The High Cost of Pricing Variability

Unwarranted pricing variability is a significant contributor to lower profitability in B2B companies - often resulting in companies leaving millions of dollars of profits on the table.

Senior executives across organizations have the strategic objective of reducing or eliminating unintended variation in their business, yet they often ignore variation in pricing.   In the words of a Chief Operating Officer for a global manufacturing company, "today we accept a degree of variation in pricing that would get a plant manager fired...."  When managed effectively, pricing variation has the potential to deliver significant profits to the bottom line and give companies the competitive advantage they need to succeed in today's markets.

To manage pricing variation, business-to-business (B2B) companies must understand its causes.  Take an example of a typical B2B company with the following attributes:

• Has 20,000 SKUs (stock-keeping units)
• Products sold through four distinct channels
• Products sold to 30,000 customers across 30 industries
• Products sold in 30 countries across four regions

In combination with hundreds of pricing decision makers such as business unit leads, sales executives, and pricing managers, these attributes can cause significant pricing variation.   As illustrated in the graphic below, the outcome is large variation in margins for customers with similar characteristics, ultimately resulting in significantly lower margins.

In a typical B2B company, many different factors drive pricing variability, including:

• 1. Sales performance - variability due to inconsistent negotiation outcomes
• 2. Analytic insight - lack of understanding of key drivers of profitability
• 3. Process execution - ineffective pricing and lack of processes to ensure compliance with pricing policies

Addressing these drivers of variability effectively and consistently is critical to improving profitability.  Over the next several posts, we will explore each of these three areas to discuss best practices to address them.

To learn more about managing variability, you can also access our OnDemand webinar on Reducing Pricing Variation to Improve Profits. 

Visit http://www.vendavo.com/ to learn more about pricing.

Pricing OnDemand - Rapid Time to Value with Minimal IT Investment

With increasing acceptance of cloud computing, more and more companies are looking at adopting sophisticated applications in a Software-as-a-Service delivery model.  Pricing Management and Price Optimization solutions are no exception.  Earlier today, Vendavo unveiled an expanded portfolio of Pricing Intelligence OnDemand solutions.

Vendavo Pricing Intelligence OnDemand is a sophisticated pricing solutions suite available to customers in SaaS delivery model. It enables B2B companies to take advantage of pricing to drive profits while freeing them from the IT resource requirements and upfront costs associated with typical deployments.

The solution includes ongoing access to our pricing experts - giving you the confidence that your investment will deliver measurable results on an ongoing basis.

Key highlights of Pricing Intelligence OnDemand include:

• OnDemand pricing software
• Direct access from your quoting and CRM systems
• Ongoing pricing expert support
• Quarterly subscription fees
• Secure, high availability, high performance access
• Minimal IT investment

The Pricing Intelligence OnDemand solution suite includes three solutions:

ProfitVision OnDemand - provides users access to in-depth pricing analytics, dashboards, and scorecards to help them rapidly identify profit improvement opportunities.

Deal Pricing Insight OnDemand - provides sales users access to relevant analytics scorecards and charts directly from their CRM or quoting systems - minimizing need for change management and accelerating time to value. It also includes full capabilities of ProfitVision OnDemand.

Deal Pricing Optimization OnDemand - delivers segment-specific optimal prices, optimization guidance and associated analysis to the sales team for access directly from CRM or quoting systems. Solution also provides power users direct access to Vendavo Price Optimization to manage segmentation portfolio and optimized price and guidance.

To learn more about these solutions, please visit http://www.vendavo.com/

 

 

Channel Pricing and Lost Profits

Many B2B companies do a large of amount of their business through the channel - whether it is through a reseller partner or a distributor.  Channel pricing challenges are quite unique since the manufacturer does not directly sell to the customer and relies upon limited information to make important pricing decisions.  One of the key characteristics of channel selling is highly competitive markets resulting in almost a constant need for special price authorizations.

When distributors submit these authorization requests to the manufacturer, the manufacturer does not have a comprehensive repository of channel pricing information and associated pricing guidance to make informed decisions regarding approving or rejecting the authorization request.  If they approve, the price they approve it at is often driven by gut feel rather than by informed guidance.  It is no wonder that these pricing authorization requests are often a big source of margin loss for a manufacturer and represent an area of substantial opportunity.

Tackling this problem requires the manufacturer to take a disciplined approach to collecting transaction data and associated attributes to understand the key drivers to pricing variation.  Such data can yield important insights into variation in pricing across products, markets, regions, and partners.  By understanding associated causes of this variation, manufacturers can pinpoint areas where such variation is acceptable, the degree to which it is acceptable, and where it is not.  They can then formulate a comprehensive strategy to establish segment-specific pricing guidance and arm the deal desk with the right tools to execute on the guidance.  

In a recent article in Manufacturing.net, Jamie Rapperport and Chase Powell of Vendavo discuss additional strategies to execute effectively on channel pricing.  Taking a strategic approach to channel pricing can help fix margin leakage and deliver higher profits.

You can also access our OnDemand webinar on channel pricing to learn more about how you can leverage price management and price optimization strategies to drive profits.

