Pricing

Beware the “Efficiency Rut” – at your peril!

By Robert Irwin
September 9, 2013

Are you in the “Efficiency Rut?” Do you know what it is? Running a Pricing Organization focused on efficiency gains? You had better watch out! Your whole existence and that of your team is about to be called into question? That’s not so great – right! Even seems unfair, doesn’t it. You are working your backside to the bone, you are meeting your targets (those that the organization agreed to) and yet there is some unknown, menacing danger lurking around the corner.  Believe me – it is there. I have been there and lived through it! Not a lot of fun.

You might still be trying to work out what the “Efficiency Rut” is – let me help.  It’s the rut that you became predestined to fall into when you committed to a set of Efficiency Goals ONLY in your Business Case, either as a matter of self-preservation or under higher level duress.

As you know, Efficiency is one side of the ‘Benefits of Pricing” coin, the other being Effectiveness. It is the easier side. It’s the side that can be easily measured, tracked, monitored and proven. It’s the side that delivered the benefits for your Business Case to establish a pricing team or invest in a Pricing Solution that you (or your manager, or your manager’s manager) were prepared to sign up for. The Effectiveness stuff was just a step too far: achieving 3-5% ROS was just not going to be believed at the Board level or was going to mean too much scrutiny over the following months (years). So, you went for the easier side of the Pricing Benefits coin, didn’t you? Sounded like a good idea at the time. Not so great now (you will be thinking soon).

At the time of decision, it does make sense. It is enough to get the business case funded, to move forward without causing too many ripples in the organisation. The problem is that it then sets the tone and the culture of your whole Pricing Initiative. You, your team, your initiative, your solution all become about, focused on and dedicated to improving efficiency. That’s it. Nothing less, but also nothing more! So much so, that when you realise that it’s not going to be enough in the long run, no-one is willing to believe that you can deliver effectiveness gains. This is the trap. This is the “Efficiency Rut,” and it’s not cool to be in it.

As I stated, I once found myself in this “Efficiency Rut.” A long, long time ago. We had fixed everything. My Pricing Team was delivering successfully on all the efficiency measures that had been defined.  I could not work out why the Sales and Marketing organisations were no longer interested or impressed by our performance reports. It was the internal audit suddenly set up to question the future existence of my pricing organisation that provided me with the answers. This is not a tale of sorrow. We survived. After a fair amount of soul searching, a re-focus of targets and enough internal networking, the organisation made the right decision. It’s worth sharing what we all learnt. It might mean you can avoid the same experience:

1. The obvious one: Efficiency gains are not enough.

– At some stage, the organization will take these for granted. These past gains will have little current value.

– In the eyes of the Marketing and Sales departments (and their Heads), Efficiency gains do not count. They don’t count because they don’t directly impact the Front Office. There will only ever be an indirect impact at best.

2. Measuring Efficiency is easy(ier). Measuring Effectiveness is difficult.

– Don’t fall into this trap. Find a way to measure Effectiveness.  There are Best Practices to be followed in establishing Pricing Performance Measures & Metrics. Define the KPI’s, get agreement to them and ensure you can track them over time.

3. In the B2B world, you are valued by how you contribute to the organization’s overall success.

– In old school, simple terms: Sales sells stuff and is measured on revenue (I will debate this particular topic in a future post), Marketing develops stuff and is measured on margin, if all that the Pricing team does is improve efficiency……. well, what do you expect?!

So, you are warned. If you have not yet embarked on your Pricing Journey, head the advice, be brave and ensure you think about driving Effectiveness gains. If you happen to find yourself in the “Efficiency Rut,” you need to be the one that leads your team out of it:

• Be the first to admit it.

• Prepare the way and discuss it openly.

– This will prevent the nasty surprise surfacing out of your control.

• Find High Level supporters of your cause to become contributors to Effectiveness gains.

– Get them onside. Ensure they champion your cause during management discussions.

• Manage the change like a project.

– Communicate.

– Stay focused. Communicate the End Game.

– Build strong alliances. Communicate the Benefits.

– Measure and Learn. Communicate Success.

– Finally, for the cool part: Enjoy the fruits of your labour and benefits of the change.

  • best practices , effectiveness , efficiency rut , pricing

    Robert Irwin

    Robert has worked in Pricing for over 10 years and has spent the last five years at Vendavo helping customers implement and automate their pricing processes, strategies and margin optimization. Before joining Vendavo, Robert was the Global Director of Pricing at a High Tech manufacturer where he developed, built and led the Pricing Organization. He is experienced in leading sales and operations teams in the international business environment and has a proven track record of successfully leading organizations through structural and process change. Robert has an MBA from Wake Forest University and a BA (Hons) in International Business from Sheffield City Polytechnic.