Th art of PRICING

A good article from the Harvard Business Review.

The KEY message from below that is so relevant for us (in my opinion) would be

  • employ truly tailored pricing at the individual customer and product level

 price

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A Survey of 1,700 Companies Reveals Common B2B Pricing Mistakes

Poor pricing practices are insidious — they damage a company’s economics but can go unnoticed for years. Consider the case of a major industrial goods manufacturer that was struggling with low profit margins, relative both to competitors and to its own historical performance. It traced much of the cause to a mismatch between its sales incentives and pricing strategy. The manufacturer was compensating sales representatives based solely on how much revenue they generated. Reps thus had little motivation to hit or exceed price targets on any given deal, and most were closing deals at the lowest permissible margin.

Like this manufacturer, many business-to-business (B2B) companies have a major opportunity to improve their standing on price. To help companies understand the state of pricing capabilities and how they figure into performance, Bain & Company conducted a global survey of sales leaders, vice presidents of pricing, CEOs, CMOs, and other executives at more than 1,700 B2B companies. We gathered their self-rating of 42 pricing capabilities and outcomes.

Roughly 85% of respondents believe their pricing decisions could improve. On average, large capability gaps exist in price and discount structure, sales incentives, use of tools and tracking, and structure of cross-functional pricing teams and forums.

What Pricing Leaders Do Differently

To understand which capabilities matter most, we studied a subset of top-performing companies, as defined by increased market share, self-described excellent pricing decisions, and execution of regular price increases. While different pricing capabilities may be important for a particular situation, the analysis showed that top performers exceed their peers primarily in three areas. Top performers are more likely to:

  • employ truly tailored pricing at the individual customer and product level
  • align the incentives for frontline sales staff with the pricing strategy, encouraging prudent pricing through an appropriate balance of fixed and variable compensation
  • invest in ongoing development of capabilities among the sales and pricing teams through training and tools

Our analysis also revealed just how much excelling across multiple pricing capabilities pays off. Among the companies that excel in all three areas, 78% are top performers, versus just 18% of companies that excel in none of the three. Let’s explore why these three areas have such a strong effect on pricing effectiveness.

Pricing to the Average Is Always Wrong

One-size-fits-all pricing actually fits no one. Yet it is not unusual for sales executives to admit that their ability to tailor prices at the customer and transaction level is rudimentary, or that they are not even aware of how much margin they make on deals.

By contrast, more-advanced companies tailor their pricing carefully for each combination of customer and product, continually working to maximize total margin. They bring data and business intelligence to bear on three variables for setting target prices:

  • the attributes and benefits that each customer truly values, and how much value is created for them
  • the alternatives and competitive intensity in the industry
  • the true profitability of the transaction after accounting for leakage in areas such as rebates, freight, terms, and inventory holding

One North American manufacturer with margins that were highly dependent on raw material pricing suffered from an undisciplined approach to pricing. A diagnosis allocated costs at the product and customer level to determine true profitability. That diagnosis, which showed the manufacturer was undercharging in many cases, provided the support needed to raise prices where appropriate in subsequent contract negotiations, leading to an average 4% increase from that opportunity alone. The company designated an executive to be accountable for related profit margin opportunities and to track the status and effect of each price increase. As a result, the company improved earnings before interest, taxes, depreciation, and amortization by 7 percentage points.

Bad Incentives Undercut the Best Pricing Strategies

Managers often criticize sales reps for losing a deal, but rarely for pricing a deal too low, so reps learn to concede on price in order to close the deal. Moreover, companies rarely reward sales reps for exceeding price targets, which means few reps take risks to push for a higher price. Misaligned incentives push deals down to the minimum allowed price.

The antidote is to align compensation with strategic goals. Incentive plans benefit from following a few principles:

  • Clarify the objectives — be they revenue growth, share gains, margin gains, or others — and the behaviors that will help meet the objectives.
  • Make it foolproof. Help sales reps understand the payout calculation, simplify the quota structures and supplemental incentives, and make the upside for outperformance meaningful.
  • Ensure transparency. Sales reps should easily see the effect of a deal’s price on their personal compensation.
  • Track the results through regular reviews that flag areas where frontline staff might game the system.

Returning to the case of the industrial goods manufacturer described earlier, the company also overhauled its incentive program to balance revenue and profit. It created a pricing tool to make the commission on each deal visible to sales reps — for instance, “If I raise the price by $2,000, I earn an extra $700.” Sure enough, reps began to close higher-margin sales. These changes led to a 7% increase in prices, which added almost 1 percentage point as part of a 3.5-percentage-point improvement in margin overall.

Training and Tools — Often Afterthoughts — Can Have a Big Payoff

Top-performing firms invest in building the capabilities of the pricing team through training and forums to share best practices. This runs counter to the norm at many B2B sales organizations, which give little or no formal training on price realization.

Further, most companies can raise their game by adopting pricing software tools. Based on the performance of historical deals, software solutions — whether in-house or from a provider such as Vendavo or Price f(x) — can provide frontline reps with real-time pricing feedback based on the characteristics of a deal under way. Using dedicated pricing software is associated with much stronger pricing decision making, our survey analysis shows. Yet despite the proven value of pricing software, only 26% of survey companies use it.

