It’s easy enough to describe what a Key Performance Indicator (KPI) is, right? Sure, and 99 out of 100 of you would be right in saying that a KPI is a measure that indicates how on course or how well you are tracking towards you are a goal or an objective that you seeking to achieve in either your personal or business lives. But are you as right as you could be with this definition? It might be a shock to learn that definition is just one half of what a KPI is. The second part of what a KPI is, and if it is relevant to you and your company’s pricing, is being able to measure it with a defined metric to give you guidance on how well you are tracking towards your objective and if pursuing that goal is affecting your business performance in a positive way or not. Taking that two-pronged perspective approach to KPIs, in this article, we’ll discuss ‘Key Pricing KPIs: What Are They & How Are they Measured?’.
At Pricefx, we’ve spent many years helping companies satisfy their need for cloud-nativepricing software, by providing a robust pricing solution with which they can achieve all their pricing goals. And one of the most-common questions we hear from our would-be clients is ‘Once we have the tools for the job, what KPIs do we need to track?’
In this article, we will jump into why KPIs are important before outlining the key set of pricing KPIs that you’ll need to make your company a lean, mean pricing-efficient (and therefore, more profitable) machine.
Why, How & Which KPIs Are Important to Your Pricing Success? It Depends
KPIs are usually built into pricing projects from day one, and the KPIs you need will be required to align with your company’s unique set of business objectives, and that will potentially mean a distinct set of KPIs for each company.
When it comes to measuring pricing success most everyone will believe it’s all about profit; and measuring gross margin. While that is certainly a critical facet of pricing, margin is more a valuable result of efficient pricing – a KPI ‘candidate’, rather than what we call a ‘pure’ pricing KPI. Margin is like getting an A in school – it is a great pointer to a job well done. However, the result does not signify what you have learnt about Trigonometry or American History in class, right?
So, if that is the case, what really matters in pricing? Pricing actions must have a strategic goal; and driving improvement to that goal is success. Directional successes are often the most important, especially when your company is going through change or responding to changing markets forces. Measuring success against your KPIs might please your company’s head honcho, but will it make your pricing better? Measuring success should also quantify how well your pricing process and solution is working to achieving your organization’s goals and pricing strategies.
For example, you may have a goal to drive your market share in certain sections of your company’s products through a sales units increase without eroding margin. Perhaps the KPI objective was set at a 10% increase in sales units at your existing margin. Accomplishing only a 5% increase with no margin erosion shouldn’t be regarded as a failure. However, it’s a successful step on the way to reaching your KPI goal, particularly if your company has never done that before. What’s important was accomplishing the increase.
A few standout lessons to think about on KPIs:
Rarely is one KPI goal sufficient: For example, margin is easy to get if competitiveness or market share is not an issue. Also, always measure pricing against the trade-offs implicit in pricing, such as revenue vs profit or sales volume vs. margin or revenue.
KPIs rarely exist company-wide – getting granular will be required across different customer and product segments: Just as different products play different roles in the assortment, different pricing goals should too across the different customer and product segments of your company.
Long story short, whatever KPIs your company sets up must be relevant to what your organization is trying to accomplish as a business.
Pricing KPIs: What Are They?
So, with all the KPIs available at your fingertips, what are the key pricing KPIs recommended to consider? As seen above, there is no sure standard set of KPIs are right for each-and-every business but there are a range of more standard measures which we will take a closer look at now.
2 Types of Pricing KPIs
To kick-off, we have identified when it comes to pricing that there are two types of KPIs – those that everyone follows – let’s call those ‘KPI Candidates’ for the sake of this article – and ‘Pure Pricing KPIs’ – that are discovered and drilled into to produce deeper insights and go after your company’s unique set of business objectives and enable a pathway to value through good pricing governance.
Here below is a non-exhaustive list of ‘KPI Candidates’ and what are simply called ‘pricing metrics’ or ‘KPIs’ in some pricing circles (the list is an endless one that depends on your company’s business goals and the industry your organization operates in) that you may choose to measure.
Gross Profit Margin – Gross Profit Margin is almost every company’s go-to-KPI. It calculates how much money is left from the revenue after removing the cost of goods sold and expresses it as a percentage of revenue. This shows how profitable your products are.
Total Revenue – Total revenue tells you exactly how much money your business generates before expenses. In other words, it’s the total amount of income your company brings in from selling your products/services.
Won Opportunities to lost Opportunities Ratio – It can be calculated by dividing the number of opportunities your business has won by the number of opportunities your company has lost.
Number of Deals – Total number of new deals that your company has welcomed over the last period.
Average Deal Size – The total revenue achieved in a set period (e.g., a month, a quarter, a year) divided by the number of closed-won opportunities during that same period.