2010 Prediction from Leading Analyst: Price Optimization to Maintain Margins

Earlier this year, in the blog post on Strategic Pricing: A Top Trend for 2010, we discussed the strategic importance of pricing in 2010 for B2B companies.  In a recent report published by Gartner on the future of Sales and Marketing, the analysts concluded at "Sales organizations will also make use of newer technologies and solutions such as price optimization and sales performance management in order to aggressively sell and maintain margins."  More insights from the report can be found this Destination CRM magazine article. 

The predictions in the report reaffirm the critical importance of pricing for companies looking for ways to improve profits as the economy recovers.  It should be no surprise that more and more global companies will continue to add comphrensive price management and price optimization initiatives on their executive agenda for 2010.

To access reports from leading analysts on pricing, please click here.

Building Pricing Competency to Drive Pricing Success

Understanding pricing strategies, how to apply them, and how to leverage technology to realize value from pricing are critical requirements for sustained revenue and margin growth in business-to-business (B2B) companies. It is often the difference between a successful pricing initiative and an unsuccessful one. Many business organizations underestimate the importance of pricing education and lack the necessary knowledge to meet their business goals.

Earlier this week, Vendavo launched the Vendavo University.  It is a price management and price optimization education center of excellence (COE) that is built specifically to develop and sustain pricing excellence in a company through innovative and effective education. One of the key offerings of the COE is Vendavo University OnDemand.  It is an e-learning training platform offers application and price management content for diverse users including executive management, pricing managers, marketing and sales professionals, and technical users.

As you think about executing your pricing initiatives, you should take into account the different roles and groups that will be affected.  A comprehensive training program that is designed to enhance pricing competency, accelerate learning of the solution and associated pricing business processes will be critical to the success of the initiative.

To learn more about the Vendavo University, please click here.

Strategic Pricing: A Top Trend for 2010

In a recent article, Manufacturing Business Technology magazine explored the top trends that manufacturing companies will pursue in 2010.  Along with inventory optimization, expanded use of analytics and sustainability initiatives, one of the top trends was increased focus on strategic pricing.  It is not surprising that this view is validated by many different experts.

2009 was a very challenging year and most companies tried to sustain their profits by reducing costs to the extent that they could.  However, with increasing signs of life in the economy, most companies and Wall Street analysts are looking to revenue growth as a source of higher profits.  Clearly, volume expansion is one way to increase revenues but use of strategic pricing is another critical opportunity that companies just cannot afford to overlook.

In the MBT article, Derrick Herbst, Director of Business Consulting at Vendavo mentioned that "Many companies still view pricing as a tactical measure, done in an ad-hoc reactive manner. Companies need to get strategic about pricing by incorporating it into core company strategy and objectives."

This ad-hoc view of pricing is what makes it a substantial under-leveraged opportunity.  Strategic planning and execution of pricing has the potential to help companies deliver on their revenue growth objectives consistently.  

If you are not thinking about it, you risk being left behind by your competition!

To learn more about how your company can take advantage of strategic pricing in 2010, you can attend our live webinar.

Implementing Price Increases Successfully in Paper & Packaging Industry

A recent Wall Street Journal article discussed how some companies were gaining pricing power and passing on raw material related cost increases.  As energy and raw material prices increase, margins come under pressure and suppliers start to consider price increases.  But the article pointed out that price pressure can vary widely in the supply chain: some downstream companies are incurring higher prices without being able to command them.  

The age old margin squeeze: early recovery in some industries means that costs start to increase long before your own markets are ready to accept price increases.

The article mentioned Packaging Corp., a Lake Forest, Ill., maker of containerboard and corrugated containers for shipping.  The company reported lower expenses, but said the prices it can command are falling even faster, cutting into its bottom line.

All is not lost for paper and packaging companies, however, as markets show signs of nascent recovery.  In the current period of tentative recovery, even before backlogs shoot out, the most effective price increase strategy is to adjust pricing guidelines. 

By selectively reigning in discounts on new business, companies can achieve the net effect of increasing prices, even before increasing operating rates translate into upward pricing pressure.   Early in the recovery, suppliers still need volume, but may not need to discount as deeply to win new spot orders.  During this period, certainly, paper and packaging companies should be careful not to commit to any long-term discount pricing. 

Key actions include:

• Reducing discounts on the early recovery grades
• Reducing discounts on grades made on the same production assets as early recovery grades
• Reducing volume discounts to reflect current market conditions
• Tighten scrutiny and approval policies about for large, deeply-discounted orders

By intelligently refining discount guidelines and preparing for price increases, companies can maximize price realization during current phase of slow recovery.  While paper and packaging companies may not have the power to increase prices, tightening policies can help achieve the net effect of increasing realized prices.

To learn more about value of pricing to mill product companies, please click here.  You can also review my article in Pulp & Paper International on Price Management in the Pulp and Paper Industry.

Establishing Baselines for Pricing Efficiency Improvements

A critical step in quantifying pricing value opportunities is to establish baseline metric values.  Establishing baselines provides you the means to compare and benchmark improvements in your pricing processes accurately.

