Pricing Leadership

Manufacturing.net and PROS’ Doug Fuehne, VP, Professional Services of PROS Pricing Software Solutions talk about how manufacturers can improve their pricing strategies and come out ahead as the economy turns around.

To get right to it, the five pricing strategies Fuehne suggests will help you come out ahead in the economic recovery:

1. Identify underperformers.
2. Proactively forecast future performance.
3. Increase organizational agility.
4. Focus on customer satisfaction to keep the customers you DO have.
5. Provide sales force with optimized prices and other highly relevant information in a timely manner.

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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!

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.

As more and more companies are looking at pricing, they are asking themselves, “what can we do to jump start the process?” Ultimately, it’s understanding how you price.

On each of our implementations, PROS conducts a “Day in the Life” of potential users; we call this “riding in the truck” as a reminder – because we actually rode in the sales truck of one of our customers! This is the only true way to fully understand how, empathize with, appreciate the pains, and absorb the pricing practices of those users. If pricing is such a strategic lever that can make a significant difference in your profitability, shouldn’t you be willing to invest the time to understand all the corners of your organization’s pricing practices in order to squeeze out as much ROI as possible?

The question is: how do I conduct these Day in the Life sessions? I can start by telling you what not to do… don’t just ask questions! Put yourself in your employees’ shoes… if they are called into a room, and must answer a bunch of questions about how they do their job, what do you think they are imagining? No matter how you prep them, how you preface your message, or how you triage any malcontent, they will be nervous. Unfortunately, that feeling will result in them answering the questions they way they “think” you want them to answer. Anyone can put concepts on paper, which is what their answers will no doubt provide; you are trying to get at the dark and ugly truth about price and profit leakage. Therefore, take the “interview” to the next level… go ride in the truck.

But don’t just observe in the “white lab coat, clipboard, and one-way mirror” sort of way… observe AND interact. Ask “why did you [insert activity here]” until you fully understand – don’t assume anything. Then go beyond observation and interaction: solicit their feedback for how they would improve their processes. What else do they need? What could they do without? What typically causes them to sit around and wait for three days while your competitors steal your business? Get them to believe they will have an impact on the outcome, the new process that they will be asked to follow… BECAUSE THEY DO! Once you have this buy-in and belief in your employees that you want them to do better and are willing to give your time and efforts to help them, the truth comes out.  It’s only then you can work with your cross-functional team to improve your pricing processes in a way beneficial to all… because you know how your organization really prices.

True, leading-edge companies already have this figured out as they are investing in pricing for the long-haul. They are looking at the support mechanisms, training programs, and business policies that must be enacted in order to have a successful pricing initiative. This is not simple and it takes various business units agreeing to change for the mutual benefit of the company. After all, if it were simple, the company would have already figured it out and pricing would not have the immense returns that we have seen time and time again.

Have you considered how performance management and price optimization are related? Performance management is a technique used by many executives to manage both behaviors and results. Pricing has behavioral implications for your customers and your sales managers. The changes in behavior resulting from pricing policies, internal and external, can have a large impact on your bottom line if managed properly.

PROS is an active member of the Professional Pricing Society and Doug Fuehne, VP, PROS, will be presenting a live webinar on this topic in cooperation with PPS on October 6th at 12:00 noon EST.  For more information check the PROS webinar calendar: http://www.prospricing.com/webinars/

Webinars are for PPS members only, however Pricing Leadership blog readers can use the below special registration to attend the webinar even if you are not a PPS member: https://www1.gotomeeting.com/register/900702721

One more thing…did you ever take a PROS Pricing Excellence Certification Course? If you did, you now have the opportunity to transfer these credits to the Certified Pricing Professional program from the Professional Pricing Society. Contact PROS at info@prospricing.com to request a credit transfer.

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Companies across the globe are realizing the value of pricing and doing whatever they can to reap the benefits from an increased focus on pricing. However, it is truly the leading companies out there that recognize the simple fact that pricing is not just a business function, performed by those that need to be involved. Pricing is a complex business process that must have the correct support and guardrails around it. You wouldn’t implement new SOPs without training, support, and feedback… why should pricing be any different?

True, leading-edge companies already have this figured out as they are investing in pricing for the long-haul. They are looking at the support mechanisms, training programs, and business policies that must be enacted in order to have a successful pricing initiative. This is not simple and it takes various business units agreeing to change for the mutual benefit of the company. After all, if it were simple, the company would have already figured it out and pricing would not have the immense returns that we have seen time and time again.

Think about what you and your company are currently doing to realize ROI in 6 months and even 12 months? There are not many initiatives out there that have the potential impact like pricing. Therefore, this will not be simple.  But if the desire and determination is there, taking an average 4% profit margin to 5.5% in 6 months and sustaining that gain is not far-fetched. In fact, it is probably understating the true gains.

One of the biggest differences I have noticed in the European community as compared to the US is how different two “neighbors” might be.  For example, take Germany and France. They are geographically next door to each other; but they are miles apart in most aspects – and their approach to pricing is no different. If one company operates in both countries, it is expected that each country will have their own approach to pricing. On the flip side, in the US, while California and New York are miles apart (and there are many additional differences in addition to geography), if one company operates in both California and New York, it is much more likely there will be one approach to pricing (if not one, a least similar enough approaches that may be managed centrally). Thus, a “global pricing approach” is not a simple, straightforward strategy in Europe as is tends to be in the US.

That being said, how a company goes about implementing a global pricing strategy must also allow for and expect the complexities that currently exist in managing the business centrally. If for instance the current business environment is very much decentralized, having a central pricing strategy is not reasonable in the short term. Ignore the change management aspects for the moment, the simple logistics of understanding the diverse and disparate pricing methods and go-to-market strategies that currently exist are immense. The long-term plan should account for this and not expect one, global approach to be implemented in the near term.

However, this does not mean that companies, especially those that are very decentralized in their management, cannot achieve great value by taking a global approach to pricing. It just means that their time horizon must be appropriately set. For example, one customer here in Europe has a long-term vision that includes roll-out of a global pricing process to roughly 40% of its worldwide business (represented by countries and regions of countries) by 2015 if not beyond. Pause and read that again… “global process” for 40% of its business. ”How is this truly global?” you might ask. It’s simple: they are not planning to stop at 40% but they are pragmatic in their approach to ultimately reach 100% of their business. Regardless, as this customer has already begun the global process country by country, it is achieving great value already.

Also, setting up a global pricing process should not imply centralization of power. In fact, it can amplify the current independence and power of the remote business units. Another customer here in Europe is rolling out its global process and by doing so, is providing guardrails that its remote businesses must operate within. But at the same time, it is providing much more information to the remote business units; so much that the decisions those remote business units make are now better supported and therefore, they should be able to operate more independently within those guardrails.

In summary, companies, especially those that operate across cultural borders, should view a global pricing process as a journey. There is extreme value to be made along this journey, but it will take time. Prioritize your “low-hanging fruit” to maximize your return, but commit to the long-haul.