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3 Pricing Myths: Don’t You Believe ’em!

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In the world of pricing management, the adage “Don’t believe everything you hear” holds special meaning. Myths run rampant here. If you allow any of these myths to influence the price decisions you make every day, you risk leaving far too much money on the table.

Here are three of the most potentially harmful pricing myths that our pricing consultants hear every day. Avoid them to ensure you’re making smart decisions that drive margin improvement:

·          Lower prices equate to more volume. Not necessarily. We’re taught in business school that any change in price has a corresponding change in unit volume purchased. This stems from the concept of elasticity of demand where a buyer could be stimulated to buy more when prices are lowered. This might be true in consumer markets for items such as soda pop or sweaters. But in the business-to-business sector, demand tends to be set based on business requirements. Reducing price will not cause the buyer to purchase more widgets than they need. While lower prices from Supplier A may steal volume from Supplier B at a given account, it won’t stimulate demand.

Similarly, increasing prices slightly typically does not chase volume away. Would you lose business by increasing prices just .5 percent? Not likely.

·          The sales team is in the best position to set prices. While sales reps may be closest to the customer, they are not necessarily in position to make optimal price calls. If your business resides in a complex pricing environment, your front-line team may find it impossible to manage all the possible prices. A business with 5,000 SKUs, 1,000 customers and five markets will have up to 25 million different possible prices. It’s impossible for anyone to manage this level of complexity.

Who should set your pricing then? Your executive management team – aided by pricing technology that performs the necessary calculations and takes into account the price sensitivity related to each deal. This type of program is vital to your price optimization success.

·          “Our product is a commodity.” Few products are true commodities. Think oil, orange juice and natural gas. These are commodities. Claiming that your product is a commodity is often an easy way to avoid the hard work of differentiating your offering and selling the value. Yes, commodity volume responds tremendously to price changes. The vast majority of other products don’t. We see price drops of 20-30% required in order to get significant improvements in volume for many products. Does your product have that much margin to give away? Not likely. Price drops typically just give away margin and disrupt the competitive environment.

When you’re in the heat of battle in day-to-day business, it’s easy to fall victim to myths such as these – to adopt and incorporate popular fallacies into your pricing strategy. But stop and look at the big picture: Breaking away from harmful myths means moving a giant step closer to optimizing your prices for maximum profitability and growth. 

How Much of Your Business is Underpriced? Price Consultants Can Help

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Can you assume that the pricing of your products and services are spot-on? Consider that every sale made represents a price point that was acceptable to the individual buyer. This means that all sales in your business represent sales wins as opposed to lost sales. We know that the customer was willing to pay the price that you presented. But, were they willing to pay more? Did you miss an opportunity to earn a larger margin?

Sales win data can tell us a lot about what customers are willing to pay, especially when there are wide variances in prices for a single item. Price variances for wholesale distributors and manufacturing companies most often occur when the sales team has some authority to discount or set prices. Without sufficient guidance, prices can vary considerably. Try looking at these varying prices a different way – as market-based price testing that can provide insight into willingness to pay.

For example, if you are selling a specific item to 50 different customers who are in the same market and have a similar profile, prices for this item might vary from $10 per unit to $28 per unit. If 40 of these customers are paying closer to the $28 price point, why wouldn’t the remaining 10 customers who are paying closer to $10 be willing to pay more? The evidence in the data suggests that they would. However, without this insight, individual sales reps are left with only their own experience and judgment to make price decisions.

This is a common scenario among wholesale distributors and manufacturing companies. In fact, our price consultants find that these companies are typically leaking 2 to 4 margin points due to underpriced transactions. The problem is that they have no tools or processes to measure their margin loss across a large number of items, customers and markets. While some analysis can be performed manually using spreadsheets, a comprehensive and granular data analysis using an automated system is necessary for pinpointing opportunities at the individual item level.

So, how much of your business is underpriced? PricePoint Partners has the tools to analyze your sales data and reveal your margin loss. Call our price consultants to learn how you can gain new insight into your pricing opportunities.

Thinking About Strategic Pricing? Start Here With Price Consultants

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As the field of strategic pricing continues to grow at an ever-increasing rate, more and more companies are wondering how to start their own strategic pricing programs. The challenge for most firms is that, unlike finance, marketing, operations or sales, strategic pricing doesn't have a home within most organizations - at least not yet. When you add the fact that strategic pricing is really quite a narrow field of expertise, has its own vernacular, and requires input from many departments, it's no wonder so many companies struggle to get started. Often, price consultants can help make the transformation.

