Pricing Leadership

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?