Reducing variable costs is important for profitability, as is optimizing sales volume to leverage fixed costs. But for most companies, improving realized price (the price you actually receive) is the fastest, most effective way to grow margin and improve profitability.
Today, a growing number of companies are focusing on pricing processes and capabilities to improve profitability. They understand that because customers’ perceptions of value vary—as does their “willingness-to-pay” for that value—it is important to treat different customers differently at different times.
Successful salespeople intuitively understand these variations in willingness-to-pay. The challenge, however, is turning that intuition into a repeatable and measurable policy. You need a system in place that lets sales reps know what to quote on each opportunity to maximize profits while minimizing the risk of losing a deal.
Target Pricing Sets the Stage for Success
In a perfect world, customers and sellers would come into each deal opportunity with the same fact-based frame of reference—and target pricing would be clear to both parties. In reality, this rarely happens which makes determining the price a battle between the opposing frames of reference.
In order for sellers to win the frame-of-reference battle—and close the most profitable deal possible—they must have a clear and practical goal in mind as they enter into negotiations. When considering the prices they offer to customers, sellers need to know what is acceptable or achievable. And the best way for an organization to communicate that information to its sellers is through well-defined, data-driven price targets.
As such, the first step toward better negotiations is to establish a “culture of target pricing.”
With an established culture of target pricing, you can then work to improve how you determine the target price recommendation in the first place. Most organizations fall somewhere within 4 levels of pricing guidance maturity.
MATURITY MODEL FOR PRICE GUIDANCE
A Roadmap for Implementing Pricing Guidance
To get where you want to be, it’s useful to define where you are now. Here’s a roadmap that helps you understand where you are today on the maturity model along with a few tips on how to mature.
STAGE ONE MATURITY:
Cost awareness is a foundation for gathering data that is used in more progressive stages. At this stage, you are actively evaluating the profitability of proposed customer business. If you aren’t already here, it’s a great place to start.
TIP: Although many businesses choose to start this journey with spreadsheet-based costing, investing in technology can yield benefits. It can provide a platform and repository for cost information; improve cost and profitability assessment; automate the escalation and approval process, and improve data collection and analytic insights.
STAGE TWO MATURITY:
Transitioning to a target pricing culture requires an organizational transformation. To create acceptance around this approach to pricing, it is important to be clear with your sellers about the strategy and incentives you are creating—with different pricing for different customers.
TIP: As with stage one, businesses may choose to start this journey with paper or spreadsheet-based pricing tools for sellers—but technology can provide analytics to improve target price setting and performance monitoring. Additionally, it can provide a central platform for managing customer segments and target pricing—and effective delivery of this information to point-of-use, within quoting tools.
STAGE THREE MATURITY:
At this stage, a typical organization will be actively collecting and managing transaction data—at the product line item level—for at least 20 to 50 customer segments.
TIP: At this stage, investment in technology becomes a necessity. Without appropriate software, designing customer segmentation and calculating percentile-based floor and target price guidance would simply be too difficult and time-consuming.
STAGE FOUR MATURITY:
In stage four pricing guidance maturity, math plays a central role. In many cases, businesses start on this path by engaging with any number of pricing science consultants who specialize in this work. Consultants typically receive a large data set from the customer and work with an offline toolset to design and validate customer segmentation for pricing. Once their work is complete, they typically deliver a customer grouping model that is then used in the ongoing calculation of target pricing guidance by the business.
It’s important to note that for some organizations, stage four price guidance maturity is not the necessary end state. Philosophically, some companies prefer segmentation that is purely strategy-based, versus one that is mostly math-based.
TIP: At this stage, investment in a proper software toolset is critical. Given that a math-based exercise usually results in a very discrete segmentation, with hundreds or even thousands of customer segments, investing in a system to manage the calculation of target pricing is essentially a non-negotiable requirement.
Establishing—and utilizing—appropriate and smart pricing guidance in B2B organizations can drive spectacular gains in contribution margin. And the good news is you don’t need perfect data or a sophisticated tool to make progress in this area. By taking logical steps, you can achieve your goals without the need for major investments or quantum leaps in sophistication.