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The Greatest Challenge to Every Pricing Strategy

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We have seen well managed manufacturing and distributor companies spend a significant amount of time and money in building pricing strategies. We have also watched these companies invest heavily in technology to help them optimize prices to improve margin. All too often, these companies fail to realize the price improvement that was originally targeted.

Why? Because the execution of these strategies collapsed at the point of sale. That is, the customer facing teams were not able to fully execute. We typically see price improvement initiatives realize one quarter to one third of their targeted goals.

There are three common reasons why sales related teams often fall short.

1.      The sales team was not trained on price execution strategies and techniques. Don’t assume that every sales person knows how to deal with price changes. Prices at many companies don’t change frequently enough for sales teams to build their skill set around this important activity. Provide your team with value based sales training that includes a heavy component of pricing execution. Once the sales rep has exposure to sound price implementation practices they will embrace the task and deliver.

2.      Sales team incentive plans are not aligned with the pricing strategy objectives. Most sales teams today are still heavily rewarded for selling volume. Price rarely enters the situation. Look at your incentive plan. Where can you add a price realization component? Even consider a temporary reward for the duration of the price improvement initiative.

3.      How well equipped is your team with data and information to support the pricing initiative? Supporting data from secondary information sources like trade associations is a great source of objective support.

Finally, address these issues well before the point of execution. In fact, consider bringing some of your forward thinking sales people into your price strategy sessions to get buy in. They will lead the sales team to successful implementation.

Five Signs That You May Be Excessively Discounting Prices

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Discounting prices is a common every-day occurrence for many manufacturing and distribution companies. In some industries, discounts are expected as a part of doing business on every transaction. The discount culture is manifested over years of practice by industry participants. To a great extent, as suppliers to a marketplace, we create these price discount cultures and encourage the practices by continually offering discounts at every turn.

On the upside, price discounts support revenue goals. On the downside, they cut profit margins. Maintaining a balance is crucial to maximize business performance.

Changing this culture doesn’t come easy. It takes time and commitment to adopt price integrity. That being said, discounts certainly have their place and should be used carefully to support revenue goals.

So, how do you know when you may be discounting excessively? We first look at sales teams and their behavior to get an indication on the extent of discounting.  Often, the sales team is where the discount originates in an attempt to close a sale. Here are five situations where your sales team may be telling you that your price discounts are out of control.

·         Do your sales reps have the authority to discount prices…even just a little?

·         Are your reps compensated in whole or in part on the basis of their sales volume?

·         Do reps tell you that your prices are too high?

·         Do they ask for last minute discounts to close the deal?

·         Do they give away free products or services?

If you answer YES to any or all of these, you may be losing a significant amount of profit margin through the sales organization. Unnecessary discounts at the sales level cost manufacturers and distributors an average of 2-4 margin points every year. In fact, we’ve seen companies lose as many as 10 margin points as a result of excessive discounting. Margin leaks at the sales level are one of the most over-looked and under managed threats to profitability.

Do you have a price discounting problem? Call the pricing consultants at PricePoint Partners to learn more about stopping price leaks and lifting margins.

Long-Term Agreements: What's the Best Pricing Strategy?

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How often do you experience one of these situations?

•  You have a customer who is promising to purchase a large volume in the upcoming year. Over the next 12 months, they intend to buy a significant amount of product over several orders. Of course, they want your very best price. You sharpen your pencil and calculate a heavily discounted price based on the volume promised. However, at the end of the year, you realize that the customer has ordered significantly less than originally promised. You never planned to sell at such a low price for so little volume. Unfortunately, the year is over, and you have little recourse for rectifying the situation without jeopardizing your ongoing relationship with this client.

• You have a long term agreement with a customer for 100,000 units at a discounted price. You are at the end of the contract period and the customer has purchased only 40,000 units. Now it’s time to renegotiate the contract, and the customer is expecting the same low price.

What do you do?

In each of these cases, the structure of your arrangement makes taking corrective action difficult if not impossible. In short, there isn’t much you can do to remedy what has already happened. However, you can prevent this from happening again. Here is a recommendation from the pricing consultants at PricePoint Partners.

The solution is to create a pricing schedule that offers incremental discounting as volume levels are actually achieved rather than simply as they are promised. For example, if the customer plans to purchase 10,000 units over a 12-month period, set a higher price for the first 2,500 units; a slightly lower price for the next 2,500; a lower price yet for the next 2,500; and your lowest price on the final 2,500.

Structure your price points so that you will ultimately generate the same revenue as you would have if you had quoted a single price at the onset. This means that, by the time you get to the last order of 2,500 units, the per-unit price will be even lower than if you had initially quoted the quantity discount on 10,000 units.

