Six Sigma & Pricing: Benefits & How It Can Improve Your Business Pricing Decision. Six Sigma (6σ) is a term that describes the various management tools and techniques designed to improve business processes and make them work more efficiently. Although originally developed by two Motorola engineers – Bill Smith and Mikel Harry – in 1986 to reduce defects on the manufacturing floor, six Sigma is now adapted to drive continuous improvements in other areas of business such as pricing.
In a company, one of the top factors that could literally make the finances bleed red is a bad pricing decision or poorly executed pricing strategy. For instance, it’s true the coronavirus introduced factors that made many marketplaces more difficult and competitive.
Even with this, there’s enough room for the management of most organizations to improve their overall pricing level and consequently their revenue using a combination of six sigma & pricing.
Sometimes, managers try to boost their top and bottom line in a tight business terrain by giving excessive discounts to attract price-conscious buyers or opportunistic high prices to a different group of customers. The downside of going this route, however, is that excessive discounts will likely cause you to lose margin even when your sales volume is high.
Also, when the customers you are charging high discover that some people are getting more discounts from you for no clear reason at all, they might either leave or decrease their business with you. On the other hand, if they choose to stay, they would probably want to negotiate deeper discounts, thus eroding your already dwindling profits.
So, in cases where your pricing operation is filled with many “defects” that are causing your business to continually leak out cash, how can six sigma help correct the situation, and what benefits does it offer?
How Six Sigma can improve the pricing decisions and strategy of your business
Traditionally, the six sigma approach consists of five stages aimed at eliminating defects and improving quality in a production plant. But with time, the system has evolved to bring improvements to other business processes and industries besides manufacturing.
The five stages of six Sigma specially adapted to help business leaders make the best pricing decision (and also perfectly execute their pricing strategy) are:
Define the “defect” or problem and the extent of the defect present in your pricing operations, transactions, and contracts.
Measure and identify factors necessary for pricing success along with various aspects of the existing pricing process.
Analyze the data collected in stage two and note all root defects found. In addition, brainstorm other problems that may be in your current pricing process.
Improve the current process by recommending changes that need to be done. Furthermore, make estimates of the improvements that would be seen in prices after implementing these changes.
Control the way the process is carried out in the future by recommending controls that ensure employees follow the agreed changes and achieve the estimated results.
Is combining six sigma & pricing successful or not? How to tell
When applied to pricing, the aim of the Six Sigma concept is to estimate the best commercial pricing decision for a company. To achieve that, the five steps of the concept, whose acronym is DMAIC (define, measure, analyze, improve and control) are used to evaluate and improve essential pricing-related criteria.
Before any improvement is made to any of the criteria, each is given a severity ranking. The severity ranking starts from 0 and ends at 10. A ranking of 0 means the criteria has zero negative impact on the customer, while a number 10 indicates a catastrophic effect.
At the initial stage of the six sigma process, the ranking shows which pricing-related area needs improvement and how much. And at the end, a positive ranking shows the effort aimed at improving pricing was successful.
The criteria worked on to improve pricing for a business include: Time to complete, resource to complete, EBITDA improvement, sales volume improvement, cycle-time reduction, quality improvement, operational buy-in, and management buy-in.
Benefits of combining Six Sigma & pricing
There are many benefits that Six Sigma & pricing offers, and this makes the process tough to beat by other methods doing pricing improvement. These benefits include:
- Easy decision making
- Lead time reduction
- Propositions that have a balanced mix of qualitative and quantitative factors
- Better alignment between pricing strategy and pricing operation
- Risks and opportunities are quantified accurately to a large extent during each decision
Six Sigma & Pricing: Benefits & How It Can Improve Your Business Pricing Decision.
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