To recapture profits squeezed down primarily by inauspicious pricing strategies, firms need to quantify the loss. In measuring the magnitude of pricing inefficiencies, there is one thing that matters most: the ability to regularly benchmark the company’s performance against its peer organizations.
At Copperberg’s Pricing Excellence US Summit, Todd Pate, Business Solutions Consultant at Zilliant, evidenced the importance of benchmarking for regaining profit margin loss. The ideas presented during his talk on The Hidden Costs of Ineffective and Inefficient Pricing were strongly supported by findings from Zilliant’s 2020 Global B2B Benchmark Report. Committed to providing real value to industry players, the report analyzed data from 6+ million customers to impart the deficient pricing practices unwittingly normalized by firms — the direst being inconsistent pricing, misaligned market pricing, and inefficient pricing processes.
With data gathered from Todd Pate’s presentation, this article will walk industry players through the inadequate pricing practices that directly impact their firm’s financial gains and some of the most efficient techniques for identifying substandard procedures.
The Threat of Inconsistent Pricing
The practice of inconsistent pricing is perilously conducted by organizations that deliberately over or underprice their offerings based on the account they are selling to. A cogent example of this pricing mishap is provided by Todd Pate during his presentation:
“I have the same — or similar — customer, buying the same — or similar — products, with the same — or similar — types of transaction characteristics, like order size or distance of shipping. I have that transaction in January, and I have the same transaction in May, and yet I offer two different price points to service those transactions.”
Mispricing is widespread, but what many have yet to realize is that the lack of pricing consistency may permanently impair organizational reputation. To avoid the worst-case scenario, companies need a mechanism of control. That mechanism is often the ability to make early projections on the inoperable pricing strategy that precariously guides the firm’s efforts. For that reason, Todd Pate expertly lays out a series of questions for firms to ask themselves as a formula for determining whether they face the risk of inconsistent pricing practices or not:
- Are the company’s sales representatives free to discount in order to win the deal? Can they create special price exceptions for customers?
- Does the company have clearly defined rules for acceptable pricing and an enforceable approval process?
- Do professionals often observe that small customers get large discounts? And are premium products failing to capture their full value in-market?
Once identified, correcting the issue of inconsistent pricing begins with working out a plan where pricing dispersion presides over volatility. At the same time, “rational prices are necessary for trust,” Todd Pate points out, “[and] constrained optimization is the only way to ensure that all rules are enforced.”
The Problem of Misaligned Market Pricing Is Prevalent Among Industry Leaders
As far as misaligned market pricing is concerned, its use—as emphasized in The Hidden Costs of Ineffective and Inefficient Pricing session — includes “quotes that are systematically rounded (out of market context!) and transacted below minimum margin thresholds, [and] pricing that does not quickly and accurately account for cost changes.”
When the firm’s strategy is characterized by a poor response to cost changes, choosing the most favorable pricing technique is distinctly complicated. Try asking different people in an organization: What is the right price for a given product? In all probability, this question may spur a grooving incident — and here is a good case in point of how this works:
“The first person I talk to may say 25% margin. […] I ask the second participant, [who may be] someone on the Pricing team thinking in terms of a dollar amount of $1400. The third person I talk to may be in Marketing and [prefers] a list price — $1499.99. Then, the fourth person may be in Finance and thinking in terms of a 30% discount. […] They are all different metrics — some are percentages, some are dollar amounts — but each one of these assumptions, to the extent that you have multiple people who follow these rules of thumb and behaviors, create a grooving phenomenon.”
If this grooving effect is adeptly removed, industry leaders can get more out of pricing and drive better margins for their businesses, according to Todd Pate.
Still, a question remains: How can firms identify the extent of misalignment to correctly price products? A firm can expose a critical vulnerability in its pricing strategy by answering these high-level questions:
- Does the company rely on robust analytical models that incorporate transaction data and/or other relevant market data to calculate price points?
- Are the attempts to escalate prices typically unsuccessful when costs increase? And do they fail to recapture the desired margin?
- Is there a disproportionate number of transactions that fall on repeated prices, discounts, or margins?
The Lows Take in the Struggle of Inefficient Pricing Processes
Organizations have long since planned to restructure their operations with technology-led systems that optimize sales, but many ended up pushing back against such projects. Those who have yet to upgrade from manual to automated processes need to address a sobering truth: as firms continue using manually-operated practices, the time to update prices when costs change is far too long and costly, Todd Pate warns.
There is a way to come across evidence that indicates the inefficiency of pricing processes in an organization — the more a firm understands where it stands in relation to its peers, the more it figures out where it is lacking and how to course-correct its performance. This benchmarking technique involves a process of self-assessment, with professionals repeatedly questioning:
- When costs change, does it take the company too long to update prices?
- Does the Pricing team rely heavily on manual processes and spreadsheet tools?
- Is the company’s quote response time far longer than customers expect?
Any manual pricing method can present a setback for the modern-day organization. Therefore, removing the risks of time-intensive manual practices is growingly essential for companies to be financially successful.
A Method for Stimulating High-Yielding Pricing Practices
The idea of benchmarking indicates a turning point in the deep-rooted struggles of inefficient pricing.
Developing a discipline around the use of benchmarking is indispensable to identify unfavorable pricing practices, measure the loss, and course-correct the firm’s performance. Perhaps even more importantly, this benchmarking exercise is becoming critical for firms not willing to fall back on old and patently precipitous pricing habits.
View the on-demand recording of Todd Pate’s presentation on The Hidden Costs of Ineffective and Inefficient Pricing and stay informed on how to regain profit margins. You will come to grips with the importance of comparing your company’s performance against others in the industry by using Zilliant’s interactive Global B2B Benchmark Report.