Why Mid-Market Companies can reap even greater returns by investing in pricing solutions?

“Mid-Market” Blog

By: Vernon E. Lennon, III

In today’s conversation we look at why Mid-Market companies can benefit even more greatly from investments in pricing solutions / services / software.

For over 20 years now the Pricing industry has primarily focused their efforts on the “Billion plus” target customer while offering little attention to the larger group of smaller cousins.  While the industry has been in growth mode during this time frame due to some customer internal knowledge of the pricing lever, this doesn’t equate to Mid-Market customers not needing the attention.  Rather I contend due to the demand and the ROI considerations; the pricing industry has primarily focused their marketing campaigns on the “big boys”.  I further suggest that a two pronged approach in the future can not only help the Pricing Industry grow, but can also educate and assist a largely untapped segment.

After all in the U.S. alone there are thousands more of the “sub 1 Billion” customers all looking for enhanced valuations (more fodder here in a future post) and yearning for learning on how to do so.  Couple this with the greater potential for “quick win” returns leading the charge on change management and cemented executive commitment and this pool of companies appears to be ripe for collaborative improvement. 

So let’s take a look at my top ten reasons why this segment is poised to benefit more from pricing assistance.

Mid-Market Companies:

1. Typically don’t have dedicated pricing departments.  In fact many of these companies’ functional departments are responsible for multiple areas and thus only focus a small portion of their time dedicate to price management.
2. Historically have grown out of an idea / innovation, not through business efficiencies.  Ideas and innovation have led them to a great position in the marketplace, but as the maturation cycle has evolved this competitive position is eroding.
3. Tend to be Sales Led vs. Sales Centric.  Historical desires for growth have given the sales organization too much leeway on order taking.  Rather than providing them with central led enhanced information, central offices often relinquish majority control on ultimate pricing decisions.
4. Volume oriented.  Strategies for growth and overall compensation metrics (Sales and Executive) often are too heavily weighted on top line growth, hence there is no impetus to “walk away from bad business” and focus majority efforts on profitable customers only.
5. Believe the forward supply chain typically has greater leverage.  In many cases, Mid-Market companies are selling into customers and channels that are much larger than they are, like the “big box” stores.  This offers the appearance of limited leverage, and without proper controls in place margin leakage here can be great.
6. Assume they need large capital budgets for software solutions.  Due to a lack of clear education and communication, many companies in the segment don’t realize there are some “value” priced SaaS Software packages and Solutions that can firmly meet and beat their pricing needs.
7. Deal with data inefficiencies and information inconsistencies.  Much like their larger cousins lack of data control is perceived to be a road block, but this isn’t necessarily the case (see October 2011 PPS Presentation on Virtual Markets).  In fact there are many existing techniques that can assist companies with taxonomy and hierarchy improvements along with firm graphics enhancements.
8. Often fail to project a true image of value to the marketplace.  Lack of investment in clear “voice of the customer” initiatives or value mapping / attribute selection analysis leaves companies not enabling a powerful market based message.
9. Lack of clear executive commitment to price.  Too many short term initiatives and too few resources often lead to operational paralysis and no clear leadership on how to capture value through the price lever.
10. Lack of Pricing Strategies, Policies & Processes to support organizational behavior.  Limited clear concrete messaging often leaves loopholes of operation and limits the rigor in price deployment.

In conclusion, a large number of Mid-Market customers continue to go un-served by the Pricing Industry as training, education and marketing are too often oriented toward larger customers.  That said, given the points made above, the “need” appears to be greater for the Mid-Market segment and the potential returns that much higher.  With the proper focus on information dissemination by the Pricing Industry, the right tools, solutions and services provided for quick wins with commensurate plans for long term change, the future can be bright for all Mid-Market customers wanting to find greater price competency. 

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

Pricing Czars vs. Institutionalized Pricing Strategy

Pricing Czar vs. Institutionalized Pricing Strategy 
by Michael Hurwich, President of SPMG

PRICING Czars. They sit in their offices, colossus' spanning the universe. Salespeople telephone them begging their indulgence as they present their deals – deals which could make or break performance bonuses and incentives. Discounts are requested, competitive information reviewed, special requests are considered and then, with pontifical certitude, a decision is rendered.

Anointed by the CEO, a price czar is the absolute final arbiter on any deal done on a day-to-day basis. Ideally, the czar is a competent and benevolent despot who will advance the cause of the organization.

Often they emerge within an organization over a number of years and are generally acquire considerable experience, a track record of selling success, and an intimate knowledge of customers. Eventually, by virtue of history, the organization turns to him or her, time and again, whenever a tough decision has to be made on a specific deal. This pattern can become so widespread and routine that the individual, de facto, becomes a pricing czar.

Sometimes the position is institutionalized by the CEO and the power to finalize deals is formally granted. This requires the absolute trust of the Chief Executive because any overturned decision has the potential to undermine the authority of the czar, perhaps irreparably. A successful pricing czar requires the absolute respect of the sales force; otherwise this individual can significantly demoralize their efforts in the field.

Advantage:

There are a number of factors to weigh when an organization is considering institutionalizing a pricing czar. The big attraction is that it provides a simple, quick fix to an often-chaotic pricing situation. The pricing environment is generally characterized by a lot more deal making, special off invoice discounts, and special service requests. If these special arrangements are not managed properly, pricing can quickly spiral out of control and result in an overall collapse of profitability. Rather than investing in the monumental task of installing sophisticated internal and external-tracking mechanisms supported by adequate controls, it is tempting to turn to “good old Charlie” who has been with the company since the dawn of civilization and make him a pricing czar. 

Drawbacks:

There are drawbacks to this position. 

1. Evaluation

One of the immediate ones is evaluating the performance of a pricing czar. No company has ever structured a test whereby half the deals are turned over to a czar and the other half are managed through a more sophisticated systems/management structure. So a lot of faith is required in the setup to sustain it over time.

2. Disconnect

A further difficulty comes when the organization wants to take a new direction with its overall marketing strategy. Often it will become apparent that brand managers, who develop the price positioning strategies and have ultimate profit responsibility, are not in control of, or possibly even aware of, the actual prices being paid in the marketplace. They quickly come to learn the limitations of developing marketing strategies with only three of the “4 Ps” at their disposal.

3. Continuation

With all of the knowledge and decision-making resting with one person, another problem is inevitable: what to do upon the czar‘s departure. Many organizations have gone through wrenching transitions after losing their czar, because new systems and controls require significant time and effort to design and implement. As an additional hurdle, the overall approach to pricing may have become so individualized to the czar, it cannot be replicated. The alternative to a pricing czar is to institutionalize pricing strategy.

Institutionalizing a pricing strategy 

Institutionalizing a pricing strategy provides the context and guidelines for day-to-day decisions. This requires comprehensive customer research and tracking, detailed financial analysis, competitive positioning, and a careful tie-in to business objectives. In addition, if the strategy is communicated effectively it will, in and of itself, improve organizational pricing performance.

To ensure the strategy becomes ingrained and that positive results are maximized, it should include a policy outlining the steps to be taken in determining and negotiating prices, the assignment of responsibilities, and a definition of the organization‘s pricing objectives. Measurement mechanisms must then be installed to monitor performance and keep the organization on track.

With these elements in place, an institutionalized pricing strategy can have dramatic impact on the bottom line, much more than the reliance on a pricing czar. The czar may be a good stopgap when an organization is scrambling, but a firm should invest the resources for the long term to build and execute a sound pricing strategy.