Engineering & Energy Peer Pricing: Challenging sales staff to raise their game, boosting profitability in the process Harald L. Schedl, Partner Peter Colman, Senior Director Alexandra Wogritsch, Consultant www.simon-kucher.com
Peer pricing complements existing implementation measures, empowering and challenging salespeople to achieve better outcomes by introducing transparency and clarity to their results No matter how much effort companies expend in designing the perfect pricing strategy, more often than not, they realise a sub-optimal spread of outcomes. Whereas some firms respond by issuing ever more prescriptive guidance to the sales force, this often overlooks the fact that they could achieve better results and higher profits by harnessing their salesforces competitive instincts through the power of peer pricing. It is no secret that few business-to-business (B2B) marketing and sales teams see eye-to-eye when it comes to pricing. The question both are trying to answer is, What is the right price for my products? A deal struck at a certain price with one client may rightfully constitute a success, whereas a deal at the same price with another client may leave significant value on the table. Some degree of inconsistency in pricing outcomes across a sales portfolio is inevitable because in sales teams, as in all walks of life, certain individuals are better performers than others. Rather than lament this fact, companies need to turn it to their advantage - peer pricing uses the best performers as a yardstick to improve overall pricing and profit outcomes. Simon-Kucher & Partners Pricing Excellence framework (below) is used by ambitious firms to drive profit improvement. One important phase of the journey to Pricing Excellence is price implementation - and peer pricing is a powerful tool to achieve success in this. Whereas price implementation has historically focused on centrally issued guidance and prescriptive rules, it is nearly impossible to control every situation and gaming by sales staff is commonplace. Peer pricing complements existing implementation measures, empowering and challenging salespeople to achieve better outcomes by introducing transparency and clarity to their results. www.simon-kucher.com 2
The challenge of price implementation salespeople develop a reliance on the price they have successfully achieved elsewhere and then use this as a starting point for negotiations. Gut feel and judgement play too much of a role In a differentiated pricing environment, commonplace in many B2B markets, ensuring that the right customers get the right prices is a constant preoccupation for commercial directors. Logic rightly suggests that larger customers with more bargaining power ought to have more leverage in negotiation than smaller customers, which should be reflected in the prices realised with each. Justifying to salespeople why a small customer should not get the same price as a large customer should not be difficult in theory, but this rarely plays out as expected in practice. In our experience, salespeople develop a reliance on the price they have successfully achieved elsewhere and then use this as a starting point for negotiations. Gut feel and judgement play too great a role. Fig. 1: Current and potential margin distribution Figure 1 sets out a typical ABCD customer segmentation, where customers are sorted according to their importance in revenue terms. The graphic highlights this pricing implementation problem very clearly. The customers in segment D, who account for just 5% of total customer revenue, but over 60% of the total number of customers, frequently receive prices closely comparable to larger, much more important customers. This is a pattern we frequently observe in the course of our assignments. www.simon-kucher.com 3
This leaves us with the question: What mechanisms can be used to support sales staff for price implementation and in so doing boost profitability? Peer pricing: Introducing price benchmarking in sales When entering price negotiations, the sales person needs to consider multiple complexities such as current customer value, product mix, market segment, region, the competition and the distribution channel, amongst others, to try to determine the most appropriate price for that specific customer. With this complexity, making predefined rules or setting thresholds to cover every eventuality is highly challenging. Each deal is practically unique, so how can companies understand whether salespeople are achieving the best outcomes possible? This is where peer pricing comes in. It takes the outcomes realised by the most successful sales reps the so-called best performance prices and has them serve as benchmarks for the entire sales team. To successfully deploy peer pricing, Simon-Kucher suggest that companies need to follow a four step process, forming metrics that are objective and fair, and that will serve as a challenge to motivate their sales teams. The steps are: Step 1: Understand your data Step 2: Set price-performance corridors Step 3: Highlight potential within customers Step 4: Communicate, incentivise and implement www.simon-kucher.com 4
Step 1: Understand your data The first step in introducing peer pricing to an organisation is to understand its internal profitability data in detail, and with it, the factors which explain the current variation in outcomes. As Figure 2 reveals, pricing outcomes usually follow a distribution around an average point with some better than others. Whereas some of the variation will be readily explicable, other outcomes will arise as a result of adopting an inconsistent pricing implementation approach. Differentiating between these two drivers is key to the successful implementation of peer pricing. An initial review of the extent of price variation will give a high level indication of the likely profit improvement potential that a peer pricing exercise can be expected to provide. Broad targets can also be set to add importance to the project, such as improving the average by x percentage will realise y profit improvement or moving x certain proportion of transactions to a higher level will result in y increase in earnings. Fig. 2: Realised and potential price distribution for a product group www.simon-kucher.com 5
