Revenue Optimization & Pricing Insights

Our partners at PriceBeam wrote an interesting article about how to use willingness-to-pay research internationally:

https://blog.pricebeam.com/6-ways-to-improve-international-market-launches-through-pricing

At RevBeam we can help with the strategy:

• Creating a framwork for monitoring and comparing international prices
• How to set up an internal language for talking about and comparing price levels, discount types, terms & conditions
• How to adjust to local willingness-to-pay but still avoid parallel trade
• Coordinating pricing on international launches
• Managing prices to international key acocunts, who buy from you in multiple markets
• Sharing best practices in terms of markets
• and much more.

Get in touch and see how we can help you.

Dynamic Pricing models are used to dynamically change prices, either at relatively high frequency, or on-demand, i.e. each time a customer queries about the price for a given product or service. The parameters in dynamic pricing can be many, including:

• costs
• capacity
• stock
• customer's willingness-to-pay
• customer's previous purchase patterns
• margin expectations
• competitor prices
• seasonality
• customer behaviour on e.g. a website (are they first time visitors or have they queried the price before)
• price elasticity
• and much, much more.

Price elasticity of demand has been in the economic text books for many decades now and while the classical demand curves with their price elasticity assumptions have rightfully been criticised for being too far away from reality, there is still room for the use of price elasticity in dynamic pricing models, in particular in industries and businesses with high transaction volumes.

Having statistically significant numbers for price elasticity allows for modelling what happens when price changes in the model. Similarly, other elasticities for any of the other parameters, such as competitor price changes, can be used to make dynamic price changes when the model predicts it is necessary. Or to stay put despite competitive price changes, because the model "knows" that the volumes sold for this specific product is not impacted by competitors' moves. 

The operative phrase above is "statistically significant". In other words, if you have a lot of historical transactions to base the elasticity parameters on in the model, then it is often a good thing to use price elasticity in dynamic pricing. If on the other hand you have only few data points, then modelling based on historical data is not useful. 

Pricing is always an important profit driver but even more so when determining the success of a merger or acquisition. If you get prices, discounting, terms & conditions wrong, then most likely you are losing millions if not billions. If on the other hand you reap the pricing synergies, considerable (and often additional) profits are to be made in M&A from price optimization and execution.

A well-executed pricing workstream in an acquisition includes the following areas:

1. Price Planning: get prices, discount structures, terms & conditions well-planned as early as possible. In some industries the prices can only be changed with long notices or annually, thus you may lose an opportunity if not planned in advance.
2. Pricing Strategy: set a strategy for how pricing, discounting, terms & conditions should work for the combined business, post-acquisition. Plan for how to reap pricing synergies (with possible legal constraints).
3. Terms & conditions: the new combined business will in all likelihood need to offer one single set of terms & conditions, instead of the two separate ones before the acquisition. The devil is here in the details, as some customers may benefit while other will suffer from this harmonization, and thus you need to be able to handle both situations. 
4. Training of sales teams: post-acquisition it is likely that your sales teams will be selling the combined portfolio of products or services. So there will be a lot of unfamiliar offerings to suddenly promote now. In some cases they might even have now to say nice things about something which they used to deride as a competitor in the past. Therefore, it is key to train the sales teams in value argumentation for the combined portfolio. Equally, they must be trained in how to sell the merger itself: how to prevent customers from exploiting harmonization of terms or reducing their engagement with the New Company, in order to get better prices/terms post merger.
5. Internal Communication: there are many stakeholders in M&A, and across various workstreams it is of course paramount to communicate well. This certainly also applies to pricing, where people who have influence over pricing (e.g. Marketing & Sales) in NewCo must be on board with the strategy and the execution plan. Sales often being the spearhead with the customers in M&A must in particular be well-equipped to defend the merged product portfolio, its prices, terms & conditions.
6. External Communication: At the end of the day, the success of pricing in an acquisition phase rides with the customers' acceptance of new prices, discount structures, rebate systems, terms & conditions. Therefore, it is key to plan an execute detailed communication to each customer, "sell" the merger and make sure to sell the combined portfolio. There is no longer "us and them", there is only "we". Communication needs to reflect that.
7. Roll-out management of everything to do with pricing: communication with each key account, monitoring of performance, negotiation support, etc. While planning and strategy are important, the actual execution is equally important for the pricing success. In industries such as FMCG / CPG, where often a handful of key accounts make up more than half of the market, it is necessary to make detailed account by account action plans for how convince them of the new prices, discounts and rebates.

Get in touch with us if you want to learn more or discuss your specific needs about pricing in M&A.

Revenue Control systems (see e.g. https://blog.stratinis.com/revenue-control-continuous-incremental-profit-improvements) are very efficient ways of improving pocket prices and thus profitability in most B2B industries. But as with most things in business, it is important to not only introduce a new system but also getting the people on board. When it comes to revenue control systems, the sales people are often the most important ones to get on board.

