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.