4 STEPS TO STOP
OUT-OF-CONTROL DISCOUNTING
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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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