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Article Series on Managing International Pricing – Managing Pricing with International Customers - 2 of 5

This is the second article in our series on international pricing. For the first one, please go here:

Companies selling internationally often have to deal with customers either buying from them in multiple countries or customers exploiting price differences between countries. Consumer goods manufacturers must deal with large retailers, chemical manufacturers with large manufacturers who buy in many geographical locations. Even stationary providers have international buying teams trying to find better deals on office supplies. A recent survey showed that companies invest 7 times more (in people, technology, training) in international procurement than those companies who invest in international sales teams.

The problem for the sellers is clear: they must face buyers who will compare prices for products or services across a number of geographical locations and exploit any differences. This puts pressure on profits as the supplier, if accepting the lower price, is no longer able to reap the profits from the high-priced markets, but only the low-priced markets.

So can’t they just harmonize prices and sell to international customers at one single, harmonized price? Yes and No. In cases with just a single buying and supply point, there can be a single price. However this is not really what this article is about, nor is it about the challenge in many industries. The problem occurs when customers buy in many local markets. Just like price differentiation makes sense in a single-country, national market, based on what customers are willing to pay, international price differentiation also makes sense. In some markets (local) customers are willing to pay more, and might demand premium products or services on top. In other markets, there is heavy competition or no customer loyalty, so prices will be lower. But a differentiated model overall does not always fit with a global customer’s demand for harmonized prices, especially if a harmonized global customer price creates gaps versus differentiated local prices.

It is in many cases possible to maintain differentiated pricing between markets, using a variety of techniques and arguments. While not all will be applicable in all situations or all organizations, here are some ideas:

  • Use the price waterfall structure to harmonize some aspects of prices to global customers while using other building blocks to differentiate net net prices. E.g. have a uniform on-invoice price across markets for the given customer, but differentiate actual net net prices by offering different off-invoice rebates in local markets for customers performing local activities to “earn” those rebates
  • Product differentiation or service-bundling: essentially make the product specific to the local market. In some industries that can work well, whereas in others it is ignored by sophisticated buyers comparing the Base product (i.e. the product without local differentiators)
  • Value-added services: offer services locally that can only be delivered locally and thus only should be considered when pricing locally
  • Arguing that cost bases are different in different markets and so should prices be (even if you are doing value-pricing)
  • Argue that the customer’s resale prices (in e.g. retail or industrial input markets) also vary by country, and therefore it should be accepted/understood that your prices differ.
  • Focus on value rather than costs and price, and build local market cases for how your customer can achieve better sales prices with their customers.
  • Stall or delay harmonization, as time = money. The more you can delay a time where prices get harmonized the longer you can reap the profits of higher prices in some markets.
  • Demand from the customer that you must increase prices in low-priced markets so both sides are equally well off in an harmonization scenario (often, they cannot convince their local people to accept a 20% price hike, even if they on the other hand could get a 20% price reduction in a high-price country)
  • Allow negotiations to happen locally, maybe even removing the option for global negotiations: if there is nobody in the sales organization to negotiate a global price with (in reality or just what is said to the customer), then it is more difficult to force through global pricing.

Stratinis has substantial experience in helping all kinds of companies manage their local and international prices, with numerous projects both as strategic advisors and software implementers. Please get in touch to learn more about how we can help you.


Article Series on Managing International Pricing - Setting Pricing by Country - 1 of 5

