1.5 What Six Sigma Pricing Is
As discussed, many factors contribute to defects in pricing processes. The fundamental causes are poorly designed or even unspecified processes. But even if the processes are known and clear, controls may not be effective. Either way, the Six Sigma approach for improving processes can help.
The Six Sigma philosophy, using data and statistical tools to systematically improve processes and sustain process improvements, can be applied to the pricing process with a focus on eliminating the "defects" of excessive discounts or excessive prices. Six Sigma is a methodology traditionally used in manufacturing to improve quality. Six Sigma Pricing, or the application of Six Sigma to pricing, enables systematic elimination of process-related defects by exposing the sources of these defects.
The five stages of Six Sigma Pricing are the same as that of Six Sigma except that they are adapted for pricing processes:
- Define the pricing-related "defect" in operational-, transaction-, or contract-specific pricing processes and the extent of the defect.
- Measure the extent of the defect along with parameters of the pricing processes as well as the invoice, say by analyzing past invoices.
- Analyze the data collected in Measure to infer how the size or incidence of defects varies with different aspects of the pricing processes as well as brainstorm on the other causes of defects related to the existing process.
- Improve the process by making process change recommendations along with quantitative estimates of how much improvement in related prices or other metrics would take place following implementation of these changes.
- Control the proposed process. For example, recommend controls to ensure that people are following the agreed-upon modifications and that the estimated benefits are achieved.