Some tips to remember when implementing revenue control with the sales team:

• Demonstrate how the system is easy to use and often gives them better information about their customers and deals
• Ensure that the process doesn't take longer than today, nor takes so much time to get approval that deals are lost. Ideally, use the revenue control system to speed things up so sales people feel they can close faster.
• Equip the sales team with value arguments and negotiation techniques, so they feel comfortable presenting prices and increases to the customers.
• While some parts of the revenue control system might feel like a black box, generally communicate as much as possible internally (externally is a different matter)
• Repeat internally that revenue control helps improve profitability and is for the good of the company
• Train, train, train in value selling and value argumentation
• Differentiate approval workflows so only those prices that really need it (i.e. they are low) go through elaborate approval. Good prices (read: high) should be auto-approved with a minimum impact on time and effort.

We have helped customers in a variety of industries implement revenue control systems and generally see payback in less than 3 months. Get in touch and learn how we can help your company.

Interesting articles about E-Commerce today:

• PriceBeam: https://blog.pricebeam.com/ecommerce-pricing-the-ultimate-guide-to-winning-the-pricing-game 
• Stratinis: https://blog.stratinis.com/pricing-software-in-ecommerce 

At RevBeam we help E-Commerce companies set up their pricing process and data flows, so that they can optimize prices continously while minimizing manual work. What we have helped companies with in the past:

• Price Optimization models
• Continuous dynamic pricing models to update prices frequently
• KPI design and analytics
• Data design 
• Software implementation
• Organizational considerations
• and much more...

Get in touch and we would be happy to hold a meeting about how we can add value to your E-Commerce business.

Whether you are creating, growing or just managing a pricing department, there are several things to consider to make it successful. Below some items from our own experiences when working with pricing teams and observing which ones seem to do better.

1. Executive support: with support and understanding from top management that pricing is not only important but also a strategic differentiator, many pricing teams are working in vain. You need sponsorship and support from the C-suite.
2. People: as with most things in business, good people make a difference. So recruiting the right people is naturally key. But also important in larger organizations is that people see the pricing team as a good career step: in other words, where do people go after the pricing team? If working in pricing is seen as a good step to learn sales/marketing/finance with good career prospects then so much the better.
3. Structure: One of the key things when designing the pricing department is where you put responsibilities:
   • Global: responsibilities for prices are places with a global team who need to be asked whenever local prices need changing.
   • Local: most pricing responsibility is with the local teams
   • Hybrid: some pricing responsibilities are global, such as setting global pricing guidelines/floor prices/target prices, as well as making pricing trainings and value argumentation. Other responsibilities, typically around discounting and rebate agreements are placed locally, though often restrictions from the global pricing guidelines.
4. Training: closely related to the people aspect: make sure to train the team on techniques, pricing strategy etc, but very importantly also how to communicate and train other people (their colleagues in various departments) in how to do value pricing.
5. Organizational empowerment and influence: Without the power and organizational ability to change or approve pricing matters impacting other departments, the pricing team very often just becomes a business intelligence department, and while analytics are important, it is not what moves the profit needle when it comes to pricing. Succesful pricing organizations are consulted or even have veto powers over some pricing KPIs (so they become needed by Sales & Marketing) and are part of setting overall revenue and business strategy, such as what revenue streams to pursue, what kind of pricing position to take, how to fix brand health issues etc.
6. Tools: the most successful teams have a plethora of tools at their disposal from pricing software to collaboration tools, analytical tools, training tools and more.

 At RevBeam we help companies build and improve their pricing and one aspect is how the pricing teams are structured and developed. Contact usto learn more.

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.

"Floor Price" refers to the lowest acceptable price a sales person can go to. It can relate to different elements of the price waterfall, from the Pocket Price to adjusted pocket prices, to net invoice price or a multitude of other elements from the price waterfall. The floor price can visually be illustrated also with its counterpart, the maximum price, in a pricing corridor:

While the duality of a minimum floor price and a maximum price can be useful in certain international/channel scenarios, the most important is the Floor Price, as this helps secure minimum profitability. 

So how do you establish what the right floor price should be? Different approaches include:

• The current, average pocket price plus some sort of nice-to-have increase in this budget year. This approach is typically used when Floor Prices are used to drive financial performance of the overall company.
• A target price based on estimates or actual research about the customer's willingness-to-pay.
• A specific price for one or more customers/channels to avoid commercial problems when those customers compare pocket prices, either between channels, countries or other comparison bases.
• Costs plus an acceptable target margin: typically called "cost plus pricing".

While the purpose of Floor Prices is to drive net prices higher, by avoiding profit leakage below the floor, a world-class Floor Price system should have some variation to take into account channels and countries (it is implicitly understood that floor prices of course vary by product), so that differences in competitive levels, market attractiveness or other strategic reasons can be followed.

At RevBeam we have implemented many floor price systems for our clients and we would be pleased to help you with yours. Contact us for discussing your needs.

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.