Pricing Leadership

I am not very good at poker. My friends say I have more “tells” than they can count. A tell in poker, is a facial expression or body position that gives away what kind of hand you have – a bad one, a good one and sometimes a really good one. The best poker players in the world don’t have a tell, but read others like an open book. Take a look at the embedded videos and watch Daniel Negreanu show off his amazing skills at reading his competitors and accurately guessing their hands – it’s downright freakish.

http://www.youtube.com/watch?v=Tbp_i8dOUvU&feature=related

http://www.youtube.com/watch?v=FhQjwdeViGk&feature=related

There is one aspect of poker I do understand well – calculating the probability of a winning hand. Without a doubt, the best poker players in the world can easily calculate the odds of winning a hand. They don’t have perfect information, but they know, right out of the gate, what their approximate chances of winning are. In Texas Hold ‘em, some cards are eventually exposed to give more information about your chances of winning and then betting continues. With each exposure, good players recalculate their odds and play accordingly. Mathematics and statistics play such a vital role in poker, you can’t even come close to competing at the highest level without it.

B2B negotiations aren’t that different from poker. The best sales people are like Daniel Negreanu in the video – they are able to read the customer. They negotiate better pricing, giving the company more profits and themselves fatter commission checks. 

But even the best negotiators don’t know the probabilities. The top sales people use their vast experience to determine pricing danger zones and winning strategies. What if you could give them, and other sales people with far less experience, a window into the probability that they will actually win the deal?  This is the heart of B2B pricing science – giving real-time analytics to sales people and negotiators to expose the pricing that wins while maximizing margin dollars. In poker, there are many different hands – straights, flushes, pairs, full-houses, etc. Depending on what you could put together, your strategy changes. In B2B, different types of customers, products and transactional environments change as well. Pricing science can tell you the “sweet spot” for every different scenario you can think of – often changing drastically (e.g. A large customer renewing a contract versus a small customer with a one-time rush order). 

Did you notice the “probability of win” in the video? That’s really powerful information. Pricing science does exactly that – it helps calculate the probability of winning a deal or contract acceptance. Our goal is to have B2B companies negotiate closer to the price that achieves the best probability of winning as well as getting the most margin dollars. This is where poker and pricing differ. Poker is about winning. Pricing is about winning and maximizing profits.

Are your sales people armed with the right analytics to help them win? Are your competitor’s sales people armed?

Many companies recognize the importance of having multiple business strategies in place for how they will approach the market. Do they want market share, or do they want to be the prestige brand? Are they trying to launch new products and/or sunset others? Each business strategy requires the tactical plans in place to execute, and therein lies the need for mixing up your pricing strategies.

Why is it that many companies recognize the need for multiple business strategies, but then execute through one or two “tried and true” pricing strategies. Each different market approach can be achieved through different pricing strategies, but with vastly different results.  If your brand is positioned as the “prestige” brand in the market, don’t expect the same pricing policies that keep that image in place to work for market penetration.  The same can be said for the typical commodity markets – applying value based pricing to those products in those markets simply will not produce similar results to value based pricing for specialty products. Yet company after company will re-apply “proven” pricing strategies in new markets for new products, without fully analyzing all alternatives. And why is that? It’s not because they don’t want to; typically, it’s related to a company’s inability to project and forecast multiple strategies and manage them once they are in place.

This is where a robust pricing execution tool, such as PROS’ Price Optimizer, shines. The ability to properly forecast price changes using a library (meaning more than two or three) of B2B price strategies is almost invaluable. In addition, companies need to realize that since business is dynamic, so too must be your pricing libraries. A true price execution tool will allow for price change modeling using proven price strategies, but with the necessary tweaks to meet changing market conditions. And so, a new price strategy may be added to the ever-growing library for use elsewhere. The value of such a price execution tool is the reusability of what works, the elimination of what doesn’t, and the proliferation of success throughout the entire organization.

In one of our latest implementations, we had a scenario where we were getting lower than expected sales adoption of the optimized price guidance in one division of our large distribution customer. Initially when we were trying to determine potential causes, all seemed OK – this division had followed the same change management plan, same training schedule, etc. We had recommended two additional paths to help with sales adoption – matching commission rates to the price recommendations, and publishing a weekly ranking of sales reps and their performance against the price envelope.