 

If you have been reading our newsletters over the past few years, you have seen that strategic price management can make a tremendously positive financial impact. By now, you must be thinking about how it could improve your bottom line.

 

Get ready to launch! Following is a summary of four key drivers of strategic pricing success you can leverage to introduce pricing discipline in your organization:

 

Senior-level Sponsorship - If our 16 years of experience has taught us anything, it's the importance of having support from senior-level management. Advancing your pricing capabilities will mean a culture change within your organization in how it views and manages prices. These types of changes flourish when management makes them a priority. It shouldn't be difficult to get them on board: Senior managers are keen on the margin, value and cash flow gains that strategic pricing delivers.

 

Training - When strategic pricing is new to your organization, it is vital for you to get everybody on the same page. Schedule a strategic pricing training session to kick off your program. A one-day program will get everybody talking the same language, provide insight into your pricing challenges and opportunities, and provide a vision for going forward. You might consider starting with the sales team, where price decisions and negotiations occur every day. Getting the sales team on board early removes potential barriers and spurs short-term gains.

 

Insight - Perform some initial pricing data analysis to identify the low-hanging fruit for price and margin improvement. Some simple analysis will provide great insight into your pricing practices and typically reveals opportunities. 

 

Quick Wins - Training programs, especially those that include data analysis on your business, provide "next day" pricing opportunities. These are short-term, easy-to-capture gains in price and profit margins. Early wins are important to stimulating momentum in your pricing program.

 

Achieving pricing excellence in an organization can take years, but the first steps are relatively easy and almost always fruitful. It's not unusual for a company to gain one or two margin points from a single well-executed training session. What are you waiting for?

 

Speak with PricePoint Partners price consultants to start your pricing strategy program.

 

Key Indicators of Pricing Challenges & Opportunities

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It is estimated that only 3-5% of all businesses have captured the profit margins they truly deserve through their pricing schedules and policies. This statistic indicates a lot of untapped potential given the typical improvement of 2-4 points realized when a company begins approaching pricing from a strategic view. Our price consultants experience supports these findings.

Ask yourself: Are there price improvement opportunities in your business? Where?

Before actually conducting data analysis to definitively identify price improvement targets, examine some of the situations within your business that might be early indicators of price improvement potential. Do any of the following circumstances apply to your business?

Complex Pricing Environment – Does your business sell a large number of items or SKUs?  Are there many customers and a variety of markets? The combination of these factors quickly creates a complex pricing environment. Even 500 SKUs, 500 customers and five markets creates a potential of 1.25 million different price points. How do you assure that every price for every customer is on target and within the market range? If this situation exists in your business and you are not employing pricing technology to manage pricing, you are likely leaving money on the table and losing sales due to under-optimized prices.

Sales Reps Setting Prices – Many businesses rely heavily upon the sales team to arrive at executed prices. Sales reps can have great insight into specific accounts and competitive factors. However, asking reps to rely on their own individual experience to set prices does not optimize the prices you’re receiving. What if, instead, each rep had the collective experience of the entire team of reps to set prices? A centralized pricing structure that uses historical pricing data can deliver optimized prices to every rep, helping ensure higher close rates and improved margins. If your business is relying on individual sales reps to determine prices, there is likely room for significant improvement.

Cost Plus Pricing – If your business uses a cost-plus pricing approach – that is, cost plus a pre-determined margin – then it is highly likely that you are leaving money on the table and losing sales opportunities. This is a clear signal for price improvement. Three things can happen when prices are set on a cost-plus basis, two of which are bad. In one case, the price is set lower than the customer is willing to pay and you leave valuable money on the table. In the second scenario, prices are set higher than the customer is willing to pay and you lose the sale. Finally, in the third case, the price just happens to be optimized and you realize maximum margin and close the deal. Unfortunately, this scenario happens only a fraction of the time.

If any or all of these situations exist in your business, then it is highly likely that you are underperforming in price and margin realization. Your next step is to conduct pricing data analysis to identify specific price targets. This analysis will almost inevitably reveal some low-hanging fruit that will provide a quick return on your effort and minimize any risk to your business. Then you can determine how to move forward in optimizing your pricing and maximizing your return for the long term.

If you need help in analyzing your pricing the price consultants at PricePoint Partners can help. Just give us a call and we can guide you in  the right direction. Call 330-342-0923 and ask to speak with a price consultant.

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.