Self-assessment to discover opportunities to improve price in B2B
Discover hidden opportunities to improve prices in your B2B company
You may be looking to improve pricing in your business, or it may be facing an outright price erosion. Whatever the trigger for assessing pricing performance, these six incisive questions, tried and tested at Fortune 250 and Private Equity owned B2B companies, can help you to discover pricing potential to improve margins in your B2B company.
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 instances this price variation is justifiable – e.g., due to differences in volume sold, customer size, local-market etc. However, it is not uncommon to find that the same product or service is sold at different prices even across like-for-like customers and sales orders.
A leading facilities services company was suffering from margin erosion and it believed that this was due to competitive pricing pressure. However, a review of tens of thousands of invoices revealed several instances of ‘unjustified’ price variation across similar orders and customers even though they were exposed to the same local-market dynamic. The company took customer specific tailored price actions, to reduce this unjustified variation and achieved >400bps of margin increase.
Q2. Are we serving each customer profitably?
Even if all sales reps in your organisation were pricing exactly as per the policy, there could still be a significant – and often unjustified margin variation across similar orders for similar customers. Companies rarely have a visibility on true margins even at a customer level, so evaluating and comparing margins at order level is usually never attempted.
However, using modern analytical tools an OEM was able to construct order level profitability. Doing so exposed the orders that had an unnecessary margin leakage, caused by excessive discounting and/or by not passing additional costs incurred e.g., for freight, rush orders, small orders etc. It also highlighted low / negative margin SKUs and customers. By revising the price for unprofitable customers and SKUs and by fixing the source of order level margin leakages, the OEM was able to improve its margins by >250bps.
Q3. Is our price benchmarked vs. online and other competition, and with the value that we provide?
Previous 2 questions probe if your sales team is consistently executing your price policy, but do you have an optimum price policy? A very low or very high churn or an excessive price exception authorisation activity 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 which had, over time, become 3x-4x the price charged by online wholesalers. While some sales reps were able to achieve a premium over the online price, many were matching or undercutting the online price just to win the sale. A closer scrutiny revealed that the company had a strong value-add vs. online due to 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 clearly at point of sale. It is expecting >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 due to their high volumes, it is important to ensure that you have not just ‘bought volume’ by sacrificing margins beyond what is necessary.
If you are managing your Key Accounts well, then, you should see a growth in both share of wallet and operating margins at those accounts. 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, we have helped B2B companies to identify and create 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 achieve 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 customers. A lack of regular price increase or a history of rolling back prices decreases customer receptivity to 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 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 appropriately both at customer onboarding and at contract renewal.
It is important to be upfront with your customers about when and why you will increase prices, prepare them to expect regular price increases and then take those price actions.
Q6. Is our Sales team trained to effectively communicate our value proposition and negotiate the expected price?
All the price increase opportunities uncovered by the earlier diagnosis will stay on paper unless the sales team is able to effectively negotiate the new prices. To achieve this, the sales reps themselves need to be convinced of the price increase rationale and then need the confidence to convince the customer of the benefits and address any counter arguments.
A global industrial goods company decided to formally train its 25 Account Managers before asking them to implement a revised price policy. The training included 4 workshops and multiple 1:1 coaching over 8-10 weeks. First, we trained them on tools to discover customer-specific pricing opportunity. We then role-played negotiations with each account manager for his/her individual price actions to build their conviction in the revised price and to build their 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.
To conclude…
Pricing is considered an art, but systematically reviewing price and margin variation, value-add potential and sales training can unlock pricing opportunity and increase margin.
A “No” or a “Not sure” response to more than two questions above will indicate a likely opportunity for price and margin improvement 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 – like 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, feel free to contact us at pricing@b2bgrowthconsulting.com
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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.