Self-assessment to improve prices in B2B
Uncover hidden potential to improve prices in B2B
You may be looking to improve prices in your B2B company to fight margin erosion or you may be looking to defend the strong YoY EBIT growth recently delivered. Irrespective of your trigger to assess your pricing performance, these six incisive questions, can help you to uncover hidden potential to further improve prices and margins in your B2B company. These questions are tried and tested at Fortune 250 and Private Equity owned B2B companies.
Q1. Do we sell the same product or service to similar customers at the same price?
Businesses often sell the same product or service at different prices to different customers. In many cases this price variation is justifiable – e.g., because of differences in the volume sold, customer size, local-market, etc. However, it is not uncommon to find that a business sells the same product or service at different prices even across like-for-like customers and sales orders.
A leading facility service company suffering margin erosion believed that this was because of competitive pricing pressure. However, a review of tens of thousands of invoices, using modern digital tools, revealed several instances of price variation across similar orders and customers. This variation was ‘unjustifiable’ as these customers and orders faced the same local competitive pressure. Based on this analytics driven insight, the company took customer specific tailored price actions. Targeted price actions helped it to reduce this unjustified variation and achieved a >400bps of margin increase.
Q2. Are we serving each customer profitably?
Even if all sales reps in your organisation price exactly as per your pricing policy, there could still be a significant – and often an unjustified margin variation across similar orders for similar customers. Companies rarely have a visibility on operating margins even at a customer level, so they rarely attempt to calculate and compare margins at an order level.
However, using modern analytical tools an OEM constructed order level profitability. Doing so exposed the orders that had an unnecessary margin leakage. This was because of excessive discounting and/or not passing additional costs incurred e.g., for freight, rush orders, small orders, etc. The order level analysis also highlighted low margin or negative margin SKUs and customers. The OEM revised the price for unprofitable customers and SKUs and fixed the source of order level margin leakages. Doing so helped the OEM to improve its margins by >250bps.
Q3. Is our price benchmarked vs. competition (incl. online) and does it match the value that we provide?
Previous 2 questions probe if your sales team consistently executes your price policy. But, do you have a value maximising price policy to begin with? A very low or high churn or excessive discount authorisation would be tell-tale signs of a sub-optimal pricing policy.
A leading product of a B2B product and services company had a list price that had, over time, become 3x-4x the price charged by online wholesalers. This had increased the number of discount authorisations and workload in the business. Even as all sales reps were discounting the price, some could still achieve a premium over the online price, while many were matching or undercutting the online price just to win the sale. Closer scrutiny revealed that the company had a strong value-add vs. online because of a better quality of service and delivery speed. Backed by this insight, the company decided to revamp its list price, its discount rules, and communicate its value-add at point of sale. It is expecting a >150bps margin improvement from these actions.
Q4. Are we growing both share of wallet and operating margins at our Key Accounts?
All B2B companies have ‘Key Accounts’ – that receive a special focus, a special service level and a special price. While Key Accounts may receive discounted prices because of their high volumes, it is important to ensure that you have not just ‘bought volume’ by sacrificing margins beyond what is necessary.
Well managed Key Accounts deliver a growth in both share of wallet and operating margins. Even if margins are on a decline in the industry, a well-managed Key Account should still generate an above industry average operating margin. To achieve this, B2B companies need to identify and deliver true sources of value for their Key Accounts. The mutual sharing of this value can then create a win-win situation that enables the B2B company to capture and sustain a better price even from their Key Accounts.
Q5. Have we conditioned our customers to accept a regular price increase?
B2B companies are often hesitant to increase prices due to the fear of losing their customers. A lack of regular price increase or a history of rolling back prices, decreases the customers’ receptivity to any price increase, and even blunts the skill of sales teams to pass any price increase.
A services company had CPI (consumer price index) linked price increase built into their contracts. However, some country organisations, who viewed any price increase as a risk for customer retention, kept holding or reducing their prices and had faced margin erosion over time. On the other hand, organisations in other countries were better at defending their margins and achieving a regular price increase as i) they built CPI into their annual pricing process, and ii) they communicated this policy both at customer onboarding and at contract renewal.
It is important to i) be upfront with your customers about when and why you will increase prices, ii) prepare them to expect regular price increases and then iii) take those planned price actions.
Q6. Is our Sales team trained to communicate our value proposition and negotiate the expected price?
All the price increase opportunities uncovered by the earlier diagnosis will stay on paper unless your sales team can negotiate the new prices. To achieve this, you first need to convince your sales reps of the price increase rationale. Next you need to build their confidence to convince the customer of the price increase rationale and address any counter arguments.
A global industrial goods company trained its 25 Account Managers before asking them to implement a revised price policy. The training included 4 workshops and multiple 1:1 coaching sessions over 8-10 weeks. First, we trained them on the tools to discover customer-specific pricing opportunities. We then role-played negotiations with each account manager for their individual price actions. Doing so built their conviction in the revised price and gave them the confidence to negotiate that price with their customers. The result was a 250bps increase in margin and a >25% price increase vs. what they had traditionally achieved.
Companies consider Pricing to be an art, but systematically identifying the unjustified price and margin variation and value-add potential, and combining it with sales training, can unlock new pricing opportunities and generate increased margins.
A “No” or a “Not sure” response to two or more questions is a strong sign for price and margin improvement opportunity in your business – even if your business margins may appear healthy in the aggregate. To quantify this opportunity, you will need to move beyond the traditional top-down or summary analyses to a granular invoice level analysis – similar to what the companies did in the examples above. Modern analytical tools make such analyses possible. If you have further questions on this self-diagnostic or if you sense a pricing opportunity but need help to quantify it, contact us at firstname.lastname@example.org
About the authors:
Kedar Gharpure is the Director of B2B Growth Consulting Ltd. He has served business heads of several Fortune 250 and Private Equity owned B2B companies on growth strategy and commercial transformation.
Vidya Ranade is the founder of Decodexis, a company that provides bespoke analytics and consulting services to clients in marketing & sales, operations and R&D.