Ten Price Commandments
Much of my time at work the last few months has been taken up with a profitability project.
Up until recently, we suffered from a problem a surprising number of mid-size companies have: we knew overall how profitable we were, and how profitably various product lines or manufacturing plants were, but we didn't have good data on what individual items cost, and thus on which items and customers were more and less profitable.
Over the last six months, we did a major project to get that item level cost data, and so now for the first time we have good, detailed information on which items and customers are profitable and which are not.
You might think that this would make it easy to increase our profitability: just take the stuff you're losing money on and increase the price or (if the customer won't accept the higher price) stop selling it. Ta da! Higher margins.
But everyone can come up with all sorts of excuses for why this just isn't possible: This is a strategic loss leader! If we don't match (money losing) competitive pricing on this product, customers won't buy our other profitable products. If we win this business (at a loss) it will lead to winning other (profitable) business, or maybe we'll build up enough sales volume that our cost of producing it will drop.
On and on it goes.
Those of us in the finance department decided it was necessary to put together a clear and short summary of what rules we needed to follow around pricing and profits.
"We need a ten commandments of pricing," I joked.
"Yes, that's exactly what we need," the CFO replied. "Can you write one?"
I cheerfully signed up to write a pricing decalogue. After all, I write all the time, often about religion, and I'm a pricer, so why not?
Then I found myself staring at a blank page and feeling like everything I wrote was just variations of "don't lose money".
In the end, my solution was to think about how the actual ten commandments are structured.
The first three commandments are a basic statement of what is true: There is one God. We should worship him and no others. Then the following seven commandments explain how we should live in relation to others due to those truths.
I tried to structure my pricing commandments the same way. The first three attempt to sum up what is true about pricing and profitability. The following seven then describe how we should conduct business based on that truth.
And here they are: