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Pricing

Does Your Sales Team Have Enough Value IQ?

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Getting your fair share of price in the marketplace is dependent on your sales team’s ability to sell your value. The stronger case made for your value directly translates into the price you capture from your customers.  Is your sales team selling your value and capturing the best price? Or, worse yet, are you losing sales due to a weak value message?

Value is an often misused term that conjures up images of low quality and low price. Not so in B2B markets. Value refers to the underlying economics that support the purchase of an item or service. It defines the benefits of the offer that help increase sales, reduce costs, reduce risk or improve competitive advantage for the user. Presenting an economic case is a powerful approach to drive value perceptions and willingness to pay more.

Here are three critical elements that every sales team member must embrace in order to effectively communicate value and defend their prices.

·         Understand the Numbers- Take the time necessary to understand the economics in every sale. How will the buyer justify the purchase? How will they compare our offering to the next best alternative? This requires understanding how your offering helps the customer improve their economics. For example, think about increasing production throughput, reducing waste, increasing quality and increasing revenue. All of these benefits are measurable and should be presented at the time of proposal. Once you can talk dollars and cents you will move the discussion away from price and focus on value.

·         What the Customer Values- Don’t assume that you know what the customer values. Every buyer is different even in identical industries. Buyers like to talk about what they value. Using your basic selling skills, ask questions, (lots of them) that uncover their value needs and their picture of success in this purchase. Here are a few to get started.

o   How will you measure success of this initiative/purchase?

o   What business results are you trying to change? How much?

o   What would you consider to be a “home run” in this purchase?

o   How will you know when this initiative/purchase is a success?

Get the buyer to paint a picture of success.

·         Trade Value- Despite the best executed value selling process, buyers are trained to cut your price anyway. Be prepared for the discussion and be committed to avoid discounting your price. Instead, trade value. When the buyer asks for a lower price offer to reduce the benefits of your sale in order to maintain a balance in value. Buyers will quickly recognize that you are negotiating and not discounting. Discounts are not free.

Improving your sales team’s Value IQ begins with understanding the value selling process. We recommend starting with training and coaching programs that lay the foundation for executing value concepts. Additionally, include solid price negotiations training that give your team the confidence to present and defend prices in the marketplace. The net result will be higher close rates and improve profit margins through better price negotiations.

PricePoint Partners provides powerful training and coaching programs to empower sales teams to sell value and protect prices. For more information on programs that can improve your company’s Value IQ contact Ralph Zuponcic at 330-342-0923 or email Ralph at rzuponcic@pricepointpartners.com

How to Win Price Increase Negotiations with a HUGE Customer: Case Study

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High-volume, high-visibility customers know they have negotiation power. That shouldn’t stop you from initiating price increases with them when they are warranted. Suppliers tend to back down under the pressure of negotiating with their biggest customers, and who can blame them? Rocking the boat on price issues sometimes puts your company at risk of losing the business.

But take heart: It is absolutely possible to raise prices, no matter how large your customer. This case study will show you how one specialty tool manufacturer’s strategy and tenacity earned them the price increase they truly deserved.


BACKGROUND

A manufacturer of specialty tools, 427 TOOL (alias), is about to initiate a price increase selectively applied across their business. Many accounts will see increases; the amounts will vary depending on the various levels of price sensitivity among items, customers and markets.

The customer, BIGWERKS (alias), is 427 TOOL’s third-largest customer, accounting for well over $2 million in sales. 427 TOOL has been serving BIGWERKS for over 15 years. The volumes are steady, but margins are diminishing. The last price increase accepted by BIGWERKS was in 2007. Since that time, 427 TOOL has attempted to execute price increases on two separate occasions with no success. BIGWERKS made the process grueling by intentionally prolonging any price increase discussions until 427 TOOL finally gave up.

