Free Good Engender Entitlement - B2B Pricing

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I fly a lot. And, as one of the top 3% of customers of my preferred airline, they treat me pretty well, on the whole. I don’t pay a fee to check a bag; there is sometimes an accelerated lane at the security check; I board the aircraft first, so I can be sure of overhead bin space. Most of all: they give me free upgrades to a better seat.

In the 40-ish flights I’ve taken this year with a premium cabin, I’ve been upgraded every time but once. That one time, boy – was I a ghastly pouting snob, silently furious at my perceived ill-treatment (and this blog piece can be regarded as penance for that shameful reaction).

There’s a serious B2B pricing point here. Giving products or services, which ordinarily come at a price, for free, is a serious matter, and companies should think very carefully indeed before implementing these policies.

Firstly, it communicates to the customer that they need not pay; this is fundamentally a bad message to send.

Secondly, in many cases it’s based on very spurious logic. The airlines, to go back to my illustration, could claim that it’s worth foregoing to potential revenue from the premium seat, to ensure my revenue for the rest of the year.  This might be true, but it’s such a crude instrument that it ignores a crucial aspect – how profitable I am. Remember – a firm’s most profitable customers need not be their largest in revenue.

Additionally, the practice of giving free goods or services ignores a key selling technique – upgrade the mix. This can be rewarding for both vendor and customer, when done with skill and flair.

Here at Vendavo, we’re always interested in hearing your feedback. If you didn’t manage to make it to our Profit Summit this year, we’d love to see you next year. And in the interim, maybe I’ll see you in an airport somewhere – I’ll be the guy checking the upgrade list.

What B2B Sales Managers Can Learn from Wine

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Following the recent news reports on CNN of the Hero on the New York City Subways, Snack Man

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Following the news reports on CNN this week of the Hero on the New York City Subways, Snack Man (Google: Snack Man CNN), I thought back to my days as a kid in New York City. During the 1980’s riding the New York City subways safely meant more than being armed with a bag of chips. It meant knowing about respect. It meant not looking at the wrong person in the wrong way at the wrong time.

As I work with our customers at Vendavo, I find that of our most successful customers Price with Respect and they do this in 3 ways, they:

• Respect their Products
• Respect their Sales Representatives and
• Respect their Customers

So how do they do this?

First, respect your Products.

Respecting your products means you understand where your products have unique value in the market place and where they don’t.Respect the time your engineers, manufacturing and product management have put into making the product and don’t discount it away at first request. In order to do this our customers implement value based pricing, educate their sales reps continuously and implement stricter discounting policies for products with unique pricing power.

Second, respect your Sales Representatives.

As a pricing professional, don’t ask your sales team to do anything that you would not be willing to do yourself. Just as you might have to defend yourself on a NYC subway one day, your sales teams are asked to defend your prices every day. Don’t arm them with a bag of chips, arm them with something more powerful. Again our best customers provide information, guidance and easy to use analysis for their teams to justify price increases. One of our favorite Pricing Directors, writes newsletters on Raw Material Cost increases and flies around the country defending price.

Lastly, respect your Customers.

The unique thing about B2B pricing we find is the value of emotions in selling and the risk associated with it. While everyone preaches win-win, we constantly walk the thin line in B2B pricing.There is nothing worse than having to face the procurement manager at your largest customer who is just realizing he/she was burned on the last 2 negotiations. We find our best customers don’t use pricing software and initiatives to trick their customers. They use pricing programs to better inform, analyze and recommend what the price should be to their customers, representatives and product management. At the end of the day, you must be able to defend your price.

As my mom used to say, “that and a token gets you on the subway”, I now like to say “Pricing with a little respect gets you a little extra margin”. 

Pricing Automation: It's Time For Henry Ford

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The Science Museum in London has a great collection of inventions from the 1880s. This one decade saw a tremendous burst in creativity as inventors unleashed products such as the typewriter, the bicycle, the phonograph, the camera and the automobile. But this burst of creativity did not filter down to the actual manufacture of products. It still remained in the realm of the craftsman, who served a long apprenticeship then developed his own methodologies and techniques to make what was asked of him. This process had not changed much since the age of medieval guilds. The outcome was that these stunning inventions remained the preserve of the rich.

But one man had different idea: his name was Henry Ford. By developing the automated manufacturing plant he was able to make an efficient repeatable process, with standardized parts and little reliance on craftsmen. Now Ford certainly had some off-beat ideas (the recent book “Fordlandia” is a fascinating insight) but one outcome: his cars were for everyone.

