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.