Compounding matters is that the purchasing personnel within BIGWERKS seem to be constantly changing. Interruptions in relationships between sales representatives and buyers prevent any continuity in discussions, which has made it difficult to achieve price negotiation goals over extended periods of time. At this time, prices have remained unchanged for seven years and have now fallen below market pricing. Obviously, this has negatively impacted margins at this account for 427 TOOL. The 427 TOOL sales representative, Roger, is preparing for a long and drawn-out negotiation process.

THE PROCESS BEGINS

September 2013

Roger has scheduled a meeting with the buyer at BIGWERKS to present the price increase. The average increase amount is 3.5%. However, increases are applied selectively to individual items, and not all items will see an increase. Additionally, Roger has prepared a summary of rebates, trade show participations and other supporting services that 427 TOOL has delivered over the past several years to demonstrate the added value the company has provided to this important customer.

BIGWERKS buyer, Justin, listens attentively at first but quickly starts pushing back, challenging the rationale behind the increase. Additionally, he begins to paint a picture of growing opportunities for 427 TOOL in the future. Suggesting that larger opportunities lie ahead for the supplier is a common tactic used by buyers to move the discussion off of the increase. Many sales representatives react to this discussion; Roger does not. He knows the discussion is intended to divert attention away from the increase. He is committed to getting the increase and stays focused.

October 2013

BIGWERKS looks to solidify their position with 427 TOOL by offering a long-term supplier agreement. The agreement includes descriptions of promotions, rebates, trade show participation, warranty allowances and the like. There is no mention of the price increase in the agreement. 427 TOOL pushes back on signing the agreement, and BIGWERKS says that the agreement is not related to the pricing discussions. 427 TOOL signs the agreement but continues to push discussions on the price increase. Looking back, 427 TOOL admits they should have delayed the agreement until the price discussions were resolved. This minor setback, however, did not negatively affect the final outcome.

December 2013

Roger schedules another visit to discuss the price increase with BIGWERKS. At this time, the buyer asks for more supporting information to justify the increase. While they will provide information supporting cost increases of incoming materials, 427 TOOL’s policy is to not provide total cost information to customers.  Roger delivers the cost increase information, and further discussions are delayed by BIGWERKS until the new year.

January 2014

Discussions start heating up. Roger is holding tight on the price negotiations. He continues to communicate with Justin to maintain momentum in communications and send the message that 427 TOOL is not retreating on this issue. It has been five months since negotiations began.

Justin shares a critical revelation in one of his telephone calls with Roger: He tells Roger that BIGWERKS really does not want to lose 427 TOOL as a supplier. This knowledge instills renewed confidence in Roger and spurs him to continue on his path.

Then Justin reveals a surprise. He states that BIGWERKS corporate has mandated price reductions from all suppliers in 2014. Is this a real mandate or just an attempt to offset the increase? Roger recognizes that BIGWERKS is trying either to thwart the increase completely and actually get a price decrease, or to use the mandate to negotiate a non-increase. Roger will not settle for either of these options. He and the management team at 427 TOOL are committed to getting the increase. (Management commitment is a key component to any price improvement initiative.)

Roger presses on relentlessly for the price increase. Intense discussions continue over a two-week period. Justin announces that the BIGWERKS division vice president will participate in the next telephone discussion. Roger decides to add to his own horsepower and invites 427 TOOL’s president to participate in this phone conference.

The conference call lasts nearly two hours. 427 TOOL holds their ground on the increase, not wavering from the initial amount. BIGWERKS makes no offer to counter and insists on no increase. Interestingly, BIGWERKS is fighting to protect its reputation on not accepting price increases. They believe that if word gets out to the supplier base that they accepted an increase, other suppliers will attempt increases as well. Their unwillingness to counter is also noted. They are desperately defending their reputation on no increases. At this point, it’s all or nothing.

Committed to the increase, 427 TOOL continues to hold their ground and insists on the increase in whole. Finally, after nearly two hours of negotiation, BIGWERKS accepts the full increase, with only one caveat: that the increase will go into effect in June so that BIGWERKS has time to get the new pricing into their systems. 427 TOOL is happy to oblige.

