Lean Six Sigma Tools
Cause & Effect Diagram
As stated above, the company’s sale force all wanted to lower prices to help them sell more (close more business). We analyzed what impact (good or bad) that might have on sales and profit.
We started the project with a Cause & Effect Diagram of everything that impacts sales and close rate. Download Price Senstitivity Analysis PowerPoint Presentation.
In general, when working on Sales & Marketing projects we will use the Cause & Effect Diagram as a guide, because it captures the company’s tribal knowledge on what impacts sales, close rate, profit, etc.
Pricing was an issue that the team felt should be investigated.
We used scatter diagrams to understand how pricing and close rate were correlated. (Profit/RE is a profit margin measure that is applied to the product they distribute)
As you can see price and close rate were not correlated. There were low close rate customers paying low (margins) prices and high close rate customers paying high (margins) prices.
Additionally we created visibility that the low close rate customers were using this Client as a price-check. Our Client was doing all the work to develop detailed proposals and getting almost no benefit.
This graph showed the sales force the folly of lowering prices to win more business, except in specific cases. It actually showed the times that raising prices would be the best way to increase sales and profit.
I think this case study is a great example of letting the data lead us to great business decisions. This simple tool told a very meaningful story that helped guide pricing decisions. I want to note that more work was done (not shown here) to determine other pricing decisions such as the markup strategy based on the size of the project. That analysis showed that this Client should lower target margins for large opportunities.