This earn-as-you-go pricing strategy ensures that your customer earns the full volume discount upon fulfillment of the terms of the agreement while it safeguards you from revenue and margin loss. You will consistently attain your target price and profit levels while recognizing the customer’s climb in volume.

In addition to protecting your pricing and margin levels, this pricing strategy provides a more balanced negotiating strategy as buyers wave intoxicating volumes in front of your sales team. In the end, it is fair and balanced for both buyer and seller.

How to Reward Your Sales Team for Price Performance

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For manufacturers and distributors driving toward margin improvement through pricing realization, the road to success passes through the sales team. The best pricing strategies, and the most robust pricing technologies will go nowhere unless the sales team is on board. Pricing execution at the sales level is key to realizing price improvement.

Three Key Criteria Must be Managed at the Sales Level:
  1. Build a solid pricing architecture that delivers reliable prices on every deal. Communicate your pricing strategy so that the sales team understands that the prices are optimized and will support their ability to achieve sales goals.
     
  2. Equip your sales team with value based selling techniques and tools so they can support the economic value of your offerings. Selling value negates selling on price, which is destructive to profit margins.
     
  3. Align incentives with price performance.
 
Many sales teams are still being rewarded based on increased sales volume. As sales representatives sell more, the reward, regardless of its calculation, increases, thereby encouraging sales volume. This approach does not support achievement of your profit goals. It ignores profit margins or price performance and encourages sales teams to discount unnecessarily and drive margins downward.
 
Some sales teams are rewarded based on profit margins. This is a step closer to improving price performance as pricing is a driver of profit margins. However, a review of the basic profit equation shows that cost can have a significant impact on margins:
 
Profit = (Sales Unit Volume x Price) - Cost
 
A closer look reveals that most sales teams can influence two of the three profit drivers: sales unit volume and, in many instances, price. However, most sales teams have little to no influence over costs and may coincidentally gain or lose profit margin on changing costs.
 
A solution to creating sales team incentives that reward better pricing is to focus a significant portion of the incentive on price performance. This means establishing product price targets and rewarding the rep for achieving or exceeding the target. The plan may also include a penalty for falling short on price performance goals. Of course, this assumes that reps have the ability to change prices through discounting or, in some cases, actually set prices.
 
The price performance incentive feature and the sales volume feature – the two profit drivers that the sales team can influence or control – can be combined. A 60/40 split between these ensures that both will receive proper attention by the sales team. 
 
Sales incentives alone will not drive your sales team toward profitable pricing. But once you have achieved the ideal balance of reliable price points, strong value selling tools and a proper incentive plan, they will have the confidence, capabilities and motivation to help you move your business forward toward price and margin improvement.
 

Batman Pricing Strategy, Wham! Pow!

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Last week hosted the annual Barret-Jackson automobile auction on television. This is one of the most well-known auctions for classic and collector cars in the world and they feature some of the most well-known automobiles and their owners. For example, Clark Gables 1955 Mercedes Benz Gull Wing 300SL and several Shelbys by the late Carroll Shelby.

One by one, cars parade across the auction block as bidders compete to win. Being a car guy, I spend hours watching. And being a pricing consultant, I am continually amazed at the prices that some of these cars command regardless of economic conditions.
 
But one car this year was very special. This year’s feature car was the Batmobile from the famous television show, Batman. Now, there were actually four of these cars produced for the program. One was used for stunt purposes. And, two were used for shows and displays around the country to promote the Batman brand.
 
Only one car was actually used in the TV show. This was the car that Batman and Robin used to fight crime. And, this is the car that was up for auction. The owner was George Barris, the original builder of the car. Mr. Barris has built a number of special cars for TV and movies over the years including the car for the TV show, “The Munsters”.
 
The auctioneer started the bidding at $100,000. Within 20 seconds the bidding rose to $1million. And, it didn’t stop there…
 
…$1.2 million
   …$1.4 million
      …$1.8 million      
         …$2 million
 
Bidding continued all the way up to the $2.7 million mark and stalled, but, not for long. 
 
Bidders quickly drove the price past $3 million and proceeded to cross $4 million before finally stopping at $4.2 million.
 
Wow! $4.2 million for the Batmobile!
 
You can imagine the excitement in the auction hall. You can imagine Mr. Barris’ excitement, too. He was one happy man.
 
So, what drives the price of a car like this to such an astronomical level?
 
First, it takes at least two people who want the car very badly and have the funds to throw at it. But, more importantly, the bidders must have a high value perception of the car. The winning bidder said that he grew up watching Batman and had his eye on this car for 20 years just waiting for the chance to buy it. He also said that he “knew” that he would win the car which sounds more like he was committed to buying the car.
 
