5 TIPS TO AVOID PRICE & MARGIN EROSION Tip Sheet If intuition, guesswork and emotion currently drive your pricing decisions, it’s time to stop what you’re doing and take a hard look at your pricing strategy. Subjective, inconsistent pricing means you’re probably leaving money on the table today, and undermining your future sales. When faced with customer demands for lower prices and limited understanding of your competition, an organization that lacks a disciplined pricing strategy is an easy pushover. The results? Excessive discounting and attempts at competitive matching that accelerate pricing and margin erosion. Many factors contribute to price erosion, including shorter product lifecycles, budget constraints and increasingly sophisticated buyers. But your lack of pricing discipline shouldn’t be one of those contributing factors. Implementing a sound pricing strategy prepares your company to deliver up-to-date pricing guidance to sales reps wherever they might be at the time of contract negotiations. This combination of strategy and technology sets the stage for a more disciplined, consistent and profitable sales organization. Follow these five pricing strategy tactics to help your sales team minimize price and margin erosion: 1 Segment customers by willingness to pay: Many sales organizations sell product lines with good/ better/best variations in quality and value. When a price-sensitive customer seems unwilling to pay more for the higher-value options, sales reps often feel pressure to offer all three options at similar price points to win the business. This practice creates a significant risk for margin erosion. When sales reps enter negotiations with a good indication of a prospect’s willingness to pay, using customer analytics and segmentation they’re able to improve sales offers and avoid driving down prices on higher-end products. With a highly price-driven customer, for instance, the best sales strategy is to offer only lower-end products, instead of a full range of value propositions. This strategy makes managing prices easier during the negotiations and helps sales organizations control margin erosion for higher-end products. 2 Set accurate floor, target and stretch prices: When most of your deals need to go through your exception process for approval, that constant review might seem like an indication that you have pricing under control. In fact, however, too many price approvals via exception usually indicate the lack of a disciplined pricing strategy. Meanwhile, the sheer volume of exceptions tends to obscure those deals that genuinely require scrutiny and slows the sales process. While reps wait for quote approval, prospects may lose interest or opt for a competitor’s products and services. To reduce these exceptions, take time up front to establish accurate floor, target and stretch prices for each product and customer segment. This practice offers several benefits: reducing discounting, accelerating approval for sales reps, and allowing sales and pricing leaders to employ the exception process more effectively. Building on a consistent, objective pricing framework also tends to produce logical price bands that help slow the rate of price erosion while protecting market share. 5 TIPS TO AVOID PRICE & MARGIN EROSION Tip Sheet About PROS PROS uses Big Data to help its customers sell more effectively, revealing the opportunities most likely to close, offers most likely to sell and prices most likely to win. The company’s software and methodology draw on 27 years of data science experience in more than 30 industries, optimizing sales, pricing, quoting, rebates and revenue management. The new PROS Step cloud solution uses Microsoft Azure’s scalable, enterprise-grade platform, allowing customers to eliminate large capital expenditures and reduce IT support while maintaining privacy and security. For more information, visit www.pros.com and www.step.pros.com. 3 Reduce variance in pricing bands: If your company offers tiered, good/better/best product lines, tight pricing bands help protect prices on the higher-value or premium options. To get these tight bands, you need the ability to determine when a price is truly too low, and then implement floor, target and stretch prices for each tier in the product line. When sales reps then use customer segmentation to selectively offer these options, it reduces variance in price bands, shrinking exposure risk and slowing price erosion. 4 Introduce new products to target value-driven customers: When you combine a strong pricing strategy and customer segmentation, your company also gains the necessary insights to develop new products that target your highest- value prospects. These offers might be brand new, or come from bundling services and other added value with existing products. And when launching brand-new products, the ability to initially target value-driven customers with the highest willingness to pay is a great way to extend the product’s probable lifecycle and slow margin erosion. 5 Use pricing software to adapt to changing market conditions: Pricing software combines data from your sales transaction history with a variety of market intelligence sources. Based on that information, the software offers pricing optimization and the ability to quickly adjust your pricing to reflect changing conditions. It also delivers objective pricing guidance and more accurate forecasts of price changes over the life of a product. Overall, pricing software helps to organize and implement the discipline and automation needed to slow margin erosion. These software solutions offer agility and predictive insights that allow sales and pricing leaders to determine which tactics and strategies are most effective in preserving profits. Without a consistent strategy, out-of-control pricing and rampant discounting are certain to accelerate margin and price erosion at your organization. But if you’re tired of under-valuing your own products and being out-negotiated by sophisticated buyers, you have the ability to reverse this trend. Use these five tips to develop a sound pricing strategy, supported by technology that delivers accurate, timely guidance to sales leaders and reps in the field. Are you ready to make better pricing decisions and leverage customer segmentation? Download our free e-book, 5 Best Practices For Analyzing Pricing Data.