We’re here in Atlanta for the the 30th Annual Spring Pricing Workshops & Conference at the Loews Midtown Hotel in Atlanta with some of our top pricing experts in the Syncron organization to learn from some of the best in the industry – and to uncover the expanding scope of pricing today.
This morning we’re hearing from leaders at world-class companies and pricing communities. First up is Paul Hunt, President at Pricing Solutions Ltd. discussing the Pareto Principle – also known as the 80/20 rule and how to amplify its impact in business by layering and streamlining service pricing processes.
The 80/20 Rule and Service Pricing Processes
So, what exactly is the 80/20 rule? Simply put: it means few things are critically important, while the vast majority of things are not. The main driver behind 80/20 in the business world is on reducing complexity by eliminating and isolating less strategic products and customers. When applied to service pricing processes, this simple but powerful methodology could yield massive benefits for your organization.
That’s why it’s critical for you to uncover significant opportunities for positive growth and improved profitability. The 80/20 rule allows your business to:
– Identify critical few customers
– Identify critical few products
– Eliminate complexity and complexity costs
– Minimize the resources required to operate the business
– Re-invest optimized revenue
To put this 80/20 rule into action, you have to break down your customers into four quarters to better assess where your revenue priorities lie. Quad 1 is known as The Fort, which drives about 64% of total revenue because they are your A+ customers with A+ SKUs. Quad 2 is known as the Necessary Evil – 16% of Total Revenue because you’re working with A+ customers with B-level SKUs.
Alternatively, Quad 3 is known as Transactional – 16% of Total Revenue but B customers with A+ SKUs. And finally, Quad 4 is the area to “Eliminate and Isolate” because it’s 4% of Total Revenue from B-level customers with B-level SKUs. By pricing by quads, you can achieve the following:
- Reduced costs and targeted price reductions in Quad 1
- Raised prices to drive Quad 2 to Quad 1
- Rechanneled and waterfalled pricing in Quad 3
- Price increases and waterfall pricing in Quad 4
Value-based Service Pricing Processes
Assessing this kind of value-based pricing helps identify which products, even ones with high margins, can absorb a price increase and/or are underpriced in the market. To do this, you have to focus on the five C’s: customer, cost, conditions, capacity and competition. And, with 80/20 process segmentation, you can develop a structure where similar customers pay similar prices for similar products.
By layering in segmentation attributes like value and cost to serve, you can provide better structure. Not all your 80’s (A+) customers are of equal value – and not all of your 20’s (B-level) customers are equally costly to serve. Ultimately, this model provides a framework for aligning margin rate expectations across micro-segments.
FOLLOW ALONG!
Join us as we live blog our experience during the performance workshops, interactive working groups, and so much more. With nearly a week’s worth of networking, technology and strategy, we’re sure to come home with some of the best tools in pricing today!
SHARE THIS POST