4 Steps to Stopping Out-of-Control Discounting

Is highly variable discounting undermining your market share and margin? One of the major contributors to excessive discounting is not knowing what prices to offer to your customers. Read our latest e-Book, 4 Steps to Stop Out-Of-Control Discounting.

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4 STEPS TO STOP OUT-OF-CONTROL DISCOUNTING E-book Realize Your Potential 4 STEPS TO STOP OUT-OF-CONTROL DISCOUNTING 1 Contents The Costs Of Inefficient Pricing Strategy: Hewlett-Packard ..................... 2 What Causes Out-Of-Control Discounting? ............................................. 4 Additional Tips For Implementing Pricing Technology ............................ 5 Taking Control Of Your Pricing Strategy ................................................... 6 Change Management For Pricing Optimization Initiatives ...................... 9 Keys To A Successful Implementation ..................................................... 10 Conclusion ................................................................................................ 11 4 STEPS TO STOP OUT-OF-CONTROL DISCOUNTING 2 THE COSTS OF INEFFICIENT PRICING STRATEGY: HEWLETT-PACKARD Going into 2013, Hewlett-Packard was reporting net revenues of $120.4 billion for the previous fiscal year. While that sounds like a lot of money, it represented a serious setback for the world’s largest technology company. Over 2012, revenues had declined by five percent compared to the previous year (four percent when adjusted for the effects of currency). And fourth-quarter revenues were down seven percent from the prior-year period. HP was losing business and watching its margins erode — partly as a result of a pricing system that was slow and rigid. The first problem was loss of sales, due to HP’s inefficient pricing process. The company was losing business because of how long it took to provide a quote and the multiple iterations required to close a deal as each round of negotiation dragged on. Second, HP’s margins were eroding due to unscientific, gut-level pricing. It didn’t have an effective system for gathering intelligence from past pricing decisions and applying the learnings to the next one. As a result, even relatively small deals would require approval for discount exceptions, further slowing the quote approval process. The third problem was the cost of this labor-intensive pricing approach. Sales reps didn’t have enough authority to make pricing decisions in the negotiation process, which meant over 70 percent of deals required an expensive “high- touch” process before being approved. Their deal desk spent more time administering quotes than analyzing them to ensure the right product and price were going out the door. Clearly, HP’s pricing strategy wasn’t delivering, and net revenue declined even more sharply in 2013 to $112.3 billion, down seven percent from the previous year. SUMMARY A slow and rigid pricing system led to lost business and eroding margins for Hewlett-Packard going into 2013. HP has started to turn the tide by introducing a new, tiered pricing model, supported by pricing optimization technology. 4 STEPS TO STOP OUT-OF-CONTROL DISCOUNTING 3 But HP has started to turn the tide by introducing a new, tiered pricing model, supported by pricing optimization technology. Under the new pricing system: • The largest deals receive the highest discounts, after intensive market analysis. This special pricing for large opportunities is approved by a bid desk, using scientific pricing optimization and analytics tools. • Medium-sized deals receive medium-sized discounts, but require less scrutiny than the largest deals. Sales reps use pricing technology to provide quotes based on specific products and customer segments, with fast approvals based on pricing rules. • The smallest deals receive the smallest discounts, but require no escalation. For these opportunities, sales reps leverage pre-approved discounts for specific products, moving deals through quickly at competitive prices without having to wait for additional approvals. The results, so far, have been impressive. HP has experienced a more-than 25 percent improvement in quote turnaround time, and gross margins have increased by more than 200 basis points. Win-rates have ticked up slightly, and while net revenue remained essentially flat for the first half of 2014, HP has enjoyed a modest increase for the third quarter. The results, so far, have been impressive. 4 STEPS TO STOP OUT-OF-CONTROL DISCOUNTING 4 WHAT CAUSES OUT-OF-CONTROL DISCOUNTING? Most companies take a one-size-fits-all approach to pricing: Set a single price for everyone and plan to discount that price based on sales needs. After researching the market data, a company decides on what a product’s price should be — let’s say, $1,000 — and publishes the price. The problem with this approach is that when you try to set a price for everyone, you end up with a price that works for no one. While the one-size-fits-all price may be $1,000, in reality, you’re selling it to one customer segment for $900, another segment for $750 and another for $620. When you’re dealing with this amount of variability, not to mention individual sale sensitivity, the end result is out-of-control, highly variable discounting. In