In general, almost every company can benefit from deploying a relevant pricing solution and from improving pricing practices. Organizations should approach the management of selling prices and increases with the same rigor they use to curb upstream supply chain and manufacturing costs. Certainly, if a company has a handful of customers and a few products only, it can probably live without sophisticated pricing management software. However, such a company can still benefit from encouraging its sales force to diligently break down each order (that is, by customer, product, and order size) to figure out where money is being made or lost, or "left on the table."
The truth of the matter is, the more complex the pricing environment is, the more valuable pricing software becomes. For larger B2B companies with complex pricing requirements, price management software is essential in order to automate price execution processes, optimize price strategies and guidance through modeling, and provide insight into price improvement opportunities that may have significant impact on earnings and margins.
Prospective user companies should well understand that there are no shortcuts on the path to pricing excellence, nor can effective pricing be accomplished through the age-old practice of guesswork and tactical competitive reactions. Before embarking on a project, a prospective company should conduct a thorough, soul-searching exercise to ascertain its current pricing competence, and consider what changes will provide the most significant impact on the bottom line. Companies should seek honest answers to the questions below:
* Do we understand how our customers react to price changes or discounting policies?
* Have we segmented our customers, markets, and deals when it comes to pricing and discounting? If yes, then how many different market price segments do we currently serve, and do we charge different prices in each one?
* Is our pricing and promotion strategy driven primarily by costs and perceived competitive prices? Or is it based on the final measures of value—market prices and margins?
* Are we measuring customer response to and effectiveness of promotions?
* Do we analyze our pocket prices in price waterfalls to understand the costs that are eating away at our margins?
* Do we have a centralized, unified place that brings all the pricing, margin, and transaction data together for analysis?
* Do we provide our sales channels clear, segment-specific discounting guidelines and targets? Do our salespeople offer discounts outside of these margin guidelines?
* Do we have processes to enforce guidelines and handle exception review and approval?
* Do our sales channels and management understand the difference between a "good deal" and a "bad deal"? Do we proactively score our deals and contracts against this measure?
* Can we quickly adapt to any market or strategy changes to achieve short-term objectives without sacrificing margin or damaging long-term growth?
* How have our nearest competitors adjusted their prices over the past year, and why?
* Do we have real-time visibility into profit performance by channel, product, and customer segment?
* Are we able to quickly sense and respond to emerging opportunities and competitive threats as they arise?
The idea here is to create a documented price strategy and rollout plan that a company will execute. The price strategy and rollout plan should include the following information: what the discount strategy and target profitability will be, whether and how customer segmentation influences pricing decisions, what approval levels exist for pricing decisions, whether the company will sell unprofitable product lines to unprofitable customers (that is, whether volume and revenue are more important than profit and earnings), and the degree to which the company can differentiate prices across its markets.
For example, before sending a salesperson into a sales situation, the company should well understand how a customer will likely respond based on the known characteristics of that customer, the products the company plans to sell that customer, and the relative economic value the company provides to that customer. Perhaps a customer or a deal is so important that the company will yield to any demand. This is fine, as long as there is a rationale, or "rule," for making that decision. Conversely, another customer may not receive any discount, even if it means the deal will be lost. That rule is fine too, as long as there is a rationale based on data and analysis that supports this decision.
As said earlier on, on its own, price management might improve revenue (by a few percent) and gross margins (by ten percent and more). But the true benefits will only come when price management is integrated with business strategy, sales execution, finance and supply-demand planning, and operations. Companies that participate in markets with wide variations in price response, or that have the ability to shape demand through price changes, should focus on a combination of price optimization and price enforcement. Other companies might want to start from price enforcement first.
Because of the potential gains, many innovative companies have already made significant investments in price management initiatives, while their direct competitors are feeling the pressure to embark on their own pricing management deployments. A "litmus test" for a company to learn whether the solution is needed would be to ascertain 1) how pocket margins vary across its different businesses and regions; 2) how many pricing decisions are outside of existing guidelines and the extent that these exceptions require approval; 3) how long it takes to process a special pricing request (how convoluted is a pricing approval workflow, for example); and 4) how long salespeople spend looking up, inquiring about, and communicating prices.
