When it comes to pricing, far too many companies rely on an ad hoc policy on the front line, leaving too much money on the table and eroding margins.
In a B2B sales environment, where branch managers and salespeople have pricing discretion, a culture of discounts often exists. Regardless of what senior managers or investors want, front-line staff that are more inclined to give customers discounts than risk losing a sale.
And yet, pricing, more than anything else can generate huge returns. Increasing prices as little as 1% can increase net margins as much as 11%. Can you think of any other strategic or operational area where a small change could generate that kind of return?
Despite the enormous impact price optimization can make, why do 73% of B2B companies say they never, rarely, or only sometimes meet price goals? We will explore this in more detail in this article.
Why is pricing so difficult for many companies?
Wholesalers and distributors — a market we have extensive experience in — often operate on tight margins.Whether you are in the automotive, construction, or food services sector, wholesalers and distributors face similar pricing challenges.
Businesses that operate using a wholesaler/distributor model often have thousands or tens of thousands of product ranges. A geographically diverse team of hundreds of branch managers or field sales staff, all of whom have pricing authority. And a cost-plus pricing structure that changes depending on competitor offers, seasonality, and other factors.
Within this pricing environment, there is a further layer of local factors that can impact how effective a branch or sales rep can drive revenue forward.
In some geographical regions, there might be a healthy demand for your product ranges. In others, demand might not be as strong. You could be facing numerous competitors, or very few. Not every rep or manager is as skilled as others. For those with a talent for sales and marketing, sales should be higher. However, even that can’t be relied on, especially when facing tough competition.
All of the above factors influence and impact pricing. Head office rarely has as much control as it would like. Even when pricing plans are produced and communicated, policies can be misinterpreted or even ignored in favor of managers sticking with what they think works with their customers.
Managers and reps are also looking out for their own interests. In revenue generating roles, rewards are usually based on the amount of revenue generated. Commission structures are derived from sales-based performance. Targets are often set monthly or quarterly. Let’s look at this from a manages perspective:
A branch manager is responsible for $1 million in revenues every month, and there is 10 days to go, with a further $200,000 needed to hit target. A long-term customer calls them. They need a large order, worth $150,000. But they say a competitor is happy to sell the same order for $140,000. The manager, naturally, wants to retain their business and get closer to hitting target.
He does a deal for $135,000.
Discounting is one of the main reasons that companies generate less revenue and therefore profits than they should.
Beyond discretionary discounting, price banding models that many businesses use are often inaccurate. Banding makes a series of often simplistic and incorrect assumptions; such as assuming buyers in one geographic region have more or less to spend than those in another. Outdated and weak banding strategies can be combined with a number of off-invoice erosion factors, such as discounts for early payment, rebates, accounts receivable invoice offsets and other reductions to further reduce margins.
Every day, when a cost-plus model is used and front-line staff have pricing discretion (based on last mile transactions in a B2B sales environment), businesses are leaving money on the table. Margins eroded, and consequently, profits are lower.
Is there a solution?
Yes, thankfully there is. Price optimization tools and training exist and it’s a fast growing market. More companies than ever are adopting these solutions, such as Bubo AI, which is the only customer-value based price recommendation solution that uses machine learning to predict what a customer is really willing to pay.
As the Bubo.AI founder and CEO, Alan Timothy, says: “Customers are rarely as price sensitive as many sellers think, or let themselves assume when deploying banding, ad hoc discounts, and other approaches to pricing.”
Alan explains further: “With Bubo.AI, companies can use this pricing solution to solve one of their most serious challenges: Generate more revenue per customer, per transaction, across thousands of product ranges, whilst increasing margins without losing market share.”
Isn’t it time you stopped leaving pricing to gut instinct, competitors and assumed sensitivities?