricing, volume, and cost estimates, and then allows companies to route pricing approvals based on deal parameters. (i.e. Companies can configure the software to allow small, high-margin deals to be approved automatically while low negative margin deals can require various approval levels based on size.) In addition to getting customer quotes together more quickly, the software can also provide an audit trail for Sarbanes Oxley requirements – an added bonus for companies who need to fulfill that requirement as well.

Pricing administration software aims to take some of the headaches out of price management. In addition to improving invoice accuracy, many packages in this area allow users to easily perform mass price updates – something many existing ERP systems do not allow. For large companies with hundreds of thousands of pricing records processing price increases more efficiently not only reduces personnel costs, but also allows you to start capturing higher prices faster. Since these activities are highly related to pricing execution work, some vendors lump administration and execution functions together in a single software package.

Pricing optimization software is designed to help companies maximize their profit potentials by identifying optimal prices for certain customer segments in their portfolio. As these modules use patented or proprietary algorithms to identify these segments, optimization software varies between vendors more than the previous three packages.

Companies can decide which package or combinations of packages are right for their needs as well as their budgets. For more information on the importance of selecting the right software vendor please contact us anytime.

Excel Tips & Tricks: Using CTRL + G to fill in PivotTable Export blanks

Our love affair with PivotTables began soon after entering the consulting ranks following college. For people who spent about 85% of their time (in this case “time” equaling about 60 hours per week) cleaning, manipulating, and analyzing data – we were spending more time with our PivotTables than our friends and family.

As people who needed to manipulate data outside of the PivotTable itself, a major problem early on in our relationship with Excel was the PivotTables’ insistence on exporting blank fields whenever repeated values occurred after we copied and pasted the data into a new worksheet.

To get around this issue we spent hours copying and pasting values to fill the empty cells – but surely there had to be a better way – and that was CTRL + G – the shortcut that allows you to populate blank cells in less than 30 seconds by following a few simple steps.

First, after copying and pasting your pivot data into a new worksheet, select the most upper-left empty cell and type a simple = formula to have the cell equal the cell directly above it. In this case in cell A17 we would type =A16. Then select the newly-populated A17 and hit Copy or CTRL + C. After that use your cursor to highlight all columns with blank cells you need to populate, which in this example is just two columns (Customer and Market). Then with the columns highlighted type CTL + G and the Go To box will appear.



Since we want only want to paste our formula that takes the above cell in cells that are blank, we now select Special, then Blanks, then hit OK. Once this is complete you will notice all blank cells will be shaded awaiting your command. Simply type CTRL + V to paste the formula that we already to copied and all previously-blank cells will now feature the name directly above them – solving our blank fields problem and allowing us to move forward playing with the data. Before moving forward one last step we recommend is to copy and paste special all names as values to prevent data from scattering as you sort the worksheet moving forward.

If you’re stuck with an Excel problem or have a tip you’d like to share feel free to contact us anytime.

Pricing Design: A Possible Solution to Reducing Your Number of Price Records

Companies who sell products in multiple containers have two options for pricing these materials. (Like most companies we define “material” as a product in a package type.) Option #1 is called material-level pricing, where each customer has a separate base price for each package type. For example, a customer might pay $2.00 per kg when ordering product in bulk tank trucks, but $2.50 per kg when ordering drums of the same product.

Material-level pricing can create two main problems for organizations. First, it often leads to an exorbitant number of pricing records, as pricing administrators need to update each material price every time prices change. Second, companies need to constantly make sure that added pricing for packaged costs cover added expenses. The same situation is often multiplied when pricing different customer ship-to locations, as companies that include shipping costs in price need to charge more for customer locations 500 miles from a plant than a customer location just down the road. For example, if an organization had 500 customers buying five products with two different packaging types and three different ship-to locations each on average, the organization would need to maintain a minimum of 15,000 pricing records (500 x 5 x 2 x 3). If the organization decides to raise price by $.02 across the board, price administrators would need to update 15,000 rows of data, often one by one or just a few at a time.

One solution often floated to address this problem is the employment of product -level pricing with surcharging. Under this system, customers pay the same base price for a product regardless of package type or location, but are surcharged depending on package type or ship-to location. In this case, the organization would have just 2,500 pricing records to maintain, and would have a much easier time processing price changes as surcharges can remain constant over time.

One possible downside to this approach is the potential for negative reaction from customers who feel like they might be getting nickel-and-dimed when they view these surcharges on their invoices or hear about them in negotiations. (Think about the feeling you had last time you actually read your cable bill in detail.) The added logistical, freight, packaging, inventory, and labor costs involved with serving customers in packaged goods vs. bulk is often quite high – even if you pass these costs on to customers at cost there could be some sticker shock that causes customers to either dispute the charges or look elsewhere for their raw materials.

Choosing whether to employ material or product-level pricing is just one of many decisions an organization faces regarding pricing design. For more information on how to reduce your administrative costs by reducing your number pricing records please contact us anytime.

Excel Tips & Tricks: The XY Chart Labeler

If your job requires a lot of analysis and Excel isn’t your best friend, odds are you need to get to know Excel better. In addition to rich internal capabilities there are dozens of free or inexpensive add-ins that allow you to do many things in Excel that most users are not aware of. One of our favorites is the XY Chart Labeler, a free add-in available at appspro.com that allows you to add names to data points in Excel charts. One of the most prevalent uses we find for it actually refers back to our last blog entry – the Price Outlier framework.