So why do I feel that pricing is still in the Victorian Age? In the pricing world we still are dependent on the craftsman approach: a neat Excel Spreadsheet here, an Access Database there. Each person building his own tools and trying to solve the problem. The process of getting a price is slow and error prone, there is significant duplication of effort and opportunity for error is high.  

It’s time to industrialize pricing. The production of prices should be seen in a similar way to the production of any other manufacture. If we look at a Hi Tech assembly line, products roll off the end in a repeatable fashion. Do we pay as much attention to the efficiency of our pricing machine as we do to our product line? What about the quality of our prices? In our plants we have a variety of quality checks (Lean Manufacturing, TQM, 6-sigma), shouldn’t we be applying these to the “Production line of our Prices”? Also, in any modern factory, the process of designing and making is carefully controlled and only a few people can make a change to a product. But that’s usually not  the case in the Pricing Factory, where just about anyone can make up their own price. Imagine the chaos if any employee could reach down on to your production line and fiddle with a product before it went out of the door. That’s effectively what we allow to our prices: all sorts of unauthorized and poorly informed hands touch and fiddle with them before they leave the building.

Who’s going to be the Henry Ford of Pricing?

How To Work With Captive Customers

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Continuing the sporting theme we’ve seen on this blog recently, I was interested to note that the fairly dismal soccer team I fervently support entered into a Groupon deal to fill the stadium with supporters enjoying very cheap tickets. This led to a lively philosophical and practical debate among the faithful. Some thought that it was a terrible move by the owners, to heavily discount to customers who are the least loyal. Other fans thought it was a great idea – they enjoy the benefit of having the same seat for every game, and are happy that more fans are able to attend to support the team, and (hopefully) spur them on to less-miserable results.

This situation got me thinking about captive customers, and how we can work with them in B2B organizations.

Some customers will be pragmatic about their situation – they will understand that they are stuck with a certain supplier because of proprietary technologies, exclusivity arrangements, or other circumstances. But this is no reason to make them feel price-gouged on a particular transaction. For these customers, we should continue to over-communicate the strategic strength of the relationship as well as the value provided.

Other customers will be resentful, and may express negative perspectives about the organization. With reference to Jennifer Maul’s recent blog post about NPS (Net Promoter Score), we must exercise great caution in managing these customers. It may be that these customers could understand and enjoy differently - bundled offerings. If warranty terms require that servicing and maintenance of equipment is conducted by the vendor on a set schedule, perhaps that could be offered as a pay-upfront, one-time deal, for example.

As ever, the critical element in optimal pricing is truly understanding and recognizing that customers are not all the same, providing appropriate offerings, and communicating the value.  The most profitable companies in the world treat different customers differently – but all customers feel that they are receiving appropriate value.

What does value pricing really mean for your organization?

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A lot of the companies we work with talk about their desire to get away from cost plus pricing and move to value pricing. But many companies have no idea how to get from one to another.  They hope that value price means price higher. This may be the case in some instances of course, but the opposite could be true as well. Remember, customers don’t care about your fixed costs, or variable costs, or efficiencies or lack thereof, or features they don’t need, or your shipping lane rates or your good (or bad!) hedging of raw materials. They care about getting the right product for the best price they can where and when they need it. If you can do that better than your competitors THEN you are delivering value. But do this you have to be organized around this. You need executives who preach this, and salespeople who understand this, and pricing teams with the skills to analyze this, and product teams who live this. There’s no easy button.

The Chess Game of Profitability

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How many of the readers of this blog are chess players, I wonder? I am a capable player, though I don’t get a game all that often – despite a set being fairly prominent in my home.

The game of chess lends itself brilliantly to analogies in many areas of life – international relations in the political sphere immediately springs to mind – but in the business world, I think it is particularly helpful in the pricing area. Making a rational decision to commission a lean six sigma improvement project to remove deviation and errors from a factory is pretty straightforward with a cost-benefit analysis, a net-present value calculation and a gantt chart. Hiring the best candidate for an open requisition – again, beyond the critical analysis of the candidate relative to the role, that’s a linear thought process.

But in pricing, we have so many more players in the game. If we make a given pricing move, and we have three competitors, we need to think through what each of them might do in reaction. And we need to think about what our customers might do.

Even if we take the mathematically significant few – both in revenue and in profitability – then we have a chess game of quite some complexity. I like to think of it as a chess board arranged in a decagon rather than a square.