More and more companies sell outside their home country. Not only has it become easier and cheaper to reach markets around the world but often a specific customer segment in Germany has more in common with a specific customer in France or UK rather than between two different customer segments in Germany. This means there is a good business case for selling abroad, for both small as well as large corporations.
When pricing internationally, there are some common pitfalls and challenges that most companies face:  
  • How to proactively set prices by country? How do I optimize my prices?
  • If in an established business, prices often differ by country/region. This is not necessarily a bad thing but can lead to problems with customers who might exploit those price differences if they can.
  • How to deal with currencies: should we price in one single currency (the “home” currency e.g. USD) or should we price in local currencies?
  • Who should decide prices: Headquarters or local organizations?
  • How to communicate prices in different markets when the customers and market conditions differ? When value perceptions or competitive situations are different?
While there is obviously not one single answer to fit all corporations, some best practices and ideas do exist. In this article we are looking at how you can proactively set prices by country and manage different market conditions. 
In industries with truly global customers, pricing is about managing that these customers are able to either get their global supply from one point or demand harmonized prices in different countries: Here it is often important to be able to provide or communicate some sort of “harmonized” price to the global customer, as they will compare the prices they pay around the world and strike down any (considerable) differences. But it doesn’t always mean having the same net net price in B2B; differences can still exist. The answer lies in geographical clustering/segmentation as well as using the full price waterfall to differentiate discounts. Often, global customers can be swayed by that there ARE regional differences and thus net net prices are permitted to differ between regions. Also, you can use discounts and rebates to provide different net net prices by only offering specific discounts locally/when the customer does something for you locally.
In markets where local decision making is important: Here the best practice model is often to introduce an internal price corridor, where local organizations are allowed to price a certain product inside a corridor of a maximum price and a minimum price. As long as they stay inside that band, they have (nearly) full freedom, but they need HQ permission to go outside the corridor. And in complex organizations there can be several corridors per product or product category.
In markets where some degree of centralization is needed, but also leaving degree of adaptability to local conditions, a more and more prevalent model is to make a “Price Build-up” model, where various building blocks, including country factors, are combined into a calculated theoretical price per market. Example: CountryPrice = Factor 1 + factor 2 + factor X etc. As the factors vary, the final price varies too. Factors can then cover all kinds of situations but for international pricing typically involve topics such as competitive level, strategic importance (e.g. emerging vs mature) etc.
Stratinis has substantial experience in helping all kinds of companies manage their local and international prices, with numerous projects both as strategic advisors and software implementers. Please get in touch to learn more about how we can help you.


The Role of the Sales Force in Pricing

A European Beverage Manufacturer increased list prices in 2013 by 5% due to growing raw material prices. Customers complained a lot as this increase was well above “industry standards”, but the company was firm and pushed the increase through. There was much publicity and trade chatter about this “unreasonable” price increase. At the same time, the individual sales people felt that they needed to give the customers some extra discounts and “marketing funds” to reduce the impact on their customers. End result: net prices only increased by 0.3%

Meanwhile, a culture was created at a global manufacturer (€15bn sales in 2014) in which price increases should happen every year, at least in line with inflation. All staff accepted that selling below corporate guidelines for pocket prices may have caused dismissal. When sales representatives met with customers for annual negotiations, the customers often exclaimed “ah, with you from Company X, we have come to expect a price increase, but your products are usually worth it”. In a period over 5 years, 55% of the operating profit growth came from net price improvements.

From these two business cases, it is clear that the success of price improvements depends greatly on the effectiveness of the sales team. There can be multiple potential reasons why this effectiveness does not reach sufficient levels. Companies that are determined to equip their sales team with the skills, tools and information needed to make them effective in getting price increases through, will see profits increasing.

Common Issues in Pricing with the Sales Force
It is sometimes neglected that the pricing strategy is executed by the sales team on a deal by deal basis, and they are often not convinced of the importance of prices. Additionally, the incentive system is not in line with the objective of increasing profitability. Companies often focus on revenue and market share instead of profitability, which usually results in leaking profits.

Turnover does not equal profit and companies tend not to have transparency of all price elements from list price to pocket price, and they are therefore unable to identify the ones that need to be revised, negotiated or withdrawn. Due to lack of sufficient tools to create transparency of the full price waterfall, many organisations focus on market share and turnover – which are easier to measure – instead of profitability, while others pay more attention to simplifying the price waterfall rather than having a more complex one.

The sales team is close to the customers and sometimes they feel much closer to them than to the HQ managers who set the pricing strategy. As a result customer requests may shape prices more powerfully than corporate guidelines and this creates one of the major barriers to value-based pricing. Furthermore, it could also be the case that the sales team is not trained appropriately to convey the message of why it is beneficial for the customer to pay a higher price. In order to make the co-operation of pricing managers and sales managers more effective, information from customers must be fed back to provide insight on market developments and future price decisions.

Not everyone has visibility of the same information. The sales team often does not have access to the ERP system, whereas the CRM system is usually accessible only by them. Profitability information might also be restricted and the complexity of systems means they are ignored.

A Framework for Better Pricing Through the Sales Force
It is crucial that the sales force works together with the team responsible for setting prices. As a first step, a company must make its sales team understand that it prefers value-based pricing strategy and when a price change (increase) is decided upon, the execution priorities (frequency/speed and consistency) need to be clearly communicated.

Understanding the level of impact of each type of costumer allows for more efficient price control. Local customers mean more autonomy to the sales force, while global clients mean more rules and less freedom to the sales team. The level of off- and on-invoice price elements needs to be defined with careful consideration.