Normally we’d have thousands of customer/product situations, but in this example pretend we have 17 customers for a given product and we want to identify graphically which customers have pricing below the price/volume curve we typically see for a product. We start with a table of basic information.

When graphing the data we clearly see that two customers have pricing that falls below where we’d expect it to be given their volume – but we don’t know which two. We could easily check out customer prices and volumes to see who these customers are, but if we wanted to make a presentation to a business leader highlighting the fact that pricing outliers are a problem it would take forever to make 10-15 slides by product and adding in the customer names manually.


This is where XY Chart Labeler becomes our best friend for a day. With just a few clicks, the add-in allows you to select a column to bring in as data labels – in this case we want customer name. By adding those in we can clearly see that Delawhat Contracting and Get Started Painting are the two customers whose pricing might not be optimized today.


For more Excel tips and tricks please check back with us soon – there are dozens of capabilities you might not be aware of that can cut your analysis time in half – if not more. Until then if you have any questions feel free to contact us anytime.

Analytical Frameworks: The Path to Identifying Pricing Improvement Opportunities

At NextLevel Pricing we believe there are three main activities an organization needs to perfect to maximize the financial potential that pricing analytics can bring to their bottom line:
1. Producing price/margin waterfall data that is timely, accurate, and structured appropriately to allow for various pricing analyses
2. Employing the proper analytical frameworks to analyze this price/margin waterfall data in a manner that brings opportunities to light
3. Successfully integrating analysis activities into everyday business practices by providing business resources with a process to identify, validate, and act on top potential opportunities exposed by each framework

An analytical framework in pricing analytics basically answers the questions What do we want to look for? and How do we want to find it? Frameworks are generated by manipulating price, cost to serve, and margin data along with the appropriate qualitative data (customer name, product name, etc) required to make the data realistic and actionable.

A very basic and popular framework used by almost every organization is a framework that identifies customers with pricing or margins that are outside the mean for a given product. By graphing customer price or margin on the Y-axis and volume on the X-axis, we can identify low-volume customers who might be receiving a price that is lower than someone with their expected buying buyer should receive.

Analytical Framework: Pricing Outliers
What we want to find: Cases were we might not be charging as much as we should at a customer
How we find it: Identifying customers with below-average pricing and volumes for a product

Graphical Example

As one of the less complex analysis frameworks, running a pricing outlier analysis a great starting point for organizations just beginning their pricing journey to ensure they’re capturing appropriate value for their products in the marketplace. There are a number of ways to take this analysis further – one option is to group customers by overall volume then give certain groups allowances from average pricing levels before they are considered an outlier. For example, we might conclude that if a customer is one of our Top 10 customers by volume we’d expect them to receive lower prices – so we’ll ignore any pricing outliers at these customers unless they’re at least 20% below average.

For more information on how to setup this analysis in a simple format or use more detailed parameters to take this analysis to the next level, please see our White Papers section for information. In the future we’ll break down more complicated pricing frameworks and discuss methods to run this analysis for an entire Fortune 500 company in one day – but for now if you have any questions feel free to contact us at info@nextlevelpricing.com.

Price / Margin Waterfalls: A Basic Introduction

I can’t think of a better topic for our first blog entry than a basic introduction to a standard Price / Margin Waterfall – the foundation for pricing analytics. Beginning with revenue and ending with profit, a waterfall is simply an income statement in graphical form designed to highlight “leakage” cost buckets (Freight, Logistics, etc) and their impacts on profitability. Cost buckets are separated by anchors (Base Price, Invoice Price, etc) that serve as intermediate points on the waterfall and are frequently used in various pricing analytics.

Waterfall designs will vary by industry but all feature some common elements. The first waterfall elements on the left are derived from an organization’s pricing setup. A common setup begins with a customer’s Base Price and then adds various on and off-invoice surcharges until reaching the Invoice Price a customer actually sees on an invoice. Another option is to begin with List Price, but that’s a complicated decision we’ll break down in the future. Breaking down the revenue data into several buckets and anchors instead of beginning simply with Invoice Price has several advantages, just one of which is allowing you to differentiate between changes in base price vs. changes in surcharges.

Following Invoice Price, cost to serve buckets such as sales adjustments, rebates, cash discounts, commissions, and customer freight are subtracted from Invoice Price to reach what many companies refer to as “Pocket Price” (i.e. the amount of cash placed in your metaphorical “pocket” after certain costs are paid). Many companies begin the waterfall design process with several of these cost buckets already being calculated in existing margin reports and simply have to add 2-3 new elements. It’s important to include as many costs as possible to give you the most accurate picture of your true profitability – but some constraint must be shown to avoid adding too many waterfall elements or trying to add costs that are impossible to allocate back to specific sales.

Some organizations will stop at Pocket Price for fear of exposing sensitive cost of goods sold (COGS) data, but in most cases COGS buckets are subtracted to reach a final Gross Margin anchor – representing the final profit you make after all costs are considered.

We’ll get into much more detail on the importance on designing a proper waterfall later, but for now that’s your basic introduction to price / margin waterfalls. In the meantime for more information contact us at info@nextlevelpricing.com.