Can you explain your prices? The case for a pricing audit

By Michael Hurwich and Michael Oswald

                How often have you been confronted by your peers to provide an explanation for irregular or inconsistent pricing tactics? The reality is, companies spend much well intentioned time reviewing gross margins across products or categories but little time auditing net prices across accounts resulting in a possible loss of profits and in the very least an unexplainable situation at the managers meetings.

                Many managers are beginning to recognize the value of deploying a systematic review of their company's product/service pricing strategies. Robert Baker, Senior Priding Director from Armstrong World Industries suggests that, "Managers should be aware of or be guided by a set of well-founded principles to control price(s)". Unique discounts should be the exception, not the norm but often due to a lack of analysis, companies will fall trap to regular discounting and price exceptions, leading to money and potential cost lost.

                Proper value-based pricing strategies permit organizations to go after different market segments by delivering a variety of customized product and service offerings.

                Since the early 1990s, there has been a shift from the 'Old World' where one price suits all, to the 'New World' forces fences between different value offerings and pricing tactics.

                Pricing audits ensure that the correct prices are matched against the correct customer segments to ensure that those accounts that acknowledge value are also paying for it.

                At the end of the day, the benefits of good pricing practices can translate into value for all involved. End-users benefit from consistent interactions, pricing standards, and an increased focus on fulfilling customer needs.

                Employees enjoy better execution and satisfaction due to streamlined and consistent processes and better pricing training and value leadership. Shareholders appreciate the higher profits achieved through an efficient pricing process that captures the true value of a product or service.

                What is not so clear to many companies is what constitutes good pricing practices and, more importantly, when and how often a review of prices should be conducted across the organization's products, accounts & channels and the steps necessary to achieve them.

                A pricing audit should be conducted as part of the yearly accounting audit to obtain a barometer to externally measure prices against the marketplace, to internally ensure consistency across like accounts and further, ensure that profitability is maximized. It is a systematic, third party review of an organization's current product and service prices and pricing practices and should encompass every facet of the organization that either impacts or is impacted by pricing.

                While a centralized pricing unit is not necessarily required to accomplish the following steps, a well defined set of 'Rules of the Road' and coordinated activities are critical.

Pricing Audits should typically include the following:

STEP 1.

·         Understanding Your Corporate Goals and Objectives:

The primary reason that pricing strategies often fall short is because they are not aligned with corporate goals and objectives. Further, many organizations today struggle to maintain a uniform view of their goals and objectives.

·         Clear communication of corporate goals and objectives:

Whether it is revenue growth, profitability, market share, return on capital employed, or some combination is necessary to ensure the right pricing strategy is employed.

Remember: goals and objectives drive pricing strategies while pricing tactics flow from a clearly articulated strategy.

STEP 2.

·         Reviewing Current Pricing Practices:

In order to ensure pricing alignment across your company, a review of current pricing practices, discounts and incentives, customer segmentation, competitive landscape, product bundling, tied selling, etc. is required through a multi-faceted approach. This includes:

                1. Interviewing internal management;

                2. Interviewing the sales force

                3. Reviewing pricing across distribution channels;

                4. Benchmarking your company against direct and indirect                competitors; and,

                5. Analyzing historical data.

The Goal: To assess all areas within the organization (systems, marketing, sales, finance, distribution, operations and others) that impacts or is impacted by pricing.

STEP 3.

·         Identification of Opportunities for Improvement:

No matter how refined your pricing process is, pricing practices must be periodically reviewed and fine-tuned to respond to market forces.

                The degree of pricing refinement necessary is related to where your company resides on the 'pricing pyramid'. A well-executed pricing process is fundamental toward achieving corporate goals and objectives of improved operating profit.

                The SPMG 'Pricing Pyramid' example is a useful methodology to minimize ill-conceived decisions in circumstances when a customer is threatening to cut business unless a concession is provided.

                The higher your company resides on the SPMG Pricing Pyramid (http://pricingexperts.net/price-consulting.html) the less likely a pricing audit will reveal any unusual or inconsistent pricing practices.

Conclusion:

                Only through a third-party can companies avoid the internal jockeying for price positioning that often occurs across corporate silos. There are several other benefits of engaging external resources to conduct your pricing audit:

                1. Third Party Objectivity: It is virtually impossible for an employee of a company to provide an impartial view of the company's pricing practices. An outside-in perspective by individuals without a vested interest in the company provides the objectivity and credibility required to make an unbiased assessment of one's pricing practices.

