Sunday, April 30, 2017

Applying Black Belt Principles to the Pricing Process

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Looking back at American manufacturing, a New Renaissance took place in the latter two decades of the 20th Century.  It started slowly, but by the mid-1990s, companies large and small began to apply principles tied to lean manufacturing and the related quest for continuous improvement.

Coming out of the movement was the “Black Belt.”  Initially, Black Belts worked entirely within the manufacturing process; leading teams through what was once viewed as the hazy world of plant floor work and material flows.

By the turn of the new millennium, the concept had been pushed to other processes. Things like order flows, procurement systems and even human-centric processes were scrutinized.  Similar to the manufacturing world, massive improvements were made.  Companies enjoyed new found efficiencies and gained a competitive advantage.

One person saw the advantage of putting the same principle to work on the pricing process.  Enter Greg Preuer of SPASigma.  Greg was certified as a Master Black Belt DMAK by General Electric.  He saw an opportunity to apply the same Black Belt methodology to the pricing used by companies.
The goal:  better pricing programs.


Pricing is a big deal
In an age when most companies find themselves facing competitive pressures, pricing policies have fallen into disrepair: special pricing abounds, discounting has grown rampant and operating margins have been pushed and squeezed.  Here’s where Six Sigma (Black Belt) efforts come
into play.  Black Belts work to understand and leverage each specific customer’s willingness to pay a price slightly different from their peers.  Simply put, they focus on already existing price sensitivity variances between customers.

Most companies rely heavily on their sales teams for what little direction they may have.  But the reality of the situation is very few sales teams have the proper training or tools to determine price.  Because they place priority on closing the order at any cost (or price,) they tend to underestimate the proper price level.  With this approach in mind, it’s no wonder that pricing has fallen in to disarray.  What sales teams crave is an advanced scouting report on what each specific customer would be willing to pay for every (specific) product in the portfolio; real data that kills the guessing game they currently must play.  

Nowhere has this been felt more directly than in the world of wholesale distribution.  Unlike the manufacturing world, distribution is a low margin business.  Wholesalers serving many industries survive on margins equaling just a couple of points.  There is little room for error.

One wholesaler described pricing in his organization as a visit to the wild west.  Lone Ranger salespeople set pricing for their customers mostly without firm understanding of costs associated with handling or servicing the customer.  Gross margin numbers are used for the same customer regardless of order size or difficulty in providing the products.  Reviews of the pricing used by hundreds of distributors reveals sell prices using familiar numbers which predictably end in zero or five.  Profitability suffers.

Enter the Pricing Black Belt
First, we must define precisely what a Pricing Black Belt looks like.  The Black Belt would serve as the company’s pricing leader. Maybe he leads a team, perhaps he operates as a team of one.  Either way, his job is to manage and control systems pricing, with the goal of profitably growing his business which translates to sales and gross margin percentage going up simultaneously.

Second, the Black Belt is dedicated to using analytics to improve performance.  This is not about “gut level feelings” or years of operation in a “data free” environment.  This need for analytics calls for skills based around spreadsheets and access to raw data from within the company’s computer system (ERP.)  The Black Belt is turning your company’s “big data” into a road map to drive margin improvements.

Finally, the Black Belt will drive profitability through ongoing improvement in the pricing process.  A well-tuned pricing process tracks the thin line between gross margin growth and competitive market pressures.  It’s an ever changing equation.  Raise the price too much and customers turn away; lower the price and bottom lines suffer.  Strangely, most companies still rely on guesses and untested assumptions.  Analytics, which could provide sound direction, are either untracked or not well understood.  Analytics combined with the knowledge/wisdom of how to drive organizational change are the cornerstones of the Black Belt process.

Become a Black Belt in Pricing
Until recently, gaining the right Black Belt Pricing skillset was a long and wandering journey.  No direct pricing specific training existed.  Instead, a person learned Black Belt skills in some generalized program and then, via lengthy personal trial and error, applied the newly learned knowledge to pricing.  The journey was costly in time, effort and lost opportunities.  By the time skills were properly developed, the newly minted Black Belt may have been reassigned to another task.  SPASigma has changed all of that.

SPASigma has developed a unique program for Black Belt Certification in Pricing.   Applying web-based technologies, prospective Black Belts go through a combination of formal training and specific skills building exercises.  

Here’s where the unique part comes in.  Quoting Greg Preuer: “While most formal Black Belt training uses case studies pulled from academia, we apply exercises using the student’s own company’s data.  We’re talking about real actions with real people and dynamic environments.  It’s not just busy work to flesh out the course material, our exercises are tasks developed to make an impact on your companies pricing organization.”  The Black Belt makes a real impact even before certification is achieved.

The course is done online with SPASigma’s Learning Management System (LMS,) which allows even the busiest student to make it through the class and exercises.  Add that to how the work applies directly to their current role in pricing, and the time is doubly valuable.

Who should become a Black Belt?
Mr. Preuer is a straight shooter.  During a conversation we asked the question.  Here is his response:  “Anyone who has been tasked with building, maintaining or improving their company price process would benefit from the Black Belt concept.  If you are leading a team somehow tied to pricing, the work of the whole team would step up a notch.  And if you are moving from a simple doer, (following the direction of others) and preparing to lead, this is for you.”

What are the benefits?  Greater margin, a better bottom line and improved market position.  This is important to every company.  For distributors, who operate on then profit percentages, improving gross margin drives bottom line performance like no other action.  For a $50 Million dollar distributor, a one point improvement in Gross Margin percentage means $500,000 in bottom line gains.  And to me, that seems well worth the thousand dollar investment in Black Belt training. 

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