Our recommended commission plan changes had largely been adopted. These changes allowed sales reps who priced according to the recommended prices to be paid a higher commission, aligning their goals with our customer’s. 

However, upon a further deep dive into the details, we learned that the head of the sales force for this particular division was not utilizing our recommended published weekly ranking. These “peer pressure” tools were designed to engage the human side of adoption to foster a feeling of competition among the sales reps. 

Each week, the top performing sales reps were noted on their achievement towards the target prices. On this particular implementation, we suggested measuring “value lost” – a metric that measures the number of transactions and associated dollars below the floor price in the price envelope. The top performers had the smallest “value lost”.  Similarly, the worst performers had the most margin dollars to gain by following price recommendations. Both lists were posted in a public place each week, without much fanfare, I might add – people catch onto this type of thing pretty quickly. 

When we asked why he did not post the rankings, the division sales lead said “I already have the financial alignment; I don’t need the rankings.” This is a common misconception, but an important one.  Sales reps in particular are competitively motivated, and using rankings such as these can engage the human side, not just the wallet side. Also, people generally do not share their compensation, so the rankings provide a competitive outlet that can be shared by the team. 

After instituting the weekly sales competition rankings, we saw the adoption of prices noticeably improve, and the basis point increase in margin for this particular division actually outpace the remainder of the company, moving from well-below-average to among the leaders in margin gain! It also fostered a sense of competition among the reps, and became a common discussion topic.

I think the lesson here is important – pricing software implementations are complex beasts, and making sure your company realizes the value that was promised via sales adoption is critical. Use every tool in your toolbox to make sure this happens!

The other day, I had a very interesting conversation with one of our customers. They just completed a customer survey to help determine the core reasons their customers valued them as a supplier. Many items were listed – service level, relationships, ease of procurement, technology, price, market leadership, quality and much more. Price didn’t make the top 5 (according to this customer, it ranked 7th). So what does this mean? Could they charge whatever price they wanted? Probably not — it just means that product volumes change due to many other variables other than price.

To understand the price to volume relationship, let’s look at two very different extremes – captive vs. commodity. On the captive side, let’s consider a highly customized enterprise software solution. Because it’s totally customized to your company – every change, upgrade or enhancement is subject to a work order, statement of work, or new contract. High tech companies who offer customized solutions know this fact all too well. A vital component of your business is in their hands. Their pricing for follow-up on services, maintenance and upgrades can border on egregious.

On the other extreme we have pure commodities. A great example is downstream petroleum products. After initial refinement, oil companies sell unbranded gasoline on an open market. Location, availability, competitive landscape and price are the only variables that need consideration. The lower the price, the more volume – it’s just that simple. Optimized pricing is all about understanding your competitive position and desired volumes at each terminal.

Chances are, your products fall somewhere between these two extremes. You’ve got legacy products that competitors have begun to commoditize. You also have innovative products and contracts that give you pricing power. Many companies struggle to understand which products have a captive audience and those products that have very low switching costs.

Despite this daunting task, there is good news – pricing science can mine your data across all of your products to determine their price sensitivity. By factoring out key variables (economic indicators, complementary products, seasonality and more), it’s possible to uncover the true price-demand relationship. With this knowledge, you can develop value pricing strategies by product line with confidence and understand how the market will react.

B2B Manufacturers and Distributors are departing from mass price increases and embracing targeted price changes based on market sensitivities. How are you making pricing changes?

Many times, we run across projects that are faced with a delay for business reasons… such as “all business units aren’t ready”, “we would rather wait until after/just before the next round of pricing”, or “the data looks suspect for this one country/business unit/product group, let’s wait until that’s fixed” – all are common and quite frequently heard during the course of our pricing implementations.