                2. Knowledge Base: External pricing auditors have extensive experience broadening pricing competency with companies across all industry segments. These experiences create a continually expanding knowledge base that allows for the provision of 'Best Practices'. The result is often an immediate improvement through the identification, validation and recommendation of 'Quick Win' pricing process opportunities.

                3. Proven Pricing Methodology and Tools: Determining whether the true value of your product or service is supported by your pricing structure requires a tried and true methodology.  External pricing resources possess both the methodology and tools necessary to develop pricing strategies that are consistent with corporate, marketing and sales objectives. Often, the result is the discovery of hidden weaknesses that go undetected with ad-hoc internal price tweaks.

                While the difficulty of the current operating arena is typical of turbulent economic times, companies are not doomed to suffer the consequences. A pricing audit increases the likelihood for capturing and creating improved profitability versus the competition, enhances customer focus and lessens the possibility of provoking price wars.

3 Trends Shaping B2B Marketing

Here's how the savviest B2B companies will be delivering their message and proving their value to customers this year.

Article found on www.Inc.com Written by Lauren Cannon

For progressive and tech savvy business-to-business companies, traditional marketing techniques like entire departments dedicated to cold calling potential clients have largely been retired to the trash folder. Instead, these companies are rapidly embracing technologies and practices aimed at increasing productivity, using social media more effectively, and providing engaging and informative content to potential clients. For a deeper look at these trends shaping B2B marketing in 2011, read on.

Quantifying Value Creation

If you’re looking to make your case to another business, come with lots of data, says Keith Pigues, co-author ofWinning With Customers: A Playbook for B2B. You’ll need to quantify your value to customers in terms of dollars and cents, something known as “customer value creation.”

"Many organizations are finding that some of the more traditional customer satisfaction or customer loyalty measurement systems like ‘net promoter score’ are falling short when trying to provide a real financial measure to companies to help them understand exactly, 'how much more money am I making doing business with your company verses Company B or C?,'" says Pigues.

To accomplish this, companies are looking to third parties for help. Among them is Chicago-based Valkre, a technology provider that specializes in helping companies customize and match sales solutions to specific customers, implementing marketing strategies that increase a company's online visibility, and creating daily management plans that use mainstream technology.

Valkre founder Jerry Alderman agrees that the next evolution in B2B marketing involves businesses attempting to understand how the services they're offering truly impact the bottom line of their customers. Valkre has created a new metric, called the differential value proposition or "DVP", which measures the amount of increased profit that a customer can bring in by doing business with one company versus another. Unlike net promoter score, the DVP percentage metric was designed for use specifically within the B2B industry.

Targeting Online Identities

Whittling down to the individual buyer will increasingly be the objective in online B2B marketing, even in terms of broad awareness campaigns, says Steven Woods, theToronto-based CTO of Eloqua. Instead of generalized marketing initiatives, companies are beginning to analyze the online behavior -- also known as digital body language -- of individuals involved in the B2B industry in an effort to pinpoint the specific buyer whose needs best fit the services of the seller.

Through the collection and analysis of data, companies are discovering ways to link varied online "handles" across social networks to a single individual they wish to target for marketing purposes. "The vanguard will see a lot of people in 2011 figure out the identity management challenge and be able to understand ‘you’ across those identities and understand how your activity on Facebook, on Twitter, on LinkedIn, and the various social properties indicates your buying intentions," says Woods.

The goal is to cater marketing content to customers depending on where they are in the buying process. To accomplish this, Tableau Software, a Seattle-based seller of B2B software, uses a method of "scoring" visitors that come to their website. The more that users visit, the more their scores increase, allowing the algorithm to filter them into the programs within the site that speak to their interests. Thus, Tableau targets customers based on their online behavior rather than the demographics provided by their firm or industry.

"The trend of 2011 is that marketers are as interested in delivering relevant content to relevant people, as they are to stopping the delivery of irrelevant content to irrelevant people," says Elisa Fink, Tableau's vice president of marketing. "We don't want to be spammers. Every engagement with a company is really an engagement with a person."

Getting Creative with Content 

In terms of the content being delivered, B2B companies are encouraging members of their technology departments to build their personal brand and further the recognition of their company by becoming "expert" bloggers and content creators.

