Where Are You on the Journey to Improved Pricing?
Most distributors believe that their efforts of building home-grown pricing matrices amount to accomplishing strategic pricing, but they often experience only modest or flat or even declining (over time) profit improvements. Why? The truth is that strategic pricing isn’t a “yes” or “no” proposition. I’ll propose a new way to think of strategic pricing as a journey and explore a comprehensive model that can assess improvement opportunities along this path. The journey typically begins in a state of unstructured pricing and evolves into a more integrated and adaptive pricing matrix; also known as reaching pricing maturity.
The Pricing Journey Begins in the Wild West for Many
Before we talk about the journey to maturity, let’s first address the lack of pricing structure altogether – which is where many companies get stuck. At SPARXiQ, we’ve worked with hundreds of distributors over the last 25 years, and we have seen consistent patterns emerge. Most distributors start with a fairly “Wild West” approach to pricing, which is the precursor to the stages of the pricing journey we’ll cover
In these pricing environments, sales reps often are given a large amount of price authority, and markup products using ad hoc margin values ending in zeroes and fives. Often, the only constraint is that they can’t sell at prices below cost or below certain margin floors without approval.
Pricing in this random, disorganized way is a formula for missing even the easiest margin opportunities in low-sensitivity product/customer combinations.
There may be a popular tendency to use Last Price Paid, which is a practice of indiscriminately applying and perpetuating historical pricing practices, no matter how dated or corrosive they may be. Sellers generally price 90 percent of transactions without supervision or prescriptive guidance.
A Step Forward: Inconsistent Use of Structured Pricing
When companies take their first steps away from Wild West pricing, the first stage in the pricing journey is known as random pricing or an inconsistent use of structured pricing. During this stage, the company owner, IT manager, branch manager, or sales leader has started to implement some pricing matrices to at least offer sellers a more consistent and logical approach to pricing. Usually through built-in spreadsheets, these pricing matrices are still heavily based on cost-plus approaches, as in the “Wild West” state.
The difference between the “Wild West” stage and this one is pricing matrices at least attempt to differentiate margin levels by customer size, type or geography, and often differentiate by vendor or product family.
Unfortunately, because a company’s pricing recommendations are based on home-cooked, anecdotal, cost-based assessments of appropriate margins, adoption of these matrices is predictably poor, as is the relationship to market-level pricing expectations. Some sort of foundation is in place during this stage, but a consistent structure is needed to advance on the path to strategic pricing.
An Undefined Pricing Structure is Now in Place
With a bit of a foundation in place from the first stage, companies that move ahead in their journey work to get the most out of their existing matrix. At this stage, many distributors are still uneasy about pushing onward to a formal pricing project that requires a certain level of change management, but they see the value in refining their existing practices.
To move forward, companies must apply more sophisticated pricing analytics to their existing matrix to identify areas that can support price premiums. In addition to moving toward market-level pricing, they’ll focus on specific areas of their pricing methods mix, based on existing pricing habits, to find the most accessible areas for improvement while minimizing pushback from the sales team or customers.
At this stage, companies often are still cautious about asking the sales team to change any of their day-to-day sales or pricing behaviors. To move forward along the journey to strategic pricing, the task of many distributors involves getting the sales team on board with a formal pricing structure.
A Formal Pricing Strategy with Optimized Premiums
The third stage of the strategic pricing journey is generally what separates the companies who want low-hanging-fruit margin improvement from those that strive to be excellent. Companies work to refine their matrix and seek to add true differentiation among diverse customer and product groups. It also requires moving past concerns about “rocking the boat” when it comes to the sales team and receiving pushback against a price strategy initiative.
Building on the previous analytical foundations, companies at this stage aim to strategically price both customers and products based on true market sensitivity. Premiums are determined by optimization algorithms that can specify ideal price points that maximize margin while supporting competitive positioning. Distributors can press forward along the journey and put systems in place for pricing.
Systems in Place to Ensure Success
Companies who want to further improve results beyond simply applying strategic pricing analytics will implement systems, support, and policies to reinforce the data-driven initiative already in place. The stage aims to facilitate adjustments in the sales team’s behavior that align with the strategic pricing initiatives.
Monitoring results to identify improvement areas and establishing rules to put “guardrails” around pricing behavior helps your company advance and get more out of your pricing efforts.
This entails eligibility requirements around overrides as well as pricing “bands” and “floors” that set clear rules in workflow when overrides are used. Doing so shrinks the frequency and magnitude of override margin leakage. It provides pricing flexibility supported by discipline.
The Final Frontier: Integrated and Adaptive Pricing
For companies that have optimized their strategic pricing, the logical progression is onto the stage where pricing is further refined by integrating with, and adapting to, sales performance, vendor cost of goods sold (COGS) and customer cost-to-serve.
In this advanced level of pricing, sellers progress into data-driven, optimized strategic account management. Strategic account management involves holistically managing the dynamics of customer profitability across four key, interdependent levers:
- Sales mix, share of customer wallet, and quote conversion rates
- Vendor product COGS
- Customer cost-to-serve
Those who embrace the journey to strategic pricing outperform their peers and accumulate more capital to invest in their company’s growth.
No matter where your company is on their pricing journey, SPARXiQ can help you reach the next level of business performance. Use this margin improvement calculator to see for yourself the potential profit improvement to your bottom line.