Why would you want to wait? Let’s take a practical approach to this logic: pricing can create profit lifts to revenue.  If your “acceptable” business units or countries equate to 10M USD or 8M EUR, then by not waiting, you could realize 1.1M USD or 1.65M EUR now. Yes, there’s more value to be had later on, and yes, you will go after that value in time.  But DO NOT put on hold the value that’s right at your fingertips, just for an incremental 10, 20, or 30%. Heck, even if the “delayed” portion of the project represents a significant majority of your overall business value, why would you not take what you can get now.

We have been discussing the fact that sales adoption of pricing tools is a difficult problem to solve. Lately, I have been observing a pattern towards bringing pricing into the sales tools that exist today. These solutions utilize SaaS and mobility platforms. Recent SaaS examples I have observed include companies that utilize Salesforce.com and Microsoft Dynamics CRM. Recent mobility examples include companies that utilize Blackberry devices and Microsoft Excel, in a remote environment.

These companies need pricing to help in the sales processes. This includes quoting tools to help the sales team make the right choices. They need multiple price points, as guidelines to the process. Some want to know, “what is the right offer for my customer”?

What are the technologies required to support these processes? Here are a few that are important:

Real-time Quoting and Pricing
As the combination of possible products, channels, customer segments, and negotiation methodologies explodes, it is infeasible to store all pricing permutations on the CRM tool. Service-Oriented Architecture is critical for pricing. ERP vendors have solved this problem using rules. However, creating a copy of a rule engine in every application you use is problematic for many reasons I will not dive into at this time. Real-time architectures can grow as your business rules change, and help you to maintain a single set of rules. Flexibility is really important, depending on how quickly your business strategy changes.

Composite Application Support
To maintain user interface consistency, composite application architectures are really important. These architectures allow “mash up” style interfaces where components of pricing can be interweaved with other business process components. Salesforce.com has APEX. Microsoft has SharePoint and the Dynamics xRM platform. Single “large” applications are a thing of the past. Composite applications are where the market is heading, and it is heading there fast.

On/Off Premises Integration Support
I have heard from customers that they are uncomfortable having their pricing data “in the cloud”. Can vendors offer a composite sales and pricing experience that meets the best of both worlds? The questions I hear include “can you keep critical pricing information on-premises, integrating with a cloud-based CRM tool?” and “can you make it seamless?”. Required technologies include SaaS integration technologies, such as that offered by Cast Iron Systems, and Single-Sign On technologies, such as Salesforce.com’s delegated LDAP integration.

Mobility
I will save discussion about mobility for a future article. We need to think about the mobile sales force. They are using handheld smart phones, laptops and yes, tablet PC’s. Internet access, such as 3G is becoming more prevalent.

What tools do your salespeople prefer and why?

I was catching up on my RSS feeds and I came across this excellent article by Professor Ford: http://professorford.com/2009/09/23/building-accountability-without-authority/

Many in the pricing profession are faced with a situation where they are trying to influence behavior without having direct authority over those who make the decisions. This article addresses the point head-on, with an example from the NCAA. Performance measurement and peer pressure are two ways to influence human behavior and accountability. Do you have the tools you need to increase accountability?

Regardless of where you are on your Roadmap to Pricing Excellence, whether just starting to define your future pricing processes and strategies or well on your way with processes and tools, you have to ask yourself three simple questions to judge the true effectiveness of your pricing initiatives in regards to your business:

·         How are we doing?

·         Why is this happening?

·         What should we be doing?

While these questions are simple, the answers to these questions require a Performance Management Framework in place to enable you to maximize the ample margin and revenue improvement opportunities out there.

How are we doing?

At first glance, this is the easiest question to answer.  The initial answer of most customers that I have worked with prior to our implementation would be that they have good visibility into their main business metrics such as revenues and margins.  The key here is that true visibility into “how you are doing” goes much deeper beyond the surface of traditional metrics.  It all starts with defining all the costs to serve, discounts, off-invoice rebates, only partially recovered costs such as freight in some cases and identifying the true pocket margin of every single transaction.  From there you can really focus on profitability analysis of your customers, contracts, product lines, business units and other aspects of your business.

Why is this happening?

Once you know the true performance of your business, you can start asking the “Why” question. 

·         Why has my margin declined by 5%? 

·         Why are the sales branches in the Northeast underperforming compared to others? 