"The winning marketing skill set that is going to be very much recognized in 2011 is not going to be the creative copywriting, artistic skill setm," says Woods. "It's the person who understands numbers, analytics, data, workflow, the operational skill set."

This can be accomplished via the company website, Twitter stream, LinkedIn discussion group, and even the employee’s personal blog.

Woods explains that part of this trend is a move in favor of less polished content and faster production times. In the past, all marketing materials were placed under intense scrutiny before anything was put online to represent the company. Now, personal engagement is en vogue, whereby the members of a company with active knowledge about products can engage in two-way conversations with clientele on the fly.

"[The content] might even have spelling mistakes in it. If it's a video, it might just be a very quick, ‘hey, here is how I tackle this problem, here is how I view the latest merger in the industry, or view this latest technological development,’" says Woods.

Some B2B institutions are also beginning to explore new approaches to their chain of command within marketing initiatives. In larger B2B companies, the IT department typically reports to the operations department because that's where the most money has traditionally been invested. According to Alderman, that is now changing. He points to a major player in the industry taking the approach of having their IT department report to their marketing department. By doing this, information regarding a business' technological holdings and services can be more accurately and efficiently marketed to potential clients.

As the Web 2.0 advances into a new decade, B2B marketing strategies will also continue to develop. Indeed, there are an increasing number of digital platforms, like social media, for marketers to explore. In 2011, the winners will be the ones that are best able to target their efforts to their customers’ online habits and interests, and provide true value – and be able to prove it – to users.

Every Day Low Pricing: Pros and Cons

EVERY DAY LOW PRICING (EDLP) is a pricing strategy that has been a remarkable success for some manufacturers/retailers and a disaster for others. 

                        Despite some rather high-profile failures, the strategy attracts attention among all types of marketers. 

                        Recent reports indicate that 27% of consumer non-durable manufacturers and 23% of consumer durable manufacturers have adopted an Every Day Low Pricing strategy. 

                                                The key question is: “what conditions are most critical for successful implementation of the strategy?”

How it works

EDLP is a low-price strategy designed to enhance the competitive position of the supplier based on the following basic premises:

·          A consistent, competitive price will lead to an even demand for products

·          Inventory and other logistical costs will drop because of better management of product flows.

·          Promotional costs and other forms of trade spending will be reduced.

·          The cost advantages of steady demand and better inventory management will lead to even lower prices.

One of the advantages of EDLP is that it often leads to more consistent or predictable demand.                 Suppliers or retailers are able to more effectively control and forecast production, inventory costs, and shipping costs thus stabilizing demand

                        Since periodic deals are replaced by a single, no-deal low price, there is no advantage to customers to postpone a purchase.

                        Successful EDLP strategies tend to generate large volume sales that allow companies to cut costs and pass these savings along to customers.

                        At the same time, retailers or manufacturers are able to leverage their own buying power to reduce their purchase price. These savings, as well, are then passed along to customers. 

Where it works best

EDLP works best under many of the same conditions that support other low price strategies. Typically, these include:

·          Consumer demand is relatively unaffected by large seasonal variations or other timing considerations

·          The company is able to sustain a low price competitive position through a cost advantage

·          Consumers place little value in waiting for —deals“ on merchandise

·          Suppliers are willing and able to provide just-in-time delivery

·          The company‘s size justifies the investment in the information systems required to manage inventory turns precisely

                        Purchases that can be delayed or timed to coincide with price discounts are often less amenable to an EDLP strategy, while repetitive purchases lend themselves particularly well to this type of pricing.

                        Consumer disposables, such as toothpaste, soap, or groceries, for example, are typically purchased on a daily, weekly or – at most – a monthly basis.

                        Consequently, consumers have less ability to time the purchase of these goods in order to save money.

                        EDLP works well for these types of products, especially at a retail level, because it offers consumers a bundle of low prices on a range of goods that they buy on a regular basis.

Caution advised

                        Seasonal products and services such as tourism and snowmobiles, or highly perishable products such as flowers, have a limited shelf life and discrete time periods during which product or services must be moved. In these situations, EDLP may not be the preferred strategy.

                        EDLP often doesn‘t make sense where demand is so high that price increases are warranted, or when demand declines to the point that price discounts are needed to reduce inventories. Implementing EDLP for some consumer durables is difficult because consumers can often afford to wait for special deals or incentives to buy these products.

Article Written by

Michael Hurwich, President of SPMG