Step 2: Set price-performance corridors Step two, implementing peer pricing involves defining aspirational price-performance corridors per product group. This allows for differentiation between customer segments to create acceptable ranges within which deals can be struck. It directly addresses the low prices to small customers problem. As Figure 3 illustrates, acceptable price ranges can be defined by customer type. Smaller customers, here called C Customers, cannot receive prices lower than the average using this logic, though larger A customers can. The target of the corridors is to create a specific range for setting prices as opposed to strictly setting prices or margin targets. This concept provides flexibility to the sales team to negotiate prices, instead of a rigid price/margin target. But the onus is on them to close it as close to the top of the range as possible, and they will be rewarded appropriately. Fig. 3: Determining the customer segment-specific price corridors per product www.simon-kucher.com 6
Step 3: Highlight potential within customers Step three employs an easy to use colour coding system for each customer to identify the historic pricing outcomes achieved and to determine whether they are in line with expectations. This valuable information is then used to target improvements in the future. A colour coding system provides quick visual overview of historical profitability patterns Companies using peer pricing often develop dashboards to visualise areas for price improvement. Figure 4 displays historical pricing data within coloured bands to show how outcomes meet aspirations. Frequently from this, companies develop a target list of customers to improve. This exercise builds a common understanding between marketing and sales of where both believe improvement potential in price is possible. The targets bands need to take account of changing market conditions and customer specific factors. A price which historically might have been reasonable in the market may now look too low; equally the entrance of a new competitor may necessitate a change of pricing direction. The benchmarks must be adapted accordingly. Dynamic steering of prices is a key part of this process. Fig. 4: Colour-coded customers per product group www.simon-kucher.com 7
Step 4: Communicate, incentivise and implement The final step in implementing peer pricing is to roll-out the concept to the sales staff, ensuring their buy-in and aligning their incentives accordingly. Successful implementation of peer pricing requires that all sales staff accept, understand and recognise the system as objective and fair, which often demands extensive support and engagement through training seminars. For peer pricing to be wholeheartedly adopted by the sales force, companies need to use a carrot and stick approach - as well as serving as a tool for highlighting underperformance, it should also serve as the basis for rewarding higher performers. Figure 5 sets out an incentive compensation scheme which uses peer benchmarked pricing outcomes as an input. This helps companies to create the right incentives for sales people to push for higher prices from customers in the future and is better aligned to profit outcomes than the use of revenue only based metrics. Fig. 5: An example of a two-dimension variable compensation system Finally it is important to remember that the benchmarks used in peer pricing need to adapt over time to maintain relevance in prevailing market conditions. www.simon-kucher.com 8
To summarise, peer pricing offers companies the following advantages: Peer pricing draws on the sales forces natural competitive instincts to encourage them to push for higher prices, resulting in better outcomes overall If correctly implemented, peer pricing can help to install a margin culture, rather than a revenue culture amongst sales teams The transparency resulting from implementation of peer pricing is usually recognised as objective and fair by the sales force Peer pricing complements existing price control mechanisms well, it is not an either or option Peer pricing not only improves price execution by under-performers, but also provides stretch targets for the middle and top performing sales people In our experience, the use of peer pricing can yield an improvement in margins by up to three percentage points www.simon-kucher.com 9
Harald L. Schedl Managing Partner, Simon-Kucher & Partners Simon- Kucher & Partners Willy-Brandt-Allee 13, 53113 Bonn, Germany Tel.: +49 228 9843 212, Fax: +49 228 9843 220 e-mail: harald.schedl@simon-kucher.com Responsibility: Leader Competence Centre Engineering & Energy; Managing Partner Industry Focus: Packaging, consumer electronics, automotive, oil & gas, energy, raw materials Service Focus: Specialisation in Strategy, Innovation, Sales and Marketing/Pricing. Besides his industrial background with ThyssenKrupp he has over 15 years of consulting experience (also with Roland Berger and Deloitte Consulting) Mr Schedl is an author of numerous publications and a regular speaker at management conferences Mr Schedl holds a degree in management science and industrial engineering Dr. Peter Colman Senior Director, Simon-Kucher & Partners Simon- Kucher & Partners 1 Plough Place, London, EC4A 1DE, United Kingdom Tel.: +44 7515 998 075, Fax: +44 207 8326 800 e-mail: peter.colman@simon-kucher.com Responsibility: Head of UK E&E (Engineering and Energy) Industry focus: Industrial and Technology clients Consulting focus: Commercial strategy, sales, marketing and pricing excellence Experience: More than 14 years experience in consulting and industry. Provided wide-ranging commercial advice for corporate, private equity-owned and venture capital-backed clients, throughout Europe and North America. Recent presentations: Presentation for the Professional Pricing Society on Price Execution and is a regular speaker at Simon-Kucher Sales and Pricing conferences Mr Colman has delivered growth initiatives along with change management programmes within multi-faceted organisation in B2B and B2C environments Mr Colman hold a PhD in Electronics from the University of Cambridge and a First Class degree in Physics from the University of Nottingham www.simon-kucher.com 10
Alexandra Wogritsch Simon-Kucher & Partners Rotenturmstraße 16-18/301 1010 Wien, Austria Tel.: +43 1 512 2979-16, fax: +43 1 512 2979-99 e-mail: Alexandra.wogritsch@simon-kucher.com Responsibility: Consultant for the Engineering and Energy Competence Centre Industry focus: Industrial and manufacturing companies, packaging industry Areas of specialisation: Commercial strategy, pricing & sales strategy and execution, project management and change management Experience: Prior to joining Simon-Kucher, Alexandra worked in the Marketing Capabilities Team at Heineken Central & Eastern Europe and gained experience in strategy, management and organisation at Capgemini Consulting Austria AG. Alexandra holds a degree in International Management Science from the IMC Krems University of Applied Sciences. During her studies she focused on international marketing and financing. www.simon-kucher.com 11