It's an unfortunate fact of life that almost every business will be leaking profits through their pricing execution. Of course, there are small leaks and then there are the floods – but in most cases management is unaware of these leaks because they lack the awareness and visibility to spot where the price leakage occurs.
According to McKinsey & Company, a one percent increase in average discount results in an average decrease of 8.7 percent in operating profit. And, in a world where profitable revenue is the goal, helping your B2B sales team capture that one percent back is critical to your company’s success.
The places/sources of these leaks exist in many areas, including under-optimised prices, discounting, unrealised shipping charges and insufficient recovery of handling costs and giveaways. However, it's possible to identify and stem the leakage sources through six steps that are relatively easy to execute – it will help if you can access historical pricing data from your invoices. These are just simple starting points to enable you to capture incremental pricing revenue that will hopefully lead on to more sophisticated analysis and increased profit in the future.
Step 1
Take a careful look at negative-margin customer transactions. While most manufacturers and distributors believe that they are up-to-speed on this issue, many are surprised to see how much business is being shipped at negative margins. Basically you have two choices here – the first is to "sack" the customer and the second is to raise the price to an acceptable level. Either of these choices should stop the leaks.
Step 2
Extend your margin analysis to low-margin transactions. Determine the margin floor – that is, the minimum margin you are willing to accept. Identify all transactions that lie below this minimum, and adjust them to an acceptable level. Keep in mind that the margin floor is not a target, rather, it is your minimum threshold.
Step 3
Typically, salespeople give away consulting, reference calls, demonstrations, pilots, site visits without asking for anything in exchange. These are very expensive giveaways with nothing gained in return. Instead, you should develop specific agreements that ask for tangible trades where you get something you need in the sales process in exchange for these customer requests. As an example, get an agreement for timing, volume or deal size in exchange for a pilot request.
Step 4
Your smaller accounts are often a major source of margin leakage. Are you giving away too much to the small fish? Many of these accounts get lower/discount prices that should be reserved only for your larger, more profitable customers. Analyze which of these accounts are getting prices considerably lower than their peers. Look out for price levels normally reserved for much larger accounts. Often these smaller accounts tend to go unnoticed by management. Raising the prices on these accounts is low-risk, easy to execute and should quickly show positive results.
Step 5
Determine whether you are getting the most from high-value products. While basic products may be the core of your business and require careful pricing attention, higher-value products that are customized or have a niche focus may be ripe for premium prices. Segment your product families into categories from basic to high-value, and look closely at the respective pricing. Scale your price levels according to value, and ensure that your marketing and sales teams are effectively communicating that value.
Step 6
Sales professionals (often encouraged by management) should not be too eager or quick to offer price concessions. If they are responding to customer demands for discounts merely in order to keep the sales process afloat then they are giving away the value of the product or service and eating into your margins. If they stand fast customers will respect their determination and credibility.
Conclusion
Ultimately, margin leaks throughout the sale process results in unprofitable pricing. The remedy to help protect your margins is taking more counterintuitive approaches to both selling and sales management. Pay attention to the smaller accounts, don't be quick to offer discounts or too many "freebies" and promote value. From the first sales call to the signing of the final contract there are many chances to stem the flow of margin leaks. Stopping these leaks can have a dramatic impact on your bottom line – and the good news is that getting started is relatively easy.
Sources
- http://www.trainingindustry.com/sales-training/articles/plugging-value-leaks-in-b2b-sales-processes.aspx
- Pricing with Confidence:10 ways to stop leaving money on the table, Reed K. Holden and Mark Burton, 2014
- Pricing Strategy:tactics and strategies for pricing with confidence, Warren D. Hamilton 2014
- http://www.sleepingtiger.co.uk/the-leaking-margin/
- http://www.pricingbrew.com/journal/finding-margin-leaks-in-sales-processes/
- http://www.the-chiefexecutive.com/features/feature84/
- https://iterativepath.wordpress.com/tag/price-leakage/
- https://iterativepath.wordpress.com/2009/06/07/what-is-price-realization/
- http://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/the-power-of-pricing