Price is one of the most powerful levers available for manufacturers to proactively determine financial performance. Price affects competitive position, influences the number of units to be sold and is a critical factor in achieving an optimal product/margin mix. Pricing decisions for many manufacturers are executed daily in tens of thousand of transactions, and these decisions ultimately sum to a company's key financial performance metrics: revenue and profitability.

Company executives usually have a pretty quick answer to the question, "Do you know what customers are paying for your products?" They will rapidly produce a price list or average price statistics. But, is this really what customers are paying?

Average Price Versus Net Price

The old saying poking fun at statistics, "When you have one foot in boiling water and the other in ice water, on average you are comfortable," aptly describes the value of average price. However, most executives and managers rely on average price -- defined as sales revenue divided by units sold -- as a measure of what their companies actually charge customers for their products. In reality, average price does not come close to telling the whole story and is often far from the reality of what is happening with the business.

Why is average price such a misleading number? The first reason is the definition of price. At many companies, price is generally a pretty fuzzy term. In the end, the number that really matters is net price. Net price is the amount of money your company reaps from a transaction after the dust of rebates, bill-backs, accruals and discounts settles. Unfortunately, "net price" is generally very difficult to compute given that discounts and programs are often negotiated separately from product price decisions, and there is a complex interplay between all of these programs. In addition, the timing of the bill-backs and rebates that finally settle a transaction can often be quite far apart, making net price calculations a complicated accounting exercise.

Even if true "net price" is computed at the transaction level, average price does not tell the whole story. Average price misses variability or consistency of prices. In my experience, high levels of price inconsistency are the norm -- not the exception.

Across a large number of companies and a broad range of categories, there is often little consistency in transaction-level net pricing. This inconsistency results in a disturbing situation from a customer management and financial performance perspective. Figures 1 and 2 illustrate how average price and net price for the same products diverge significantly. The impact of such inconsistency is certainly felt in the bottom line of the business.

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