WHAT JUST HAPPENED?

In a word, commitment. Sometimes it takes fortitude to get what you want in pricing negotiations. 427 TOOL hadn’t been successful in executing a price increase at BIGWERKS in seven years. This time, the supplier committed to getting the increase and showed the tenacity to not back down. BIGWERKS, based on prior experiences, believed that 427 TOOL would eventually give up. When they didn’t, the tone was set for a new pricing relationship between the two companies.

The commitment to executing price increases at large accounts can be significant. Below is a summary of time and resources that 427 TOOL incurred during the process:

  • Number of meetings or telcons           Approximately 12
  • Time commitment                               Estimated 40 man-hours
  • Amount of increase                            $90,000
  • Time to create pricing schedule          5 hours
  • Return on time invested                     $2,250 per hour

As Roger pointed out during our interview, the price increase goes straight to 427 TOOL’s bottom line. Other than sales commissions, the increase has no other costs extracted.

Each customer and each negotiation is different. In this case, reinforcing 427 TOOL’s position on the price increase was effective. Other situations may call for different strategies. Holding the line on increases, however, is a proven approach. It takes some courage and fortitude to execute, and it may mean bringing senior-level managers into the fray, but in the long run, it sets the groundwork for a more profitable long-term relationship. 
 

Start Your Strategic Pricing Program with Price Performance Visibility

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Do you know how pricing decisions are impacting your profit margins? If you are like most wholesale distributors and manufacturers you probably don’t. Measuring profit margins only goes so far but stops well short of actually measuring price performance. The objective is to isolate price and measure how prices have changed over a time period and contributed or detracted from profit margins.

Being able to focus just on price begins to create a culture in strategic pricing management. After all, what gets measured gets managed. So, being able to isolate and measure price performance gets management to think about how to positively affect prices. Reduced discounting, improve product mix, higher margin products, customers with low price sensitivity and a host of other targets will surface even with minimal analysis and discussion.

And, effective price measurement will identify the weak spots where better pricing decisions are not being supported. Think of sales reps that are consistently underpricing or discounting. Or, high value/low volume products that are underpriced. These areas may be ripe for price improvement will little risk.

Measuring price performance and giving pricing more visibility in the organization is a great first step towards managing pricing strategically. You might be surprised at what you find.

Hold Your Ground on Price Increases

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Do you experience this situation? One of your largest and best customers hasn’t had a price increase from your firm in a long time. Maybe it has been 3, 4 or even five years or more. You may have made attempts in the past only to get shot down by the buyer over and over again. Now, your profit margins on this account have diminished over time and you really need to change the momentum in price negotiations.

What can you do? Actually, there are several possible tactics to help change the momentum in this game but we will only discuss one today. First, we must understand how the buyer works. Buyers will first test your price and then test your resolve. Will you adhere to your price or will you cave?

Buyers push back because so many sales people easily cave in. They have learned that pushing back works. However, the buyer knows who will cave and who will hold on price. Buyers are less likely to push back on those that have a history of holding firm to their price. If you have had as history of caving on price, try this. When a buyer resists simply explain again the reasons for the increase. Return the discussion to the points that you originally made that support the price increase. Yes, you will repeat yourself but we want to send a message to the buyer that there is no room for negotiation. You may decide later to negotiate but we need to resist the buyer’s push back at first.

You might notice this technique is commonly employed during television interviews where the interviewee wishes to avoid the topic or stall the interviewer. Restating your reasons on a topic reinforces your position and sends a message the interviewer (or buyer) that there is no room for negotiation. Remember, the buyer is taught to test your resolve. If they can get no movement on your part they will often retreat.

Why You Should Be Measuring Price Performance

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Managers have an enormous number of measurements at their disposal to help them keep their finger on the pulse of business performance. Think of all the financial ratios and reports that are applied to nearly every aspect of a business operation. There are reports that measure sales, gross margin, operating profit, receivables, payables, quality, production efficiency and more.

