Six Sigma Pricing: Improving Pricing Operations to Increase Profits
by ManMohan S. Sodhi and Navdeep S. Sodhi
If your company negotiates prices, you need to read this book. The authors provide a welcome operational complement to the much broader literature on pricing theory. Pricing theory typically focuses on what price to set, and what policies to consider. This book focuses on how to execute those policies effectively, without the “defects” that sap profitability. Using a Six Sigma framework, the book identifies defects, or “sloppy pricing” in both prices per se, and pricing processes. Prices can be defective if they are too low, leaving money on the table, or too high, reducing purchases and leading to customer attrition. Processes can be defective if they do not meet defined service level agreements for turning around price approval requests (or if there is no defined service level). Eliminating or reducing these defects can lead to substantial profit gains, just as earlier Six Sigma efforts did with manufacturing defects.
The book comes in four parts, the “Motivation and Context,” “Basics—Pricing Operations and Six Sigma,” “Doing a Six Sigma Pricing Project,” and “Enterprisewide Deployment.” Throughout, the authors use an anonymized case study, based on their personal experience, to explicate the concepts in the book. For people familiar with the challenges described in the book, the first two parts will be a refresher, and the real interest will lie with the second half of the book. For executives and others who are not familiar with the concepts, the first half will be illuminating, while the second half may contain too much detail. Project managers and pricing wonks will want to cover the whole book.
So what if your company does not have expertise with Six Sigma? This is my only real problem with the book–not that you can’t use the concepts, but that the title implies that the book applies primarily to Six Sigma junkies. Sodhi and Sodhi provide templates, common opportunities, and suggestions for managing scope to achieve not just conceptual improvements, but real-life, measurable benefit. There is enough information here to guide novices through the process, although you might want to consult with an expert. The authors also emphasize that Six Sigma is one possible methodology to improve pricing operations, and the one that the authors have direct experience practicing, but it is not the only road. One benefit of going with Six Sigma, however, is that it provides a framework for collaboration between different parts of the company.
This book will not help you set list prices, or build a pricing practice, but it will help you build a pricing project team, and get much more benefit from your current pricing organization. For companies that have a multi-step pricing process, especially one that involves sales negotiations, this will be one of the most valuable books you will read this year.