Setting roles and governance helps identify who does what during the sales process. The pricing team and sales team must interact continuously to achieve optimal price setting. Making sure to define roles and get senior management to re-confirm on a regular basis is a key aspect in establishing a common “language” to evaluate pricing.

Providing the sales team with information enables them to make decisions with more insight that are in line with corporate guidelines. They also need to be provided with a necessary toolbox for pricing, such as value-based arguments, segmentation for price sensitivity, competitor pricing, and profitability simulation.

A company must provide its team with appropriate training and development, such as face-to-face value training every 3-6 months and e-learning for refresher trainings. It is crucial for international companies not to neglect the language barriers of local teams, therefore they need to provide localized trainings. Furthermore, the recruiting efforts must focus on potential employees who can identify themselves with a profit-oriented sales approach.

Reward structures need to be aligned with the profit-oriented approach, transitional plans support implementing the shift from revenue targets to profit targets. Measurements need to be fair and accurate to realistically reflect performance. Moreover, value creating non-sales activities must also be rewarded.  


Should Sales People Know The Costs Of Their Products?

by Finn Hansen, Founder and CEO of Stratinis.
We often find ourselves discussing an interesting decision that businesses are faced with: whether or not to inform salespeople of just what costs go into the products they sell. Two of the main arguments can be summed as follows:   
  1. Don’t give access to cost information to sales people as they then tend to lower the price as long as the margin is positive and focus on cost arguments with regard to the customer – instead of producing value arguments and getting customers to pay more. 
  2. Do give access to costs (and thus margin) as sales people cannot optimise profits (“price” minus “costs”) without knowing the costs. 
As an aside, it is important to understand what actually constitutes “costs”, as incorrect cost information could lead to poor pricing.
Many companies debate this question. There is generally a reluctance to share confidential information with more people than absolutely necessary, however, the key question must be: what is the outcome if the sales team does or doesn’t know the costs? 
Take the following example of a sales person selling two products:  
Product A has a price of 100, and marginal costs are 50; fixed costs are allocated to this product at 30 per unit, so the variable margin is 50 and margin against full costs is 20. Product B meanwhile, is priced at 120 and the marginal costs are 51. Fixed costs are allocated the same way as product A, i.e. 30 per unit. The demand for the two products is the same at their current price points. We will furthermore assume that both prices are value-based prices, i.e. the price is what the customers are willing to pay.
Even if they were not optimised value prices, there is nothing to indicate that any issue of lack of value arguments would be worse for product A or product B.
On the other hand, the bonus scheme of the sales force can play an important role in the outcome. 
Knows Costs
Doesn’t Know Costs
Bonus on Sales
Confusion, but tendency to sell more of Product A if it is cheaper and thus easier to sell.
Sell Product A as it is cheaper
Bonus on Profits
Push Product B as it is more profitable
Pushing product B is the best option for the company, as it delivers most profit (remember, demand/market size is identical for the two). Selling product A leads to lower overall profits.
Therefore the best outcome is achieved if the sales force knows the costs AND is bonused on profits, not sales. 
Companies should always deliver value-based communication arguments to their sales people - as this will drive prices higher. However, when companies sell more than one product (as most do), using only this approach can lead to incorrect behaviours if sales people are not informed about pricing and are bonused only on sales.  
Coming up with a good profitability measure is then secondary, and can be achieved either by “true” costs or using a proxy, such as marginal cost plus an allocation. Activity-based costing (ABC) can often be used with success for allocating fixed costs.
First and foremost pricing is about optimising profits, not just sales. Pricing people must help sales by helping on the pricing side, but should not seek to prevent sales people from doing what is best for the company by barring them access to cost data. In fact, an argument could be made that it is the pricing people who should be kept away from cost data - as this will force them to push value-based pricing strategies rather than thinking about costs when coming up with internal pricing policies.
Stratinis has a range of functionality to help ensure your pricing and sales people have the information they need to deliver the best prices. Please visit us here to learn how our software solution can help increase your profits.


Pricing in Mergers & Acquisitions

by Finn Hansen, Founder & CEO of Stratinis.