The truth of the matter is, the more complex the pricing environment is, the more valuable pricing software becomes. For larger B2B companies with complex pricing requirements, price management software is essential in order to automate price execution processes, optimize price strategies and guidance through modeling, and provide insight into price improvement opportunities that may have significant impact on earnings and margins.
Prospective user companies should well understand that there are no shortcuts on the path to pricing excellence, nor can effective pricing be accomplished through the age-old practice of guesswork and tactical competitive reactions. Before embarking on a project, a prospective company should conduct a thorough, soul-searching exercise to ascertain its current pricing competence, and consider what changes will provide the most significant impact on the bottom line. Companies should seek honest answers to the questions below:
* Do we understand how our customers react to price changes or discounting policies?
* Have we segmented our customers, markets, and deals when it comes to pricing and discounting? If yes, then how many different market price segments do we currently serve, and do we charge different prices in each one?
* Is our pricing and promotion strategy driven primarily by costs and perceived competitive prices? Or is it based on the final measures of value—market prices and margins?
* Are we measuring customer response to and effectiveness of promotions?
* Do we analyze our pocket prices in price waterfalls to understand the costs that are eating away at our margins?
* Do we have a centralized, unified place that brings all the pricing, margin, and transaction data together for analysis?
* Do we provide our sales channels clear, segment-specific discounting guidelines and targets? Do our salespeople offer discounts outside of these margin guidelines?
* Do we have processes to enforce guidelines and handle exception review and approval?
* Do our sales channels and management understand the difference between a "good deal" and a "bad deal"? Do we proactively score our deals and contracts against this measure?
* Can we quickly adapt to any market or strategy changes to achieve short-term objectives without sacrificing margin or damaging long-term growth?
* How have our nearest competitors adjusted their prices over the past year, and why?
* Do we have real-time visibility into profit performance by channel, product, and customer segment?
* Are we able to quickly sense and respond to emerging opportunities and competitive threats as they arise?
The idea here is to create a documented price strategy and rollout plan that a company will execute. The price strategy and rollout plan should include the following information: what the discount strategy and target profitability will be, whether and how customer segmentation influences pricing decisions, what approval levels exist for pricing decisions, whether the company will sell unprofitable product lines to unprofitable customers (that is, whether volume and revenue are more important than profit and earnings), and the degree to which the company can differentiate prices across its markets.
For example, before sending a salesperson into a sales situation, the company should well understand how a customer will likely respond based on the known characteristics of that customer, the products the company plans to sell that customer, and the relative economic value the company provides to that customer. Perhaps a customer or a deal is so important that the company will yield to any demand. This is fine, as long as there is a rationale, or "rule," for making that decision. Conversely, another customer may not receive any discount, even if it means the deal will be lost. That rule is fine too, as long as there is a rationale based on data and analysis that supports this decision.
As said earlier on, on its own, price management might improve revenue (by a few percent) and gross margins (by ten percent and more). But the true benefits will only come when price management is integrated with business strategy, sales execution, finance and supply-demand planning, and operations. Companies that participate in markets with wide variations in price response, or that have the ability to shape demand through price changes, should focus on a combination of price optimization and price enforcement. Other companies might want to start from price enforcement first.
Because of the potential gains, many innovative companies have already made significant investments in price management initiatives, while their direct competitors are feeling the pressure to embark on their own pricing management deployments. A "litmus test" for a company to learn whether the solution is needed would be to ascertain 1) how pocket margins vary across its different businesses and regions; 2) how many pricing decisions are outside of existing guidelines and the extent that these exceptions require approval; 3) how long it takes to process a special pricing request (how convoluted is a pricing approval workflow, for example); and 4) how long salespeople spend looking up, inquiring about, and communicating prices.
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