·         Why did the last round of price changes not generate the expected results? 

·         Why are we losing money on this customer deal when we expected 10% margin?

Answers to these questions can be a bit more challenging and sometimes require more sophisticated tools for analysis.  The first question can be answered by tools such as a Margin Variance Mix Waterfall that explains the impact of key factors on margin such as customer acquisition and attrition, price changes, changing volume, cost changes, product mix, and even the impact of exchange rates.  Depending on specific business context, the other questions can be answered by analyzing sales rep adoption of price guidance, customer adoption of list price increases and number of exceptions, as well as tracking the expected costs and customer volume commitments at the time deal was negotiated to the actual costs and customer orders. 

What should we be doing?

The final step in defining the Performance Measurement Framework is to align the organization around your business goals and put the necessary processes in place to achieve those goals.  Here are some of the key factors that have worked best at customers that I interact with:

·         Align performance incentives with the desired behavior

·         Provide pricing envelopes driven by scientific segmentation and pricing guidance based on those segments

·         Put in an approval process that streamlines price changes and deals with desired behavior and put in a well-defined, enforceable process for exceptions

·         Monitor results and let pricers and sales know how they are being measured

·         Set up automated alerts that let you know when pricers, sales reps or branches are not compliant

In the end, the success of your pricing initiative depends on the people in the trenches that make pricing decisions every day.  It is vital to define the business objectives, strategy to achieve those objectives and then measure performance with a well defined Performance Measurement Framework.  The key is to make this information available to the pricers and sales so they can answer the three questions for themselves: ”How am I doing?”, “ Why is it so?” and  “What should I be doing?”

With the success of PROS’ Global Leadership Seminar Series along its stop in Shanghai, China, Robert Rutledge, who leads Accenture’s Pricing & Profit Optimization practice in Asia-Pacific noted, “Manufacturers in China today face low-cost competition from places like India and Mexico and design and engineering competition from Japan and the west.”  The seminar focused on the tremendous opportunity for manufacturers in China and across Asia-Pacific to adopt advanced pricing strategies and price optimization software to remain competitive and profitable in an increasingly global manufacturing landscape. Mr. Rutledge continued, “In order for Chinese manufacturers to maintain their competitive edge, they will increasingly turn to more robust pricing strategies such as those supported by PROS’ industry-leading price optimization software tools.”

Below are two video clips of Mr. Rutledge’s presentation which the discuss the topic of Cost Plus as well as a Case Study focusing on how Chinese manufacturers can evolve from basic to more sophisticated pricing models, including pricing strategies in manufacturing and a compare and contrast with other Asian countries.

On a recent project I did a “Day in the Life” with Mark*, a sales representative responsible for selling animal health supplies to rural feed and farm/ranch supply stores. Seeing my customer’s sales force interact directly with their customers provided valuable insights that augmented the discussions we had already had with the corporate pricing team.

For example, our customer was trying to phase out a product from one of their suppliers and switch over to another, higher margin supplier. They had significantly altered the sales forces’ incentives to encourage sales to make the move. I got to see the effect first hand when Mark attempted to convince a skeptical cowboy to try a couple of boxes of the new medications. The store owner in question was not sure he could convince his customers that the new medications were just as good as the old ones. We learned that changing sales force incentives quickly and effectively changed sales representatives behavior, but the sales reps were having trouble convincing their customers to change as well.

Mark and I discussed a wide range of pricing related topics as we travelled between the tiny towns he covered. We discussed his incentive plan and he offered specific examples where it was in his best interest to drop margin as low as possible to get revenue. We visited a store where he had previously received good business at a high margin until a competitor had come in and driven him out with below breakeven pricing. Mark showed me his company’s order entry system and the pricing system that supported his pricing decisions, and suggested some improvements that would help him price faster and better.

In addition to the wealth of data that Mark had to offer, the Day in the Life also provided me with valuable perspective. Viewing a list of products takes on new meaning after you have helped sell a few; as well as hearing about a frustrating customer makes more sense when you have actually met one.

I brought those pricing recommendations back to corporate IT and we incorporated several of them in their updated sales systems.

*Name changed to protect privacy