As I discussed in a past posting, "A Simple Framework for Focusing on Pricing Value Opportunities" there are two main categories of value opportunities 1) Increased Pricing Efficiency and 2) Improved Pricing Effectiveness.  For now let's focus on establishing baselines for increasing pricing efficiency and we'll leave the second category for a future post.

There are four primary pricing process improvement metrics that may be applicable to your price management initiative:

• Approval cycle time
• Price change cycle time
• Invoice accuracy
• Price administration costs

Approval cycle time (i.e., to approve a price quote, contract or agreement) is typically defined as the time from submittal of the request to its eventual approval or denial.  Improvements to your approval cycle time in some instances may lead to increased revenues through higher win rates.

Price change cycle time is defined as the time it takes to implement an overall price change to a base/list price or to implement a mass edit of net prices.  It includes both the analysis efforts to determine how much to increase and actual administration efforts involved in implementing the change.  Improvements to price change cycle times can lead to margin improvements by capturing those higher prices (in the case of price increases) sooner.

Invoice accuracy improvements provide three types of benefits:

1. Happier/more satisfied customers
2. Lower administration efforts via less credit memos to write and process
3. Capture of lost revenue from eliminating under-billings

A rule of thumb for estimating under-billing is that for every dollar credited for over-billing there is most likely an equal amount lost in under-billing if you use a net pricing approach and 20 cents in under-billing if you utilize a list-less pricing approach.

Lower price administration cost benefits are aligned to each of the above process improvements for not only the pricing team but also other functional teams such as field sales, credit/finance, etc.

A critical observation to note is that historical performance for these metrics tends to be either trapped in the legacy system you are replacing (e.g., approval cycle times) or requires manual efforts to collect (e.g., invoice accuracy).  Consequently, as time marches forward the data becomes harder to amass while interest in providing resources to manually collect the data wanes.  Effective techniques to benchmark data were discussed in an earlier blog post on Benchmark Pricing Practices to Improve Profits.

For these reasons, it is not only a best practice to establish baselines for these metrics early-on it is imperative.  Without appropriate baselines, your ability to demonstrate the success of your pricing initiatives will be severely limited. 

To learn more about how your organization can leverage pricing to improve profits, please access our OnDemand webinars.

Pricing Issues Impacting European Companies

Contributed by James Marland, Business Consultant, Vendavo Europe

At the recent Vendavo European Executive Forum on Pricing in Brussels, many European companies came together to discuss how pricing issues were affecting their organisations. One theme that was prevalent at the event was that the downturn will end at different times in different regional markets.  As a result, pricing professionals need to be able to support local pricing strategies, within a global pricing framework.

For example, if country A is still in a downturn, then contract lengths work in the sellers' favour since there is still downward macro-economic pricing pressure, but if country B has already rounded the bottom of the curve and is coming out of a downturn, then contract length works against the seller, locking in a lower price in underlying inflationary conditions.

So what should the smart pricing organisation do?

First, you need sensitive capabilities to look at your different markets (geographic, industry, application) so you can receive signals when a market moves from a period of pricing pressure to one of pricing power. Signals can be picked up from tools which monitor win/loss rates and price realisation in potential hundreds of pricing segments. Second, you need pricing playbooks such that when each market turns, a standard series of pricing moves, market signals and sales strategies are executed. Finally you need an execution engine which allows you to make sure that these strategies stick.

In addition, you should look at long term approaches to make your whole pricing machine more sensitive to market conditions such as by introducing more index-based contracts, separating out the effects of foreign exchange from regional pricing and adopting more explicit segment strategies (chase competition, retain customers, drive volume, grow margin).

You can learn more about improving profits by effectively managing pricing in a global organization by accessing our OnDemand webinar on the topic.

Re-tooling Pricing Processes for the Recovery

 

 

 

 

Well, it's now that time for executives, managers and analysts involved in setting and executing pricing strategies to plan for the year ahead.  If you've already started the planning phase, you're coming out on the other side of a very prolonged recession.  In the process of doing so, you may have adopted "survival" oriented pricing policies.  Closing business at any cost, extending favorable payment terms, and not charging for services cost are just a few examples of survival-focused polices.  Now that the recovery is in sight, it is time to closely examine these pricing policies and practices and make necessary adjustments.

In a recent interview with Manufacturing.net magazine, Jamie Rapperport, Vendavo founder and executive vice president of marketing and business development, discussed what business to business companies need to do to retool their pricing processes.  He talked about the need to take a look at current policies and behaviors and see if companies need to change them.  For example, a company may find it more profitable not to bundle some products and services.  Instead, the company could review discount guidelines across products and transactions to prevent discounting too much and stay stay updated on the cost or impact of certain value-added services. 

According to Jamie, "a small adjustment can provide a big payoff." 

To guide you with your pricing strategies, this article provides insights you can take into consideration.   You can also learn more about effective price management and price optimization strategies for the downturn by accessing our OnDemand Webinar.

Also, we'd like to hear from you? What are you doing to prepare strategically for the economic recovery?