This bidding environment is a great way to measure the perceived value of a product. Bidders will tell you with their bids exactly what they are willing to pay at that point in time. And, close the deal on the spot.
 
The key is to be sure that you clearly communicate the value of the product. The auctioneers took time-out during the bidding to tell people about the cars history. The bidding would temporarily stop while the auctioneers further developed the benefits and mystique behind this vehicle.
 
The key to an effective pricing strategy is to fully and clearly communicate the value of the product before establishing the price. 
 
Wham! Pow!
 

Three Key Price Increase Strategies That Work

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Increasing prices can be a daunting task for many sales professionals. The fear of losing business as a result of the increase makes many a sales rep uncomfortable especially when it comes to your biggest and best customers. The accounts that buy the most have buying power and will use that power to get the prices they want. 

 
The key to successful price increase negotiations is to be prepared. 
Deliver the price increase with information and data for support. If your prices are increasing due to cost increases, be sure to present cost information and data that supports the price increase. Independent third party information such as indexes or trade association data will go a long way to establishing credibility. 
 
And, present the increase matter-of-factly. This is no time for shyness or uncertainty. Say “The price increase is X%”. Professional buyers can smell weakness. Even if you are a little anxious about the discussion, act with confidence.
 
Despite your best efforts many buyers will still challenge a price increase. The key to effectively handling these discussions requires having a back-up strategy. 
 
Here are three back-up price increase strategies to use when the buyer says “no”:
 
  1. Defer:  Defer the increase for 30 days. Don’t take the increase off the table or reduce the amount but delay the execution for a short period of time. 
  2. Trade Value: Offer to remove some delivered benefit from the offering in trade for a lower price increase. Some products, like software, are well suited for such strategies where you can easily adjust the deliverable. For others, look at delivery, payment terms, warranty periods or service levels to adjust.
  3. Swap Products: Offer to swap the product for a lower performing but acceptable product that is lower priced. We commonly see this type of negotiation with chemical type products.
 
Being prepared for these discussions is the single most important step that you can take to make your price increase successful. Once buyers see that you are negotiating and not just rolling over on price they typically will accept the price increase.
 
Remember, buyers will first test your price, then, your resolve.
 

How Does Pricing Leverage Work for Your Company?

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We often talk about pricing leverage and how just a little price improvement can dramatically impact the bottom line. While many companies are focused on cost reduction and driving revenue the greatest gain in margin lift comes from price improvement. Of course, depending on your current level of margin performance, price lift will have a different impact on your bottom line.

Here are some publicly held companies that our pricing consultants researched to determine how much a simple 1% gain in price realization would impact their net income.
 
Company Net Income Gain
Coca Cola 5.4%
Nestle 8.8%
Ford Motor Company 4.3%
FujiFilm 24.6%

Now consider the price/earnings ratio for these companies and what a 1% price improvement would mean for their market capitalization. Let’s take Coca Cola for example. Coke has a current P/E ratio of 19.43. With revenues of $46 billion a 1% price improvement would yield an income gain of $460 million. That would translate into nearly a $8.9 billion improvement in market capitalization. Not bad for a 1% price boost.

Privately held companies are typically valued lower than Coke’s P/E. But, you will still see a dramatic improvement in your company value.

To see the impact of a 1% realization for your company click on our Pricing Leverage Margin Calculator.

This handy tool is easy to use and will show you exactly how an improvement in price will impact your bottom line.

Pricing Segmentation at the Heart of Pricing Strategy

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Not all prices are created equal. That may sound like a strange statement but stay with me on this one. As manufacturers and distributors think about setting prices for products and services in B2B industries there are a huge number of factors that will determine what price a buyer is willing to pay. Specifically, what is the optimal price point that allows you to close the sale while capturing the most margin?

Consider a specialized bearing. This item may be used in a variety of applications from aerospace landing gear to production machinery to oil and gas equipment. Each application has its own unique needs and issues that the bearing will address. 
 
Beyond the application requirements lies a host of other factors that may enter the price equation, such as:
  • Speed of delivery
  • Technical service requirements
  • Size of the customer
  • Buyer skill set
  • Payment terms
  • Etc.
 
In order to arrive at an optimized price each of these factors, and perhaps others, need to be considered in the price decision. 
 
As we consider various factors we can easily see that a “one size fits all” price will not apply. In fact, it is likely that any single SKU may have multiple prices for any given situation. We have seen businesses with thousands of price points for just a few hundred SKUs.
 