But one critical report ­– the price performance report – is often missing. Yet pricing has more potential impact on profitability than any other profit driver. According to research by McKinsey & Company, a 1% improvement in price boosts net income by 11% for the average U.S. corporation. That means an additional $1 million to the bottom line for every $100 million in revenue.

So why are so few firms measuring their price performance? Wouldn’t it help to know whether your pricing is contributing positively or negatively to your profit margins? For many wholesale distributors and manufacturers, pricing can be dynamic, with prices varying for an item on a transaction-by-transaction basis. How do you know if your collective prices are increasing, holding or declining? And how are changes in pricing impacting your profit margins?

Price performance at the highest level is the change in overall price levels across a business. It measures the change in price on a percentage basis. For example, a business with a price performance improvement of 1.5% has seen prices increase overall by this amount and has contributed positively to profit margins. On the other side, a business with price performance of -1.25% has seen prices decline by this amount and has detracted from profit margins.

Measuring price performance is relatively easy, although it takes transactional-level data to execute. Measurement is simply defining the change in price across a time period multiplied by the number of units sold:

Price Performance = (Current Price – Previous Price) x Units Sold

The solution to this equation is the overall change in price-driven revenue. This equation is applied to each item sold in a given time period and summed to arrive at the total business impact.

Take the $100 million company that experiences a -1.5% price performance over a one-year period. Price was responsible for detracting from margin performance by $1.5 million. Margins may still have grown through cost reductions or increased sales, but price did not contribute to the gain.

The old saying “What gets measured gets managed” applies here. If you knew how your pricing was contributing to your financial performance, how would that change the way you manage your prices?

With insight into price performance, you begin to see where you are performing well and where there is room for improvement. What if you knew which items, markets, customers or sales reps were contributing positively to price performance and which ones were detracting from it? With measurements that provide visibility, you can manage more effectively and drive more margin to the bottom line.

5 Tips for Driving Price Performance

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Is price performance on your radar screen? If you are like most companies, your pricing management efforts fall short of a strategic pricing process in that they are limited to periodic analyses of historical practices and pricing events. A more proactive approach to strengthening your pricing performance includes data analysis, pricing policies and implementation, among other elements. And while analyses and supportive policies are pivotal, the key to realizing true pricing improvement rests on your implementation team – namely, your sales force.

Think of it this way. Building a successful pricing program without a strong implementation program is like building a car without wheels. It may have a lot of potential, but it won’t go anywhere.

Successful implementation requires price performance accountability. Here are five relatively simple steps for improving price performance accountability through your sales team.

  •  Include a price performance requirement in the sales job description. Communicate to the sales team that pricing performance management at the point of sale is important. This won’t change pricing culture all by itself, but it will help set the tone for pricing expectations going forward.
  • Set price performance goals for each sales rep. Like sales goals, each rep should have a price performance target. For instance, reduce discounting by 1% in the next year.
  •  Measure and track sales team price performance. Monthly reports that provide visibility to actual achievement versus price performance goals set the stage for managing pricing at the sales team level.
  • Conduct individual price performance reviews. Sit down with each rep and review their price performance each month or quarter. Discuss the challenges and opportunities for price improvement and create monthly plans for reaching goals.
  • Add a price performance feature to the compensation plan. Nothing gets a good rep’s attention like incentives and rewards. Create a specific pricing incentive that rewards price performance and goal achievement.

These five actions help send the message that each sales rep is expected to play an active role in upholding the company’s pricing policies and goals. This may feel like a foreign concept to your team at first, but, over time, it will become a natural part of your organization’s sales culture.

Consider training your sales team, too, on pricing execution and its impact on company financial performance. Every effort you make toward engaging your sales team in your strategic pricing process takes you a step closer to excellence in managing pricing performance.

Improve Strategic Pricing Visibility at Your Company

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Here are simple pricing tactics that can really help to improve pricing performance for wholesale distributors and manufacturing companies. Simply increase the visibility of strategic pricing. Our pricing consultants will often recommend raising the level of awareness for pricing initiatives by communicating programs internally.

