How to achieve excellence in price execution

Focus on pricing is the most powerful way to boost companies’ profitability. Nothing else impacts more positively the business than having the price right. Unfortunately, many companies also face the dark side of a poor price management with disastrous consequences.

According to the Global Pricing Survey 2012, from Simon Kucher & Partners, companies have reached just 50% of the target prices previously planned. Also, less than 20% of the companies reached more than 80% of their prices initially planned. 

Why does this happen? Why such a gap between the target and actual price exists? Commercial execution is the moment of the truth and often is forgotten. Many factors contribute to this gap in performance, such as:

§ vast and dispersed sales force poorly trained with excessive autonomy;

§ information systems limitation on providing transparency about revenue leakages;

§ sales incentives not aligned with business strategy;

Price implementation requires discipline and the following steps are necessary to achieve commercial excellence on pricing execution.

Step 1 – Provide transparency: manage price at transactional level

Transactional price management aims at making the best net price in each transaction. Every day salespeople negotiate not only invoice prices and discounts but also “other transaction terms” such as allowances, payment terms, and rebates with direct impact on the bottom line.

A high number of sales transactions brings enormous complexity to price management. To make things more complicated, most of informational systems often don’t report all sales terms consolidated at the customer level, and such lack visibility opens room for price and margin erosion.

Figure 1: Pocket Price and Contribution Margin Waterfall

The application of the Pocket price waterfall concept (figure 1) has helped companies to identify the sources of revenue and margin leakage. The first step to start the price management at transactional level relies on having the pocket price components identified.

 “What we cannot see, cannot be measured and what we cannot measure, cannot be managed.”

Once identified the pocket price and its components, it is easier to determine inconsistencies in the pricing policies currently in place. Management usually creates policies to establish invoice prices, but such policies do not cover the other pocket price components.

The following figure shows three customers of a distribution company in Brazil (figure 2). These clients belong to the same segment, have similar sizes and are in the same region. Even though they have similar invoice prices, the different transactional costs lead to a huge pocket price variation.

Figure 2: Pocket price variation in a distribution company (R$)

On a macro level, the pocket price dispersion map (figure 3) provides great insights. When analyzing beyond the average prices, managers can properly identify profit improvement opportunities looking at the customers with lowest pocket price, the source of profit erosion.

Transparency comes when every salesperson has access to the same level of information. With accurate information about pocket price dispersion managers can diagnose revenue and margin leakages and create individual action plans to improve results at the client level.

However, the diagnostic of margin erosion always comes after the sales transaction has happened. It is also necessary to create mechanisms to avoid the revenue or margin leakage at the moment the sales transaction occurs.

Figure 3: Pocket price dispersion map

Step 2 – Drive salespeople behavior through clear processes, policies and escalation rules

The second step relies on having a clear process to create such mechanisms. At the moment of the transaction three conditions need to happen to drive salespeople behavior:

§ Provide commercial team with relevant information to the price setting decision. Information, such as, customer size, segment, volume, revenue, pocket price and margin;

§ Measure financial impact on customer margin/pocket price when the transaction happens;

§ Forward decision to different approval levels if profitability requirements are not met;

A better quality of pricing deals also comes with the senior management involvement. Top performers companies in their industries have the participation of C-Level on the most important commercial decisions and consistent accountability for pricing control according to a study conducted by Deloitte Consulting.

Proper escalation rules will force the salespeople fight for better prices to avoid that the decision goes to their superiors. Escalation rules also have another positive effect on the sales team: shared accountability for non-profitable decisions with the senior management.

Step 3 – Train salespeople using the top performers as a reference

Persuasion and negotiation training are important to sales, but they are not sufficient for a successful price management.

The best pricing practices can be mapped using the peer pricing concept, brought by Simon Kucher & Partners, which takes into consideration the outcomes of the most successful sales rep and uses them as a benchmark for the whole team.

Put the salespeople together in the same room to explain the reasons behind the pocket price dispersion, debate about causes of revenue & margin leakage and learn the best pricing practices will help them to make a precise diagnostic and to identify the critical success factors for fully target price achievement.

With the peer pricing concept implementation, the top performers are the object of recognition among their colleagues. The proper credit associated with the right incentive, steer the behavior of the sales team in the opposite direction of predatory pricing execution.

Step 4 – Review incentives stimulating a non-discount practice behavior

Right incentives, first of all, should be aligned with corporate strategy. When setting the business strategy, the senior management should prioritize the key performance indicators (KPI’s), which should be reflected in the sales incentives scheme.

The incentives should also focus on profitability and not only on revenue. Today companies are creating incentives based on a set of components: volume driven (e.g. sales volume, revenue or market share) and profitability driven (e.g. contribution margin, pocket price or EBITDA). More and more, profitability has become a relevant part of the incentive.

Finally, some incentive design methods have been proved to be successful in pricing implementation:

§ Incentive (variable compensation) as a relevant part of total compensation

§ Establish more frequent payments for variable compensation

§ Automatize KPI generation for the variable compensation calculation

§ Simplicity and transparency on the incentive composition and calculation

Final remarks

Price execution excellence should be one of the top priorities for the senior management, and the following steps are crucial to achieving it:

§ Provide transparency: manage prices at a transactional level

§ Drive salespeople behavior through clear process, policies and escalation rules

§ Use salespeople to diagnose the current situation and identify margin improvement opportunities

§ Train salespeople using the top performers as reference

§ Review incentives (alignment with corporate strategy) and stimulate a non-discount practice behavior

Excellence in pricing implementation takes time, requires discipline and commitment of the senior management. Companies should focus on the steps described above to reach their target prices fully.