Unlock Your Company’s Profit Potential – 7 steps to Pricing Culture Transformation

Case Study

A multinational company selling capital equipment and aftermarket consumables had finally hit an impasse. Revenue had been steady for the past three years, but profits had fallen steadily. Despite headcount reductions and cost-cutting initiatives, net profits were in a 15% decline yearly. The overseas head office gave the local managing director an ultimatum to fix the business.  

Over the previous decade, the business had benefited from a booming economy. Sales targets had been easily achieved, and while profit targets were only sometimes achieved, they were ahead of the previous year.

Culture and Mindset

In this environment of commercial success, unfortunate company culture and mindset had developed. Sales teams could set prices for customers, offer additional discounts, establish rebates, and then revise customer rebate targets to make rebate payment easier, effectively offering other discounts in disguise. They had appointed themselves the authors and signatories to these discounting tactics.

There needed to be more oversight and governance, and delegation of authority levels had been eroded to the point where individual sales reps would make strategic and tactical pricing decisions with their one-up manager.

When the company was achieving revenue targets and making an acceptable profit, this culture was not considered a liability, nor was the opportunity cost of this culture ever considered. With a change of management, both locally and at the head office level, came new expectations and levels of performance.

The new local managers had identified a deep-seated culture of cost-plus and commodity mindset thinking that negatively impacted price setting and sales negotiations. This culture was at the heart of the suboptimal profit performance of the business. The need to change pricing strategies and tactics was clear. It was unclear how this could be achieved when sales teams steadfastly adhered to behaviours that had brought them success in the previous decade but now brought them a sea of red ink.

The Need for Transformational Change

With rapidly changing markets, business models and economic conditions, the need to change and adapt far more quickly than ever has become a strategic imperative.

No longer can organisational change be considered a long-term strategic objective that occurs every 5-10 years. Change and adaptation cycles are now shortening such that strategies and tactics that might have worked 12 months ago may no longer be commercially relevant to support business objectives.  

For a company to maximise its revenue and profit growth opportunities and minimise the risk of margin erosion, it must develop a pricing change management program sponsored by business leaders that supports continuous improvement.

7 Steps to Achieve Cultural Transformation

The company in question undertook the following change management program to transform its pricing strategy and company culture:

1.  Define the rationale for the pricing strategy change: Before introducing a new pricing strategy, it’s essential to define the cause for the change and communicate this to all stakeholders. This might include a shift in external factors, such as market conditions, changes in customer preferences, or a desire to increase profitability. By articulating the reasons for the change, stakeholders and senior executives will be more likely to understand and support the new pricing strategy and be more willing to assist with managing change.
2. Engage stakeholders in the pricing strategy change: Engage all stakeholders to ensure they understand the project scope and implications of the new pricing strategy and are motivated to support it to succeed. This might include training sessions, focus groups, or workshops to help stakeholders understand the new pricing strategy, the structured approach to adapt quickly, and how it aligns with organisational goals.
3. Build a pricing culture: To create a pricing culture within the organisation, it’s essential to provide regular training and support to all employees, including sales teams. This might include regular coaching sessions, online training modules, or workshops to help employees understand the importance of pricing and how it impacts organisational success.
4. Establish clear pricing policies and procedures: Establishing them is essential to implement the new pricing strategy effectively. This might include guidelines for setting prices, rules for discounting, and processes for reviewing and approving pricing decisions.
5. Communicate the pricing strategy change: Communication is critical to the success of any change management initiative, and changing the pricing strategy is no exception. Communicating the new pricing strategy to all stakeholders, including customers, suppliers, and employees, is essential. This might include a communication plan that outlines the key messages and channels that will be used to communicate the change, as well as outlining the desired goals.
6. Adequately resource the change: It is critical for the success of any change management program to sufficiently resource the right people to support change and be sponsored by the executive leadership team to champion the change.
7. Monitor and evaluate the new pricing strategy: To ensure the new pricing strategy is effective, it’s essential to monitor and assess its impact on organisational performance regularly. This might include tracking key performance indicators, such as sales revenue, profit margin, and customer satisfaction, and adjusting as necessary to ensure the new pricing strategy delivers the desired results.

After implementing these seven key steps, the company saw signs of positive change. At first, a small group began championing the change management process and new ways of working, which influenced a larger group to adopt the new working policies, procedures, and practices. There was still some reluctance in the group to adopt the proposed changes, which became a source of further discussion, reflection, and refinement of the planned changes. By undertaking deeper engagement and dialogue with team members, greater buy-in and commitment were achieved from those initially resistant to change. Over 12 months, the business improved its pricing and negotiation power, reduced unplanned discounting, and generated a greater return on rebate investments. Over 200 basis points of margin expansion were realised.

In summary, changing pricing strategy and culture requires a thoughtful and structured change management approach that includes engaging stakeholders, building a pricing culture, establishing clear policies and procedures, communicating whilst implementing change, and monitoring and evaluating the new pricing strategy. By following these strategies, organisations can successfully implement a new pricing strategy and culture while minimising disruption to the sales team and other stakeholders.