addition, this pricing approach means that almost every deal needs some level of approval before it goes through. The proliferation of exception requests becomes a huge burden to your pricing department, resulting in long wait times for quote approval. That long wait further erodes profit margins. When salespeople realize that it’s going to take a week to get approval for a discount, they tend to ask for larger discounts than necessary, in order to pre-approve some room to negotiate further with the customer. Otherwise, they know they’ll have to wait another week for a second approval if the price is still too high to close the deal. The end result of one-size-fits-all pricing is a constant cat-and-mouse game between the sales and pricing departments over the list price and the go-to- market price. With long wait times for quote approval, companies risk losing business to more agile competitors, and the undisciplined discounting erodes pricing and profit margins. SUMMARY A one-size-fits-all pricing approach leads to out- of-control, highly variable discounting. Plus, almost every deal requires some level of approval, resulting in long wait times. Over time, undisciplined discounting erodes pricing and profit margins. 4 STEPS TO STOP OUT-OF-CONTROL DISCOUNTING 5 ADDITIONAL TIPS FOR IMPLEMENTING PRICING TECHNOLOGY While pricing technology is a great way to support and automate your process, it’s not a silver bullet. If your underlying process is inefficient, you won’t get the full benefit of pricing optimization. Here are three tips for an effective implementation of pricing technology: 1 Use pricing technology to eliminate steps: Instead of giving salespeople a new tool for generating quotes, the best practice is to embed pricing optimization within your CRM system. Since salespeople are already entering data in the CRM system, this integration reduces duplicate efforts. 2 Start small and build momentum: The complexity and cost of applying pricing optimization across an entire business could overwhelm your team. Instead, focus on a couple of geographies or product lines, and then study the results. Often, these initial projects provide insights that support larger pricing optimization efforts. 3 Don’t confuse pricing optimization with getting the “perfect” price: Pricing technology supports effective negotiation, but doesn’t replace it. Trying to always get the perfect price for a deal slows down your sales process. Instead, focus on producing an acceptable price range, then give salespeople flexibility to close the deal at a fair, data-driven price. While pricing technology alone won’t solve every problem, many companies find the planning that goes into implementing a solution is also a great opportunity to reexamine their sales processes. 4 STEPS TO STOP OUT-OF-CONTROL DISCOUNTING 6 TAKING CONTROL OF YOUR PRICING STRATEGY Companies like Hewlett-Packard are reducing discounting by strategically setting prices based on what’s actually going to win the business in every segment of their market. HERE ARE FOUR STEPS TO TAKE CONTROL OF YOUR COMPANY’S PRICING, ALONG WITH TIPS ON HOW TO IMPLEMENT THEM USING PRICING OPTIMIZATION TECHNOLOGY: 1 Focus pricing analysis efforts on your most important deals: If your current pricing system results in more than 70 percent of quotes requiring exception approval by your pricing department, a lot of small- and medium-sized deals are taking bandwidth away from more important deals. Your largest deals often have special factors that need to be taken into account and require additional analysis — and your biggest customers are going to expect a quicker turnaround time in terms of quote approval. By moving smaller deals out of your pricing department’s queue, you’re able to speed up the process and apply in-depth analysis to what matters most. How pricing technology helps: Implementing pricing optimization technology provides deep, rich analysis on priority deals, without getting tied up in emailing spreadsheets back and forth. When you’re trying to put together deals with multiple cost structures or contract levels, pricing technology reduces the complexity and streamlines the sales process. 2 Empower your sales team to make decisions on small and medium deals: The best way to free up your pricing department to focus on the most important deals is to empower your sales team to move quickly through small- and medium-sized deals. You want to give your sales team enough leeway to negotiate 80 to 90 percent of those deals without having to get approval from anyone other than the sales leader. Think of it as creating different pricing buckets for different market segments and deal sizes. A bucket for deals in the $10,000 to $15,000 range, for instance, would have a simplified approval process with a predefined SUMMARY One key to taking control of your pricing strategy is focusing your pricing analysis efforts on the most important deals. Pricing optimization technology provides valuable analysis to help you identify priority deals. 