The value of developing capabilities became evident to a specialty chemical producer with lackluster margins. The company had hundreds of different products, each with different competitors, substitutes, and customer bases. Product and sales staff could not explain their pricing decisions, and often resorted to a rule of thumb summed up by one product manager as, “I estimate I can raise the price by four cents per pound.” Not surprisingly, she had raised prices by four cents per pound for four straight years, leaving money on the table.

By analyzing the various products and their markets, the chemical producer found pricing opportunities that enabled it to increase earnings before interest and taxes by 35% within two years. Just as important, the company set out to raise its game on pricing capabilities. It created forums for sharing best practices, trained product managers in doing fundamental pricing analysis, and trained salespeople on how to have better pricing discussions with their customers. New dashboards monitored progress toward pricing goals and flagged places where sales reps might be getting too aggressive, or weren’t getting aggressive enough. Finally, the CEO reinforced these measures by demanding that the product and sales teams report on pricing actions taken, as well as results, so that effective pricing remained a high priority. The company established itself as a pricing leader in its markets and continued to optimize margins, both by raising prices and, in selective cases, by lowering prices to drive the right balance of price versus volume gains.

Regardless of a company’s starting point in pricing, there is significant value in building out the capabilities highlighted by our survey analysis. The three areas discussed here have proved to be the most important for upgrading tools, resources, and behaviors. That said, companies in almost all industries have underinvested generally across pricing. The episodic “pricing project” approach leaves companies well short of full potential. With meaningful margin upside at stake, managers cannot afford to continue pricing by rules of thumb or by taking a one-size-fits-all approach to pricing across entire segments of their business.

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AUTHORS –

Ron Kermisch is a partner with Bain & Company’s Customer Strategy & Marketing practice.

David Burns is a partner with Bain & Company’s Customer Strategy & Marketing practice.

6 Simple Habits that Change Managers into Effective Leaders

Sharing this great article by John Eades

  • Published on August 23, 2017 @ LinkedIn

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snip

 

The debate about the difference between a manager and leader has been settled. Without question, there is a difference in both definition and behavior.

Just to ensure we are on the same page, here are my favorite definitions of both in action form:

Management: The manipulation of others for your own success

Leadership: Serving and empowering the lives that have been entrusted to you

Unless you grew up in a place of worship or had really strong figures in your life that taught you about serving and empowering, you most likely default to management. Why? Because it’s what’s taught in high school, college and organizational leadership development programs. In many ways, our environment is teaching us to be managers, not leaders, but unfortunately, that’s not an excuse. Here are six habits that can help change managers into leaders.

  1. Find a Purpose Beyond Money

While there is no question that money is important in life, one of the best ways to make a leap towards being a leader is to find a true purpose in your work beyond money. If the only reason you go to work is for money, your people will know and you will never make the leap to serve.

If this is an area you struggle in, pick up Simon Sinek’s new book Find Your Why when it comes out in September.

  1. Decentralize Decision Making

Most people move into a position of management because they were good at their job. Typically their first actions are to solve all the worlds problems and be a major part in every decision facing the team. The problem is the people they are now leading are being treated as followers and have a sense of being in a subordinate position, thus creating more followers, not more leaders. As leadership expert David Marquet says, “followers have limited decision making authority and little incentive to give the utmost of their intellect, energy, and passion. Those who take orders usually run at half speed, underutilizing their imagination and initiative.”

The key here is to not only be ok with your people making decisions make it a core part of their job.

  1. Give and Serve Outside of Work

I don’t mean to give financially, I mean give your time. Winston Churchill famously said “We make a living by what we get. We make a life by what we give.”

Look for ways to volunteer in your community or start a support group. The point here is if you learn to give up your free time to serve those that you don’t know, you most certainly will begin to serve and empower those that you do at work.

  1. Focus on Your Example

The old adage ‘do as I say, not as I do’ is an awful way to lead and a sure-fire way to erode trust with your team. Leading by example encompasses all your actions, from what time you show up at the office, how much vacation you take, what you wear, to the moral and ethical decisions you make both at work and home.

The choices you make every single day are watched and judged by others. Do your actions exemplify the way you want to be portrayed? One of the most important things you can remember is not allowing your title to effect a positive example you set for your team.

  1. Thinking You Have to Be the Hero

Like most professionals, I met my biggest weakness early on. I thought I was the only person who could do things right, and I had to have my hand in every decision. Then someone told me,

“If you want to go fast, go alone. If you want to go far, go together.”

It was exactly what I needed to hear. From then on, I knew I didn’t have to be the hero. Now, I surround myself with talented people, ask for help, give more responsibility, and try to listen more than I talk.

  1. Stop Making Excuses

If you habitually struggle with saying or thinking on a regular basis “There is never enough hours in the day” or “this quarter is so important,” stop and reflect on what you are saying. Every quarter is important and every day is important but it shouldn’t for a minute stop you from thinking critically about how you are leading other people.

I don’t care what the circumstance eliminate your excuses, take responsibility and put in the work.

The Windshield Mentality

No matter if you are a manager or a leader, I want you to begin embracing the windshield mentality. All the windshield mentality is, is thinking about what’s ahead of you instead of behind you. Start thinking and planning how you are going to implement these habits moving forward and never look back!

 

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