What Immelt taught Jack about GE

The June 2006 Harvard Business Review, had an interview with Jeff Immelt, Chairman and CEO of General Electric by the magazine's Editor and Managing Director Thomas Stewart. Stewart noted that Jack Welch tended to focus on efficiency, with initiatives such as Six-Sigma. Immelt’s focus however, is for GE to grow organically, two to three times faster than world GDP (Gross Domestic Product).

Immelt intends to achieve this goal by recognizing the realities of the knowledge economy and the importance of pricing:

“If we can create a sales and marketing function that’s as good as finance at GE, I’ll change this company. In a deflationary world, you could get margin by working productively; now, you need marketing to get a price. A good example is what we’re doing to create discipline around pricing. Not long ago, a guy here named Dave McCalpin did an analysis of our pricing in appliances and found out that about $5 billion of it is discretionary. Given all the decisions that sales reps can make on their own, that’s how much is in play. It was the most astounding number I’ve ever heard - and that’s just in appliances. Extrapolating across our businesses, there may be $50 billion that few people are tracking or accountable for. We would never allow something like that on the cost side. When it comes to the prices we pay, we study them, we map them, and we work them. But with the prices we charge, we’re too sloppy.”

$50 billion is “discretionary”!

This is a polite term for how much GE is leaving on the table because of poor pricing strategy. Let's put this in perspective. For the year ended December 31, 2006, GE had total revenues of $163 billion; hence they are leaving approximately 30% of total revenues on the table with poor pricing strategy. And, GE is an intelligent company.

Does anyone think GE can increase productivity or cut costs by this amount? Or increase revenues by this amount through growth?

The number one argument I hear from accountants and lawyers about the philosophy of value-based pricing is: “How would you know if you’re making money without time sheets?”

This is the wrong question. Of course you’re making money, especially in a Professional Services Firm (PSF) where margins are not slim. Yet no matter how accurate your time sheets and cost accounting, you will never be able to answer this far more important question: “How much money are you leaving on the table because of mediocre pricing?”

It matters not to know your costs right to the cent without understanding the value of your services to the client? This is why enlightened PSFs let value drive price and price drive costs. In effect, cost accounting is performed before the work is started, not after. This is especially important since no one really knows what a cost should be; something cost accountants don’t understand, since they only see the costs after the fact.

This is exactly how Toyota prices without ever having a standard cost accounting system. That should send a shudder down the spine of everyone who believes that you need cost accounting to be a profitable, dynamic company. Just killed that theory dead in it's tracks.

If GE is leaving $50 billion on the table, how much is your firm leaving on the table due to poor pricing? Proper pricing blows away what you could ever hope to achieve by cutting costs or increasing efficiency. Work on creating and capturing value through excellence in pricing. It’s the number one driver of profitability in GE, and your firm ... if you so choose.

© Ric Willmot 2008 All rights reserved.

Addendum May 12, 2008.

After receiving a few e-mails: Yes, pricing for professional service firms is a speciality service that we offer and is part of our expertise here at Executive Wisdom. E-mail me directly if you would like to discuss how we can assist you and your business with Profitable Pricing Strategy.

Comments

[CJRead]

1.

Your post using GE might be both the best and the worst example to use right now, given GE's (and therefore Immelt's) performance so far this year, and Welch's public comments about it. That is, of course, beside the point(s).
Let's expand on the perspective you began and compare the costs of poor pricing strategy with alternate methods of increasing revenues.
If 30% is too much, how much discretion do you leave with your frontline sales people? (I'm including PSFs here - whoever in your organisation asks for the money). To me its a like being a little bit pregnant. Either you are or you're not. So do you allow a little leeway in your pricing, or is the price the price?
GE is pretty big by most people's standards (!) so realisticly they will always have some manner of variation, particularly in such a diverse range of products and services. Lets say they enforce a strict pricing policy across the board and get the variation down to 1% (from 30%). That's still $1.63 billion of GE's money that they don't have control of!
How about a scale of business more relatable? If Executive Wisdom had a blow-out in their pricing discipline and it went out to 1%? Ric would have to run one more Leadership and Marketing Seminar (per quarter) to cover the cost!
Ric's other point is more subtle: to get the right answers, you have to be asking the right questions.

[Ashleigh Carpenter]

2.

CJRead makes a really good point. 1% is still a huge amount for GE. But I do find it relative to smaller businesses. Ric is challenging us to look at our business models and in particular our pricing policies to analyse if we need to be thinking smarter about our fee structures and pricing points. Many professional service firms fool themselves into thinking that their $500 per hour price is making them good money. Maybe. But is it making them a good profit?

It appears to me that Ric is asking us to consider what we are really doing with our pricing points and fee structures and to forget about the usual approach of "cost plus". In professional services, we tend to creep the hourly rates when we think it won't get an adverse reaction and when we feel comfortable that all the other firms in our area have done the same thing.

I personally am sitting down today with my team and asking questions, and I hope they will be the right ones.