4 STEPS TO STOP OUT-OF-CONTROL DISCOUNTING 7 negotiating range for your sales team. This way, your sales team is able to negotiate and close most deals quickly, without having to get additional quote approval. How pricing technology helps: Once your organization moves from one- size-fits-all pricing to segmenting your customers by geography, industry or deal size, the complexity becomes overwhelming if you’re relying on spreadsheets and price lists. Pricing optimization software allows you to automate much of the process by analyzing different market segments and creating rules within the system that guide and empower your sales team. 3 Look for opportunities to speed up your sales cycle: Imagine a customer comes to you needing a product with certain specifications within a week. The customer just wants a quote that’s turned around quickly and easy to understand, but the pricing often takes more time to negotiate internally than externally. When it takes days or weeks to get a quote, that’s very frustrating for the customer. If salespeople are not equipped with the tools they need to be responsive to their customers, your sales cycle slows down, and that often leads to lost business opportunities. Think about it this way: If it’s hard for prospects to do business with your team, many won’t even engage with you. If they know it’s going to take you a week or two to get back to them with a quote, they won’t even ask. On the other hand, if your organization has a reputation for quick turnarounds, you’ll end up winning more business. The vendor that responds the quickest with a quote usually wins the sale in the next cycle. When you streamline the pricing approval process, it speeds up the sales cycle, allowing your team to win more and bigger deals. And because they’re spending less time negotiating prices internally, sales reps have more time to spend with the customer, addressing their needs and negotiating larger deals. The vendor that responds the quickest with a quote usually wins the sale in the next cycle. 4 STEPS TO STOP OUT-OF-CONTROL DISCOUNTING 8 How pricing technology helps: It’s easy for companies to get stuck in analysis paralysis. If it takes you two weeks to pull data together and provide a quote, the market may have changed in that time. Pricing optimization software speeds up decision-making by ensuring a consistent process for analyzing market data. When you’ve determined ahead of time what market information is most relevant for each pricing bucket, the system is able to quickly compile the data needed to make decisions and close deals. 4 Embed pricing seamlessly into the overall quoting experience: When a salesperson prices a quote, their pricing sometimes has no relevance to their customer. The prices coming out of their quoting system are unrealistic or artificially inflated, such as a list price or band price, and there’s no established discount policy. If you integrate pricing guidance into your CPQ system, however, it improves the experience for everyone. Salespeople are able to trust the quoting tool to give them a price close to what the customer is willing to pay, without having to apply a huge discount. This streamlines negotiations, which is easier for the salesperson and the customer. How pricing technology helps: Most quoting tools today focus on automating the quoting process only rather than making pricing easier. But without the right price you run into multiple issues. The salesperson often has to choose between going with their gut instinct or spending time searching through catalogs and consulting with other people to find the right pricing. Pricing optimization allows you to segment your customer base, establish the right pricing range and deliver that pricing through the quoting tool. The customer sees the price, but doesn’t see all the analytics behind the scenes. That’s the biggest value of integrating pricing optimization technology with quoting. Pricing optimization allows you to segment your customer base, establish the right pricing range and deliver that pricing through the quoting tool. 4 STEPS TO STOP OUT-OF-CONTROL DISCOUNTING 9 CHANGE MANAGEMENT FOR PRICING OPTIMIZATION INITIATIVES Implementing a new pricing strategy and software is a major catalyst for growth, but it also requires significant changes within your organization — and that’s where many implementations run into obstacles. In terms of change management, the main challenge is to engage the sales team and other employees who will be most affected by the new pricing technology. Most barriers to adopting new pricing solutions aren’t due to the technology but to poor management of the learning and change process. This is where change management comes in: It helps to accelerate the adoption process, reduce resistance to change and facilitate organizational transformation. Here are some key tactics to use when introducing a new pricing strategy: • Start planning for change early: A carefully planned change management program stacks the odds in your favor, helping to ensure a successful implementation. • Communicate often through multiple channels: Everything starts with communicating the goals you want to achieve with pricing optimization. An email, for example, is seldom effective on its own. For sales reps, face- to-face communication is preferable. And don’t be afraid to reinforce the message through multiple channels. In successful change management, communication isn’t a “one-and-done” task. • Engage your sales team in participating and contributing to future goals: People support what they help to create. Empower employees