In B2B organizations, then, we ought to tirelessly strive to populate our pricing departments with the best and the brightest, and to equip them with the very best tools with which to analyze and monitor the result of each move. Let’s support the strategists and the statisticians – supported by the best competitive intelligence available from our sales and marketing teams. 

And back to chess… well, I can’t promise to be the most challenging opponent ever, but feel to stop by my house for a game of chess in the library. Don’t be surprised to see the Sicilian Defence – in fact, you can count on it.

What Are You Trying To Optimize?

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I see these new programmable lifts everywhere these days: the ones where
you key in your floor and are directed to a particular lift. It takes me
back to my very first programming assignment at school, in those days
when kids learnt to program in Basic. The challenge was to come up with
an optimal lift program. I failed the assignment as I was unable to
decide what I was trying to optimize: total wait time, maximum wait or
lift efficiency. It got me thinking in general about deciding what to
optimize.

In B2C retailers often are trying to optimize total gross margin, but at
times may choose to undertake brand building for a retailer, go for
footfall or other objectives.

In B2B, the list of things you may be trying to optimize may be even more
extensive, which is why reaching for an optimization tool may be
premature. Before you send in the mathematicians have you really
considered your goals for each segment? Segmentation models themselves
should be constructed such that business strategies can be executed,
rather than being some mathematical artifact that is impossible to
explain.

Also, some optimization techniques ruthlessly apply margin maximization
algorithms which may be inappropriate in a segment for which volume
growth, market share or customer retention is more important. You should
consider a framework whereby business owners are allowed to express their
strategy for a segment, and use this to refine the price guidance.

Now, where is that lift? 

Managing For Profit Despite Volatile Raw Materials Costs in Chemicals

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This is the fourth entry in a six-part series focused on exploring five of the key areas of opportunity for better pricing in the chemicals industry.

The chemicals industry is a notoriously cyclical business, and in recent years, raw materials cost volatility has become the new normal. As the price of key raw materials rises and falls daily – sometimes significantly – it makes it difficult for sellers and their buyers to agree on what the "market price" really is. Here are some thoughts on ways to manage for profit, despite the volatility and unpredictability of your raw materials.

Agility in Pricing Updates

Make sure you can execute mass price changes well and with as little time as possible wasted on administrative tasks. By utilizing your product hierarchies, product groups, or attributes (like raw materials content flags), Vendavo can automatically select any applicable customer price record that you may want to change. For instance, some Vendavo customers will use select product attributes like "contains XYZ" material as way to grab every record out there for products where the raw materials costs have been impacted significantly. Once you’ve identified the right subset of your business where the price change will occur, choose which type of price move this will be – a product price change (most likely), a new or changed surcharge, etc. Next, designate the actual amount of the price change(s) and model the potential impact this will have given your new costs as well – a predicted price waterfall is an excellent tool for that as well.

Formula & Index-Based Pricing

Consider where you can benefit from using formula-based or index-based pricing. Many chemicals companies do this today in various forms, and it can be an effective way to mitigate the risk of volatile feedstock costs. In this situation, the buyer and seller agree to a formula which takes 3^rd party published price or cost data from a reliable source like IHS, and then adds (or removes) some component to capture factors to account for the supplier’s processing costs, any market advantages, etc. Typically the formula is negotiated annually, and the actual prices charged are updated monthly, but could be updated more or less frequently. 

While formula-based prices can significantly help mitigate the risk of cost volatility, there are some challenges or considerations that go along with them:

• These formulas can be cumbersome to manage. We often see these being maintained in Excel spreadsheets with VLOOKUPs etc. Once the latest index data is available, the formulas need to be recalculated, and finally… uploaded into your ERP system.
• Due to the human intervention, there are opportunities to make mistakes in formulas and calculations. that can result in significant invoice errors, creating more work as you need to identify where the errors were made and who owes who how much money.
• And finally, this can reduce the pricing conversation to a primarily cost-plus conversation – not an ideal position in many cases.

