Executives in the UK industrial sector start 2019 facing a messy Brexit process. They have the difficult task of sustaining profitability while preparing contingency plans for potential supply chain disruption, inflation, further currency fluctuations and tariffs. However, in a challenging business environment, it’s all the more important to focus on an effective pricing strategy.
Dr Peter Colman and Nima Shakib discuss the fundamentals.
Pricing is the most powerful profit lever, and professional price management is a vital capability to protect margins in uncertain times.
However, in practice, sales teams often fail to execute higher prices, in spite of clear targets and commitments from the top.
According to Simon-Kucher’s latest Global Pricing & Sales Survey (bit.ly/tm-mar19-sk), firms typically achieve only 37% of their price increase target (i.e., what they ‘get’ vs what they ‘set’).
There is hope though. Some firms are consistently more successful than others in achieving good pricing outcomes from their sales force.
We can summarise how they approach pricing execution differently by examining three key topics:
Provide guidance through reports and tools
‘De-averaging’ provides powerful insight into the spread of pricing outcomes that are currently being achieved. While monitoring and reporting average prices is very common, it masks the detail of where profit opportunities lie.
More often than not there will be a group of customers receiving very low prices who have been resistant to increases. Clearly identifying these customers and putting them on a ‘hunting list’ helps to focus attention.
It is also important to focus on those receiving relatively high prices too, as these can serve as realistic target prices for a similar peer group of customers. While many firms leave the gap between list and floor prices to the discretion of the sales force, more capable firms use tools to give the sales force guidance on what a good target price looks like (Simon-Kuchers’ tool for this is called ‘PeerPricing’).
Where selling is through indirect channels it can be helpful to also provide the sales force with discount/rebate calculators to help ensure that annually negotiated trade terms are performance focused rather than just guaranteed, and that the reward function (levels, thresholds and rules) are modelled and optimised as much as possible before the negotiations start.
This article first appeared in the March issue of The Manufacturer magazine. To subscribe, please click here.
Assure competence through training and development
It is surprisingly common to find sales teams who have never had any value selling or price training. That is not to say they haven’t had training at all, but this has usually been product/technical or personality driven in nature, rather than focussed on commercial methods and the financial benefits of the offering to customers.
Even within the same firms we typically see a wide range of ability across the sales force, with some people consistently achieving better pricing outcomes than their peers.
By understanding and exploiting the factors that explain their success, general outcomes can be improved. This can be expressed as a ‘learn from the best, apply to the rest’ approach to coaching and developing a sales team.
The process first identifies leading profit performers and then determines their techniques and behaviours for achieving these results. Coupled with market expertise and industry best practice, training courses can then be created to facilitate better pricing and negotiation outcomes.
Align sales incentive schemes to reward a ‘margin mind-set’
It is the role of senior management to set up policies to steer the behaviour of the sales team. However, it must also be in the interest of the sales force to achieve the best price.
A poorly designed incentive scheme can quickly undermine all the hard work deployed on pricing tools and training courses. For an incentive scheme to be effective in encouraging good pricing outcomes, the focus needs to be on margins rather than simply just revenues.
We have seen a range of options around this – from measuring absolute gross margin through to price quality or anti-discounting components within the incentive calculation.
It is important that the sales force has this shift explained to them, that they are provided with an incentive calculator to help them make their decisions, and that the reward for doing it is substantial enough to make it worth it.
Execution is the area of pricing most often overlooked, but is fundamental to protecting margins. Best-in-class firms achieve significantly higher price execution levels (c. 75% of target) compared to the 37% quoted earlier in the article.
In our experience, while the sales force probably won’t be looking forward to a price increase discussion with their customers, investing time and resources to support them in their price execution is usually highly appreciated.
Rather than being left alone to figure it out, a structured approach to rehearsing the arguments and responding to the most likely asked questions/push backs helped build their confidence ahead of the meetings.
In certain cases, a specific sales performance incentive fund (SPIF) was created so that the sales force shared in the company gain from the increase.
By remembering the three key steps outlined above, sales organisations will be more capable of delivering the pricing commitments of their leaders.
Dr Peter Colman is a partner and Nima Shakib is a senior consultant within Simon-Kucher’s Technology & Industrials practice; both focus on the UK/Ireland markets.
The Pricing Forum 2019
This 2-day event on 23-24 May in Central London addresses all the challenges for companies in achieving commercial excellence and topline growth.
- Day 1 will address the strategic priorities of achieving and maintaining topline growth, incorporating thought-provoking keynote sessions, panel debates and case study presentations from leading industry professionals and Simon-Kucher experts.
- Day 2 will provide an interactive and hands-on experience for pricing practitioners, combining a pricing foundations workshop, a must for anyone working in a pricing-related role or function.