from all levels by involving them in the initiative and sharing appropriate responsibilities. • Call on influential individuals to facilitate communication between stakeholders: Effective communication is often misunderstood as a series of formal messages sent by company leaders. In fact, less formal communications from influential employees (regardless of their formal positions) are often equally if not more effective in supporting change. • Implement formal and informal leadership: Visible, active sponsorship of the pricing strategy by executives and informal leaders contributes to more adaptive and resourceful behavior during periods of change. Change management should be considered in any project that is poised to transform your business, such as implementing a new pricing strategy. This is no place to cut corners. 4 STEPS TO STOP OUT-OF-CONTROL DISCOUNTING 10 KEYS TO A SUCCESSFUL IMPLEMENTATION Just because you’re taking steps to replace one-size-fits-all pricing with a dynamic, tiered pricing strategy, don’t expect everything to change overnight. The most successful implementations include periods of transition; to overcome obstacles along the way, you need buy-in and cooperation from both executives and the sales team. Even though you’re using a data-driven decision-making process, most salespeople believe they have an intuitive, gut feeling for what prices should be in the market. It’s important to acknowledge your reps’ experience and present the pricing strategy as a data-driven means of accomplishing the same goals. HERE ARE TWO KEYS TO A SUCCESSFUL IMPLEMENTATION: 1 Aligning with your sales team: As with any change, some initial resistance is common. Reps often use customer stories to show why the new pricing strategy won’t work. Let’s say you determine that a product should cost between $500 and $700 for a specific customer segment. A rep might counter by citing a customer in that segment who won’t pay more than $320. To counter anecdotal evidence, you need fact-based arguments that use pricing analytics to defend your pricing. Armed with market and transaction data that the sales team doesn’t have, you’re able to show that the lowest price for the product is $420 and the high price is $720. 2 Motivating your sales team with pricing technology: Since sales reps often receive commissions or other incentives based on the revenue they produce for the company, they are more likely to support pricing technology when they see it having a positive impact on compensation. By communicating successes throughout the implementation and defending your pricing with facts and data, you build credibility for the new system, motivating reps to adopt a data-driven sales approach. By aligning with your sales team on strategic goals and finding ways to motivate your sales team with pricing technology, you build a solid foundation for moving forward with your new pricing strategy. SUMMARY When implementing pricing technology, some initial resistance is common. That’s why it’s important to have fact- based arguments that use pricing analytics to defend your pricing. 4 STEPS TO STOP OUT-OF-CONTROL DISCOUNTING 11 CONCLUSION If your company is struggling with highly variable discounting as a result of one-size-fits-all pricing, take heart. As Hewlett-Packard’s example shows, even the largest, most sophisticated companies need to rethink pricing strategy and adapt to the realities of today’s competitive marketplace. The key to preserving your market share and profit margin is to move toward a data-driven, scientific pricing strategy, one that focuses on setting prices that win business for each of your customer segments. While pricing optimization technology is invaluable in implementing your strategy, you need to build a strong foundation by following these four steps: 1. Focus pricing analysis efforts on your most important deals 2. Empower your sales team to make decisions on small and medium deals 3. Look for opportunities to speed up your sales cycle 4. Embed pricing seamlessly into the overall quoting experience As HP and other case studies have shown, pricing technology helps to stabilize win rates across all deal sizes by using accurate, targeted pricing to control variability and excessive discounting. Are you ready to learn more about how pricing strategy and data science could help your organization in reducing discounting and driving revenue? Visit the PROS Pricing Effectiveness Blog for expert insights and guidance. Pricing technology helps to stabilize win rates across all deal sizes by using accurate, targeted pricing to control variability and excessive discounting. 4 STEPS TO STOP OUT-OF-CONTROL DISCOUNTING 12 PROS.com Copyright © 2015, PROS Inc. All rights reserved. This document is provided for information purposes only and the contents hereof are subject to change without notice. This document is not warranted to be error -free, nor subject to any other warranties or conditions, whether expressed orally or implied in law, including implied warranties and conditions of merchantability or fitness for a particular purpose. We specifically disclaim any liability with respect to this document and no contractual obligations are formed either directly or indirectly by this document. 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