- Nov 2, 2007
1.6 What Six Sigma Pricing Is Not
Six Sigma Pricing is not intended to create a pricing strategy, but to improve pricing operations and adherence to an existing strategy. It applies to pricing operations and repeated processes, that is, to control discount levels off list prices in contracts or in individual transactions. It is not intended to define the company's position as it regards price and product attributes in the market.
A company usually centralizes its pricing strategy-setting effort—such processes tend to be tightly run, although they do not occur frequently during a year. However, setting prices for individual discounts for the tens of thousands of individual transactions in one division in a year and even creating contracts for many customers is necessarily decentralized. Such an environment can have breakdowns in control and resulting revenue leaks. It could therefore benefit from the improved controls and discipline that Six Sigma Pricing can bring. Even periodic list-price-setting across thousands of products is a repetitive process that Six Sigma could improve.
Six Sigma Pricing is not about yielding control to the pricing function or to sales personnel, although it does entail giving sales and other personnel flexibility to respond quickly to the customer. Giving personnel flexibility does not mean giving up control. In fact, using Six Sigma Pricing, companies can create tighter controls, escalating guidelines for salespeople, sales managers, and pricing personnel for discounts. Thus, Six Sigma Pricing can help companies create the right balance between flexibility and faster responsiveness on one hand and tight controls of the price on the other.
Six Sigma Pricing projects are not focus groups or jawboning sessions. Such a project involves using tried and tested robust statistical tools and other mechanisms. Furthermore, each stage has its own set of tools applicable to different situations, which we discuss.
Six Sigma Pricing is much more than designing and using improved measurement and control. It is a systematic process of building a shared understanding and the rationale for improved measurement and control. Good measurement and reporting are quite useful in controlling any process whether or not related to pricing. However, achieving this is easier said than done. The most challenging problem for CEOs is bringing about change in an organization, and Six Sigma helps with that—improved measurement and reporting are merely outputs.
Six Sigma Pricing is not about controlling only excessively low prices but also excessively high ones. Cowboy managers "taking risk" in setting very high prices or exceedingly low discounts off the list price in a particularly opportunistic transaction can be part of the problem rather than the solution when it comes to pricing. An excessively high price can be a problem especially because the customer may eventually find out about discounts offered to other customers and even to different groups in the same company. A company's gains come from the various sales and pricing personnel consistently sticking close to desired discount levels off list prices around relevant segmentation variables such as industry of the customer served, size of customer, size of transaction, and geographic location, rather than "bold" decisions by mavericks. Six Sigma Pricing helps achieve this consistency.