Think about some of these steps to help raise awareness and get teams on board…

  • Add a price performance responsibility to job descriptions for the sales team or anyone that has their hand in pricing
  • Communicate the company’s pricing performance goals and results to all team members. Remember: What gets measured gets managed.
  • Schedule regular pricing review sessions to discuss strategic pricing successes and challenges

These simple tactics help to reinforce in the organization that pricing is a priority and is being actively managed.

Pricing Discount Discipline

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Our work with wholesale distributor pricing strategies has continually exposed a variety of price leaks that drain profit margins. One such leak occurs when discount policies are frequently overridden. For example, consider a discount pricing schedule based on quantity breaks. This schedule discounts prices as an order size increases. A purchase of one to five units may be $34 while the price for six to 20 units might be $32.

While we could debate the actual structure of the schedule (we’ll save that for another discussion) that fact is that a schedule exists to provide a consistent application of prices in the marketplace. However, all too often, we see companies that apply these schedules all too infrequently. The exceptions become the rule. And, when enough exceptions exist, a new schedule is often created. Over time, we see dozens of schedules created for nearly every situation. In the end, the initial strategy is lost and uncontrolled discounting prevails.

The key is to adopt and adhere to a quantity break schedule and can be applied consistently. We have seen companies leak over $1 million just by not enforcing pricing schedules. Find the right schedule and stick to it.

Getting Push-back on Price Increases? Just Say “No!”

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When manufacturing companies and wholesale distributors are faced with increasing prices they often lose ground when buyers push back on the new pricing. Of course, buyers are well trained to roadblock any attempts to increase prices from suppliers. In fact, buyers invest 15 times more in technology to help them manage the prices they pay compared to the investment made by sellers to better manage the prices they charge for their goods and services.

While there are a number of negotiation strategies that can be employed by sellers, why not just say “No” when a buyer tries to negotiate downward? Our pricing consultants see sales reps cave on price negotiations on a regular basis when a simple “No” often sidelines the discussion.  You have the right to defend your prices. Why not put up the ultimate response as a starting point?

You can later drop back to less forceful approaches like deferring increases or trading value for the increase. Our pricing experts are often surprised how frequently the buyer will back down on their position. After all, they are trained to push back and most often they get a response in their favor. Many don’t know what to do when the seller begins to actually negotiate.

Start with “No”. You can always back up to a different offer later.

How Should Manufacturers and Wholesale Distributors Announce Price Increases?

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Price increases in industry are a fact of life. Most manufacturing companies and wholesale distributors see rising costs on a regular basis and feel the need to respond with price increases to maintain margins. But, how do you best communicate the increase to your customer base?

Depending on the customer profile there may be several approaches employed. Larger accounts may require a personal meeting to announce the increase and explain the impact on the account. Customers that order infrequently, say once a year for a small quantity, may not warrant an announcement at all. They may just see the increase at the time of the next order.

However you approach a price increase announcement it is likely that you will want to draft a letter explaining the increase. Over the years our pricing consultants have seen numerous letters announcing increases many of which we feel are ineffective.

Here are some recommended steps to building an effective price announcement letter. See if your announcements follow this pattern.

  • Create a “value sandwich”. Before actually stating the increase in the letter deliver a summary of the value that your company delivers. Explain recent initiatives that contribute to delivered value like a CRM program for example. Then, after you state the actual price increase, close with a brief summary of delivered value again.
  • Keep the actual explanation of the increase short and to the point. Avoid vague language and uncertainty. Simply state the increase amount if possible and the effective date.
  • Focus on your relationship with the customer. You desire to continue be a long term partner with this account and the increase will help to insure continued product quality and service.

How you handle price increase announcements can make or break the results. Well thought-out  price announcements have a higher acceptance rate with customers. Spend the time and attention to the details to ensure that you get the most out of your increases.