Pricing Strategies Need Pricing Vision
May 13, 2019
• If you fail to bring centralization to your operations, you are going to find yourself facing major disconnect across the various territories you serve, the multifarious ERP systems you depend on, and your SKUs.
• This tendency to let regions handle their ways of pricing and selling means instead of pricing being a driver of profits, it is so inconsistent that those international teams fail to grasp the impact on your organization that their uninformed pricing variations cause.
It is true to state that companies with any kind of retailing either have or crave a pricing strategy. And not just a pricing strategy, one that can control all aspects of the pricing cycle and work anywhere. But for that, you need to have a pricing vision.
What does that mean? It is the core on which you form your pricing roadmap. Because pricing isn’t a static thing, my friend. It is something that needs to constantly move in order to breathe just like a shark does. And nobody wants to have a dead shark on their hands, right?
If you fail to bring centralization to your operations, you are going to find yourself facing major disconnect across the various territories you serve, the multifarious ERP systems you depend on, and your beloved SKUs. This is caused by differently defined products and services, no feedback loop on pricing variations based on geographies, and a total absence of master data to drive your pricing strategy.
Missing Out on Return on Sales
Large corporations with multiple international subsidiaries beware. Take your eye off the ball, and you will soon find that you have regionalized sales teams selling products and services at totally different prices compared to their international colleagues. This tendency to let regions handle their ways of pricing and selling means you are hitting a major disconnect. And the result? Instead of pricing being a driver of profits, it is so inconsistent and a financial free-for-all with those international teams failing to grasp the impact on your organization that their uninformed pricing variations cause because they remain that, uninformed.
All in All It’s Just Another Price in the Wall
To illustrate these points in a real-life situation, we are going to take a look at EagleBurgmann, an $850 million-dollar company and global leader in mechanical seals. For them, the aha moment came when they realized that with 35,000 customers worldwide, they needed to segment on a customer level and on product classification. Add to this the need to do something about their master data, they identified that in order to optimize their price setting activities, they needed to realize that price in the market. And that was the moment that the price realization wall hit.
Drill on Through to the Other Side
They knew that if you want to act on something, you first need to identify what that something is. So, what they did was to start measuring. And by introducing measuring, they got visibility. Being able to drill down to the price movement based on customer and sales rep, they had an overview of every local subsidiary, every customer, sales rep within that customer, they could continue to drill down to reveal what the price movements are that are being achieved with that customer and by that sales rep–and that means having data they can act on.
Something Worth Building On
Having the foundations provides a solid base to build on, and that foundation was based on maximizing profits by influencing the biggest profit driver, which is price. Then comes number two, understanding the customer’s willingness to pay to avoid leaving money on the table. And number three, they needed to ensure the foundation was based on a long-term pricing strategy. With the final fourth piece being more transparency, both internally and externally, on pricing.
Value-based Pricing–a Roadmap
In order for them to create a success story with price rightsizing, they looked at their current pricing levels globally to see if they were charging customers properly. If they are charged too little, they needed to increase the prices, and vice versa. However, they are not at the value-based pricing stage where they can look at willingness to pay and what customers value in their products and then set prices accordingly yet.
Bring on the Pros
They identified the need to work with consultants that could understand their business, products, sectors and the territories they worked with, so they spoke to Pricefx, who advised them to go with boutique consulting firm Roll & Pastuch. They came up with designs based on their inputs and handed them over to Pricefx to implement them.
Four Steps to Pricing Heaven
With the consultant, they performed a huge data analysis across over 30 ERP systems. Looking at sales transactional data from 2014, ’15, ’16 and ’17, they tried to find certain trends in that data and relationships to discover what those numbers were telling them across all the pricing variability.
Then they looked at other influences such as product, customer and exchange rate data. When they imported that data into a BI tool, they discovered they were missing loads of data, which needed to be pulled in from their subsidiaries. And as data only tells you so much, they went through a round of 25 plus expert interviews with people in the organization with the most knowledge about the product, customer and their markets. They wanted to know what drives the price of the product today in terms of like attribute, pricing, and other parameters. Was it the customer, product, reputation? Or was it something else?
When they had a set of 12 drivers that were driving the price of their products to date, it was at this point they realized they were still missing a lot of master data–so the board agreed to extend the project.
Narrowing Things Down
Now was time for concept development, but there was only three more months of project time left. So they narrowed it down to the three most relevant drivers and that were all in consensus with their sales organization which were: customer purchasing power, product uniqueness, regional dimensions (especially applicable to territories with hyperinflation).
After many logic, evaluation, refining, and simulation exercises, they got to a model, four matrices where the percentages could be agreed by sales and could be seen as their corporate lead function sales that we were achieving the requirements of the boards.
Pricefx were told they needed to provide a solution that was easy to use by sales. They just need to enter the product and customer, push a button and the software tells them, “This was my last price that I sold it at. The matrix shows me this percentage, so this is now your new recommended selling price.”
It took three months for Pricefx to configure this logic into the system, it was then rolled out globally and all of their sales people are now using it. There is also visibility of all the components. So the logic is very transparent. It shows at the end the recommended selling price. They also have, on a monthly basis, all the transactional data and can compare what price increase they achieved or what price rightsizing they achieved per month–at a subsidiary level.
This pilot project with Pricefx has opened the doors of communication where they are able to see how they are pricing regionally. It shows their regional sales teams that they are with them, are listening, and want to help them increase or change their prices, which has been a huge enabler for them in the organization. Its flexibility to fit to their demands and pricing strategy has meant pushing more intelligent pricing based on actionable data and location of sale. Insights that all truly international organizations can thrive on.