The key is to think about how you can use these as a competitive advantage. Here are some best practices we’ve seen in utilizing formula-based pricing in chemicals:

• Don’t try to use formula pricing in all cases. They may make sense on products which are more commodity-like and you have little pricing power. But where you have a specialty product that is unique or enjoys competitive advantages, then formula pricing may leave money on the table. In other cases, your service costs could be more of a problem than your raw materials costs, so be careful to include that into your pricing model as well. 
• Leverage with large or sophisticated customers. Most customers with a large spend in your products will require you to price tied to a formula. When this is the case, think about the value, over and above the underlying index, that you are delivering to that customer, so that the initial price that is set is the right price. Remember, you may have to live with this price for years.
• If your product is really a blend or bill of materials, consider building a weighted formula that incorporates an approximation of the blend itself. 
• Consider non-material indices as well. For instance, if you’re working with a base material that requires a lot of energy to convert, refine, etc. you may need to consider an index that would act as a proxy for your power costs, like natural gas.
• Lastly, strive to manage formulas centrally, but still give sales the ability to negotiate. By using the waterfall, you can account for both the adjustment made by the formula itself, AND any additional adjustment made by the sales team. This helps keep track of leakage and precisely where it came from. Some Vendavo customers have leveraged the concept of a “formula price library” where approved formulas are created by central roles like product management, and then they are used by sales. This reduces the risk of “formula proliferation”.

In summary, while volatile raw materials costs will likely continue to be the new normal for the chemicals industry, by employing best practices and the tools to enable them, you can effectively manage profit for your organization.

Also, if you missed our webinar, Pricing Best Practices in Chemicals, you can view the replay by clicking below.

Effectively Managing Costs-to-Serve in Chemicals

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This is the third entry in a six-part series focused on exploring five of the key areas of opportunity for better pricing in the chemicals industry.

When thinking about how to improve margins, many companies first look at improving variable costs and/or fixed costs. That’s fine, but many companies – especially in the Chemical industry – would do well to look also at Costs-to-Serve. Costs-to-Serve are costs that the organization incurs in servicing a specific customer. The most common examples are the various costs associated with freight / transportation, logistics (e.g. inventory consignment), engineering services, and payment terms costs. This area often is comprised of several seemingly small costs, but when considered together these costs typically sum up to be in the range of 10% of revenue and in some instances we’ve even seen freight costs alone be as high as 30% of a "delivered price." So focusing on better costs-to-serve recovery can yield a chemical manufacturer millions a year in additional profit.

First of all, most companies need to improve their visibility into these costs. And the best-practice for visualizing these important areas of margin leakage is the pocket price waterfall (I’ll refer to it as the price waterfall or waterfall for short). The price waterfall is not new, but it’s surprising how many companies are still unfamiliar with the concept. And for those who are familiar with it, their use of it is limited to a highly manual effort to wrestle the data needed into an Access or Excel file for a point-in-time analysis. Here is an example of a chemicals price waterfall that has a few illustrative cost-to-serve components:

Actual waterfalls typically end up with several more elements, depending on the availability of data and the degree to which the subject is manageable or controllable.

So the first step for many companies in improving cost-to-serve recovery is to define their price waterfall – in sufficient detail that is needed to analyze root causes of margin leakage. The waterfall can also be used to easily implement insightful metrics like Freight Cost Recovery Ratio (Freight Charges / Freight Costs). These metrics are normalizing metrics that can be used across many dimensions like customer, product, region, etc.

Once you’ve built your waterfall, you can begin to analyze specifically where you’re not recovering your costs-to-serve. This can be challenging because to do this well, you need to be able to analyze this at the product / ship-to level, but, as many of Vendavo’s customers have discovered, there are often millions of dollars of profit to be recaptured.

Once you’ve identified cost-to-serve recovery improvement opportunities in your business, it’s time to start capturing that value. There are a variety of ways to do this and the appropriate action is highly dependent on the details of the situation. But here are some sample best practices around capturing value:

• Use pricing to encourage cost-efficient behavior (e.g. price in a way that encourages full truckloads or rail cars)
• Use specific charges and surcharges to discourage cost-inefficient behavior – or at least re-capture the costs (e.g. Demurrage Charges, LTL Surcharges, Rush Charges, etc.)
• Specifically identify the variances in costs-to-serve recovery by product/customer combinations
• Set targets and/or floors for costs-to-serve like freight, requiring approval for non-compliance with policy
• With large customers where price or charge adjustments are unlikely, consider working to adjust ship-to volume mix within a sold-to to improve your margins without necessarily raising any prices. In other words, work to capture a higher percentage of the volume from ship-to locations with lower costs-to-serve.

Costs-to-serve recovery can be a huge profit opportunity for chemicals companies, and with the right approaches and with the help of better tools, you can identify and realize millions a year in additional profit for your organization.