Revenue Optimization & Pricing Insights

According to several studies in B2B (whose customers may sell to consumers in the end) the difference between the list price and pocket price, after all discounts and rebates, is between 20% and 50%. In other words, it is "industry practice" to give discounts and rebates worth 20 to 50% of the gross revenue. While it sounds high, it might not in itself be a problem, as it is typically the net net price that is used as KPI, both to drive profits but also to push price increases through on. In simple terms: it is not in itself a problem if the gross price is 200 and the pocket price is 100, as it is the 100 that both buyer and seller consider and use in their business endavours. But what IS a problem is when all of those discounts and rebates are provided without getting anything, or little, in return. There is where a Business Driver framework can be useful as well as highly profitable.

A Business Driver framework means having an (internal) framework for how to classify and measure discounts according to what they give in return. It is simplest to explain by illustrating it (thanks to our partners at Stratinis for this illustration from their price management software):

In the above example, each discount given from the seller to the customer is classified according to its purpose, in addition to whatever general P&L classification that discounts sits under in the P&L/chart of accounts. In other words, ERP and the finance department may have their own P&L classification, but for the sales/marketing/pricing team, the business driver classification is an additional way of looking at all customer monies.

Steps in setting up a business driver hierarchy involve:

1. Creating the overall classification framework. This can typically be done in 2-4 weeks depending on the complexity of the business and the current sales.
2. Classifying all discounts according to the framework. Using Pricing Management Software it can be automated, otherwise you risk it becoming a burden on the sales team, and thus meet a lot of resitance
3. Evaluate what type of business drivers you spend on. Make actions on what to change
4. Enhance the framework by adding pre-contract obligations on your sales force to make a good business case for the discounts they intend to give during customer negotiations..

Steps 1-3 can be done without burdening the sales force too much. But the mere presence of such a framework and internal communication about, will start changing certain discount behaviours. In a previous case we saw how a company reduced their "Other" category discounts from 30% to 20% over 12 months, simply by making the negotiation teams aware of getting something in return. Steps 1-3 can it itself improve discounts by 2-4% of net sales in larger, complex businesses.

Implementation of Step 4 can also improve net sales but is a much longer process with heavy involvement of the sales department. Therefore many companies choose to pick the much more accessible fruits in steps 1-3 first.

Get in touch with RevBeam and learn about how we have helped companies set up Business Driver frameworks and improved profitability as a result.

Stratinis is tomorrow organizing a very exciting webinar about dynamic pricing models: 

https://info.stratinis.com/webinar-dynamic-pricing-and-machine-learning

Sign up and learn some interesting things about using dynamic pricing to increase profitability.

Great and promising article series over at Stratinis: https://blog.stratinis.com/revenue-control-improve-profits-in-complex-businesses

At RevBeam we can help you establish the process for revenue control, including defining KPIs, price waterfalls and approval processes to get maximum benefits from a revenue control system.

If you are looking to apply dynamic pricing models to your business, to benefit from the continuous updates and adjustments to market factors, then RevBeam can help. Models can take various forms and include a number of parameters.

Here is an example from Stratinis, using their price optimization software:

The typical dynamic pricing model includes:

• Input parameters, relating to customers, products, demand, supply, competition, etc
• The actual engine itself
• Parameters through which the engine is adjusted
• Output parameters, typically price, but e.g. also permissable discounting levels for the staff
• Self-learning / model adjustment: based on whether the outputted price delivers a sale or not, the model can be taught to adjust itself.

Such dynamic pricing models bring a lot of benefits, including ability to quickly adapt to changes in market conditions (or sometimes to ignore them where humans might have fallen for a panick reaction), optimization of prices and avoidance of human errors.

At RevBeam we can help you build a dynamic pricing model for your company. It is typically done over a 3 week period, where we analyze existing data and factors impacting your pricing or competitive pricing. This combined with two workshops with your team then in the end of the 3 weeks then yields a complete model, ready to use.

At RevBeam we are proud partners of Stratinis and PriceBeam. Through these partnerships we can deliver solutions to all kinds of pricing needs:

• Pricing challenges requiring consulting services: RevBeam. Read more about our pricing expertise on our website.
• Pricing challenges requiring tools, e.g. for optimization or control: Stratinis Pricing Suite is a world-class tool having helped many companies in consumer goods, chemicals, ecommerce, logistics, electronics and more.
• Pricing challenges benefitting from research: PriceBeam offers fantastic willingness-to-pay research that is done both speedily in 1-2 weeks but also cost a fraction of what traditional market research companies have charged. All possible through some innovative cloud-based software. Read more about the different PriceBeam options.