Number of Accounts – How many accounts (customers) your business has on its books.
Number of Products/Services – How many products or services your business offers to its clients.
Number of Accounts per Salesperson – How many accounts each of your salespeople services.
Sales Per Person – Sales per person relates the revenues of a business to its headcount. It is often tracked as it it addresses the process efficiency of your business, rather than the the Salespersons’ efficiency.
Accounts with a positive or negative margin – Number of accounts that either made (positive margin) or lost (negative margin) your company money.
Products with a positive or negative margin – Your products that either made (positive margin) or lost (negative margin) your company money.
Number of Transactions with a positive or negative margin – Your deals that either made (positive margin) or lost (negative margin) your company money.
And many, many more besides
How to Measure/Track KPI Candidates
Although it may be arduous work to do manually, in theory, measuring or tracking your KPI candidates’ day-in/day-out is possible using Excel or Business Intelligence Software. You honestly don’t need pricing software to do that (although it might be easier than doing it manually).
To drill down further and to surgically analyze your optimal prices so you can explore your pricing at a granular level to identify drivers for value and uncover segments, patterns, and opportunities you never knew you had, pricing software will enable you to measure a set of ‘Pure Pricing’ KPIs.
These Pure Pricing KPIs can help your business measure whether the current pricing process is doing what management thought it should be doing,and highlight the areas of possible improvements.
Pure Pricing KPIs – Only Discoverable Through the Use of Pricing Software & a Price Waterfall
On the other hand, several KPIs only become measurable and trackable when using pricing software and when identified on a pricing waterfall.
What is a Price Waterfall?
The price waterfall is a simple, easily understood visualization tool for the components that make up a price and it offers incredible pricing insight. You can plainly see in the waterfall graphic below, how distinct factors influence your price, and how it displays the distinct effect every component (e.g., discount or rebate) has on your company’s profitability.
Generally, the price waterfall chart starts with a list price, but it can start with any base price to which discounts and rebates/incentives are applied to. (Discounts are price variations applied before the invoice price. Rebates and Incentive Programs are price variances that are applied after the invoice price.)
The price waterfall shows the discounts to get from list price to invoice price and then any further rebates to get to pocket price. Variable costs can also be added to the end of the price waterfall to visualize just how much pocket profit is left over after all your organization’s pricing components and product costs have been factored in, and before fixed costs get considered.
That’s Great – But What Are the New KPIs I Can See Here?
Only when using pricing software and the resulting price waterfall can we see the three variables we refer to as ‘Pure KPIs’:
List realization is about decreasing price leakage, increasing your ‘pocket price’ (after all discounts have been applied to your products) and hence keeping a higher proportion of the list price that flows directly to your company’s profit. List realization can come in the form of a higher list price, fewer discounts, additional charges or a decrease in services.
Leakage – Unfortunately, in many B2B and B2C sales scenarios, a business is unable to get the customer to pay the full list price. Due to sales pressures, competitive offerings and other macro-economic factors, the prices are marked down. Different incentives applied to the list price are referred to as leakage, or price leakage and sometimes they do not work as planned and discounting can backfire, which is why it is critical for Leakage to be measured as a KPI.
Discipline – Relying on good pricing governance, your pricing team can track both the good outliers (those customers you have been paying above your asking price) and the bad outliers (those clients you have been paying below your asking price). With pricing software, you are now able to identify both ends of the value spectrum. By setting up new approvals and workflows in your pricing software means you can now do as much as possible to reduce those bad outliers in your customer and sales transactions and leave less money on the table when closing deals to become a more profitable organization.
How to Measure/Track ‘Pure KPIs’
These three KPIs (known collectively as ‘Price Governance’) can be captured and measured by your pricing software when using a price waterfall.
Now I Know About KPIs and Applying Governance to My Pricing – What’s Next?
After reading this article, you now have a firm idea what KPIs are and how they apply in the microcosmic world of pricing. You now also have an idea if you want to keep the pricing process manually by using Excel spreadsheets or Business Intelligence Software like Tableau or Microsoft Power BI.
Or on the other hand, perhaps you’re ready to consider an upgrade to automated pricing software like Pricefx and getting more granular with your pricing and KPI analysis to power more profit.
Not ready yet? That’s fine, it’s not a decision that should be jumped into lightly. That’s precisely why the team here at Pricefx compiled this handy article below on compiling a business case on why you need pricing software.
Hartwig Huemer has decades of pricing and business analytics experience. As a Value Ambassador, he helps organizations to quantify, articulate and communicate the value, TCO and ROI of SaaS. When he’s not helping companies to uncover value, he is a soccer referee on the weekends.