Complex? Yes, but the user interface can be simplified for the field sales team and the company is able to capture more sales and higher margin by having customized prices for a variety of pricing segments.
 
The key is to identify the critical pricing segments that will drive price differentiation based on buyer differentiation. A simple starting point is to look at your product offering and segment product families into “buckets” from commodity products to high value products and price accordingly. Other price drivers like markets and customer price sensitivity can be added later.
 

Should You Respond to that RFP?

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You just received a request for proposal (RFP) from a huge company that you have been chasing for some time. If you land this large order, it would go a long way toward helping you achieve your revenue goals. The volumes are downright intoxicating, and it would be great to add this customer’s logo to your list of accounts.

Sound like a great opportunity?  Well, maybe yes and maybe no.

Fact: Only 55% of all RFPs are awarded. That means that nearly half of buyers will never place an order. Often they are just shopping for price or leveraging low-priced proposals to reduce prices with their existing supplier. Don’t assume that every RFP will be awarded. Many won’t.

Also, consider the substantial amount of time and effort that is required to develop some proposals. One supplier recently developed a proposal for a chance at $80 million in new business. It took a team of four specialists nearly five months to create the proposal. That investment of time and talent could turn into a significant loss if the deal doesn’t go through.

RFPs and Pricing Strategy
Winning business through RFPs can certainly drive revenues. In some businesses or with some customers, it may be the only way to win business. But keep this important point in mind: For most RFPs, price will play a heavy role in the buying decision. In some cases, it may be the only criterion.

If your company delivers high value and can easily distinguish itself from the competition, you may choose to pass on responding to RFPs. We know of many companies that exercise this policy as a way to help maintain price levels in their industry.

If you choose to participate in bids, ask yourself the following questions before deciding which RFPs merit your consideration. An evaluation based on these issues will help you choose the RFPs you are most likely to win.

10 Questions Manufacturers and Distributors Should Answer Before Quoting

  1. Does a high level of trust exist between the customer and us?
  2. Were we involved in designing the RFP?
  3. Have we done business with this company before?
  4. Is the customer dissatisfied with its current supplier?
  5. Do we know the customer’s entire management team?
  6. Does the RFP fit into our overall strategic plan?
  7. Will participation in the RFP help us gain new access within the account?
  8. Do we know all the competitors?
  9. Do we have a good reputation with the customer or in the industry?
  10. Has a budget been established for the project?

If the answers to the above questions are positive, consider selective participation only when the deal provides a contribution to fixed costs AND does not undermine more profitable business with other customers AND does not negatively impact operations capacity.

Finally, beware of “Winner’s Curse,” which states that the higher the number of bidders, the higher the probability the winner will lose money on the deal.

Being selective about responding to RFPs is a sure way to increase revenues and reduce the time inherent in developing proposals. The key is to exercise discipline and be willing to say no when the opportunity is less than opportune.

What is Value Management? (And Why Should You Care?)

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NOTE: This article is an excerpt from a paper written by an open group of value management practitioners and  consultants who are interested in promoting value management. Several experts in the field collaborated on the paper and made it available for publication.

Value management and its related disciplines has become a hot topic in the business press, within leading companies and among pricing consultants. Its advocates assert that value creation and capture can and should be what companies try to optimize and around which they should be organized. By value is meant the value provided to customers, not the value extracted from customers or shareholder value.

Value management is a holistic discipline that supports the cycle of Create → Communicate → Capture → Assess of Value all based on a foundation of Understanding as is summarized in Figure 1: The Value Management Cycle.
  Figure 1: The Value Management Cycle
Figure 1: The Value Management Cycle
 
 
What is Value and how do I understand it?
  • Value can be a slippery term and it is used in many different ways. In value management the term is understood as follows:
  • Value is relative to an alternative – value cannot be judged in isolation
  • Value is composite and decomposable – value can be analyzed into a set of value drivers
  • There is more than one aspect of value – in B2B the most important aspect is the economic impact but other aspects such as the emotional, environmental and social can also be considered
  • Value can be quantified – economic value can be quantified in a currency, other aspects have their own forms of quantification such as Quality Adjusted Life Years in healthcare or Carbon Footprint for green solutions
     
The standard way to quantify economic value is shown in Figure 2: A Standard Economic Value Model.
Figure 2: A Standard Economic Value Model
 
  • There should be a mapping from the value metric (the way in which the customer gets value) to the pricing metric (the way in which the seller charges for value)
  • Value is realized in exchanges across networks and not in isolation
Value management relies on information about customers, competitors, external factors, offers and costs from both inside and outside the organization to build understanding (both perspectives are mandatory).