Five steps to effective B2B price guidance
(Sorry this one’s a bit long. It’s also a key to superior B2B pricing)
Providing high quality price guidance to your sales teams as they negotiate with customers can result in measurable profit increases. It really should be a core process.
However I’ve rarely seen clear quality price guidance. Here some key questions to ask:
1. Why is price guidance important?
When your company hires sales reps, how important are Excel skills? Do you test them for data-driven insights? I didn’t think so. Yet somehow pushing a pricing dashboard at them is going to get them to the optimal price. I think that’s misguided: better to give them simple guidance on prices that aligns with your strategic goals, backed up by robust approval processes for when the (inevitable) exceptions occur.
Of course, an alternative approach is to have pricing decisions made by a ‘deal desk’. That’s a perfectly valid approach in many cases, although that sales process will feel very different.
2. What type of price guidance to give?
Using the price waterfall concept, there are two basic options:
1. Guidance on individual price adjustments, or
2. Guidance on specific price points.
Price point based management almost always the better option when you have many products, and specifically the Pocket Price point. Trying to manage individual adjustments - like discounts and rebates - is too complex. They can be managed as part of annual contract or campaign processes. You just need to make them fit within the price guidance.
The Pocket Price point is generally the one to focus on, since it best incorporates drivers of overall financial improvement, such as payment terms and other non-cash costs, that are not included in net price. It may be a challenge to introduce this metric given it is not a finance metric, but if you are looking for a one-stop-shop for pricing metrics, you can’t beat it.
Finally, I’d go with a “price corridor” approach to managing prices. This should consist of a target price and 2-3 approval thresholds. The target is really important:
- Communicates to sales the real value of your products
- Provides a stretch target to get sales to start reaching up for better prices
- Forms the basis for a Price Realization Score (e.g. where target price = 100) which is invaluable in normalizing out price achievement across product and customer segments (more on this another time, or drop me a line to learn more).
A quick word on approval thresholds: I would have no more than 3. More slows the process down. The last approver (e.g. a price manager) can coordinate management of the special cases needing support from other functions like finance, legal, compliance, etc.
3. How to get the sales teams to pay attention?
This step is critical: what’s the point of great guidance if it is ignored? This step boils down to classic change management, but is often poorly executed. If done right price guidance will fundamentally change how you review and measure negotiation outcomes. Important points to keep in mind are:
- The guidance process needs to be a core part of the sales process and mandatory even for the smallest deals. Those are often the biggest contributors to price erosion with little upside
- The guidance needs to be “reasonable” and value-add for sales. There’s some learning here to get the balance right
- Introduce the Price Realization Score as a way to measure relative price performance
- It may require technology to support the new process. This somewhat dated report lists the top vendors, and a longer list here.
You will need to work hard at this, but the good news is that it is largely independent of the factors that go into the guidance, so the big push comes only once.
4. What specific guidance to give?
To sum this up in one sentence, price guidance should be based on:
…for a given segment,...
…based on strategic goals, experience, data and selling model.
Pricing power combines your value differentiation from the competition with the competitive intensity. A important topic worthy of its own blog.
Segmentation dimensions include product, end-user, and channel, each of which itself has multiple sub-categories (see figure). Segments for pricing can line up with marketing and sales segmentations, but need to be thought through separately. For use in pricing you must be able to build “fences” between segments to price them differently (e.g. via commercial terms, service offerings). Start simple here and build up as experience and skills increase.
Incorporating the other factors driving the price has to start with your strategic goals: it sounds obvious but it’s amazing how often pricing doesn’t line up with these. I’d start with rules based guidance based on analysis (and how much discretion you want to give to sales). “Big data” driven analysis can be helpful, but it takes time and effort to collect and clean up the data, and eliminate the patterns you don’t want (sales rep variations). “Data influenced prices” before “data driven prices”!
5. How to pull it all together?
Start by getting buy-in for the price corridor concept. Note the two sides to that – marketing for the guidance and sales to get value from that guidance. Since this construct is strategy independent, it is robust over time.
Then work on making the guidance actionable, and relevant. With time and effort the guidance can become a strategic advantage.
Finally consider a price decision support system: unless you have few products and users, you’ll find managing these processes gets tricky very quickly.
Getting price guidance right is central to effective and efficient pricing. Start the journey today.
This blog was derived from a presentation I gave at the European Pricing Platform (EPP) 6th Annual Life Sciences Pricing Forum, September 20-21, Montreux, Switzerland)
I’d be interested to learn where you are on the path? Any of this ring true? Please do reach out to me if you have questions raised by this blog.