During mergers and acquisitions, there are many things to take into consideration for the integration of the two organizations. Pricing is, or should be, one of the key focus areas as a solid implementation of the new organization’s pricing, terms & conditions can deliver significant synergies and benefits – whereas a failed M&A pricing implementation will expose considerable risks and often loss of combined profits.
Imagine some examples of challenges when dealing with pricing in M&A:
  • If prices/terms/discounts are different between the two merging companies for roughly the same product/service – i.e. Company A charges 10 and Company B charges 12 today. In NewCo one would hope for a new price of at least 11, ideally 12, but if not managed well you could end up with 10 as the customer(s) exploit the situation.
  • Different discount or surcharge schemes exist (similar to price example above): customer ends up getting lowest common denominator – to the detriment of NewCo’s profits
  • Sales people give too many discounts/price concessions to secure their job in the NewCo (“look, I closed all my deals, so keep me”)
  • Customers refusing to recognise NewCo as new supplier unless they get some additional concessions – knowing that often senior management has something at stake with the acquisition and therefore they can pressurize sales teams into giving concessions.
  • Pricing/Sales teams don’t understand the value pricing of their new colleagues: Company A has a different value pricing approach than Company B and the sales people in NewCo that used to work for Company A are not able to properly value-sell Company B products, or vice-versa.
  • Pricing synergies (often being bigger and with more market power, within legal limits) are not materializing, as sales people don’t understand how to negotiate in the new environment - at least not for 1-2 years, meaning 1-2 years of synergies are lost.
A good M&A pricing implementation program takes into consideration a number of factors, including:
  • Modelling: understanding current pricing as well as NewCo pricing options. Build models for allowing simulations of new NewCo pricing approaches. A tool like Stratinis Pricing can help support this process.
  • Internal strategy and people alignment
  • Internal materials to provide to pricing management but especially also sales people so they negotiate and achieve the best possible prices for NewCo
  • Internal communication
  • Internal training of sales team in new pricing model for NewCo
  • External materials to be shared with customers during communication and negotiation of new prices/discounts/terms
  • External Communication
  • Negotiation – support, follow-up, and crisis handling for larger key accounts 
Finn Hansen is the founder and CEO of Stratinis and has strong personal experience in this field from working with several multinational companies in implementing a strong pricing approach for merged organizations. In one global example the estimated benefits in operating income from this programme was USD 40 million annually. In another global business, the improvement in prices over 12 months after the acquisition concluded was EUR 24 million on combined sales of app 700 million.

Head over to Stratinis’ website and learn about how their Pricing Software can help manage and simulate AS-IS and TO-BE prices/discounts/terms and conditions.


Stratinis Announces New Webinar: Using Target Pricing Models to Optimize Prices

Stratinis are pleased to announce our latest webinar will take place on 14 April 2015 and will look at the interesting topic of Using Target Pricing Models to Optimize Prices.

More and more B2B pricing organizations build frameworks around floor prices and target prices in order to steer the sales teams towards optimal prices per customer segment, product group, channel and more. The idea is to set targets to achieve and then measure success against such targets, while also sometimes pushing the sales people to achieve higher prices than they otherwise would have sought.

Hosted by Stratinis CEO Mr Finn Hansen, in this webinar we will look at how target pricing models can help set and communicate optimized targets for prices in B2B sales. We will also see how a target price model can be used to achieve higher success rates in quoting or deal negotiations as well updating of prices in e.g. e-commerce.

This free  webinar will take place on Tuesday 14 April 2015 at 1600 British Summer Time / 1700 Central European Summer Time / 1100 Eastern Daylight Time / 0800 Pacific Daylight Time, and will last approximately 45 minutes with the opportunity for participants to ask questions.

While we hope you will attend as you can ask questions of the host, if you cannot, please note that the webinar will be recorded and will be available soon afterwards for viewing online at your convenience.

To learn more and sign up, please visit us here.  


Webinar: Getting More Than Pretty PowerPoint Slides out of Pricing Analytics

Stratinis are pleased to invite you to our latest webinar on 03 March 2015 that will look at the interesting topic of Getting More Than Pretty PowerPoint Slides out of Pricing Analytics”.
Pricing Analytics is an area that many companies are investing in to better understand pricing, discounting and profitability across customers, products, channels and markets. However, sometimes these investments simply result in some pretty charts shared with management every 3 months and nothing else.

Pricing Analytics should be used as an integral part of price optimization and price execution within the sales organization.

Hosted by Finn Hansen, this webinar will look at pricing analytics and approaches to gain insights from analytics that are actionable in price optimization and price execution.

The webinar will take place on 03 March 2015 at 1600 Greenwich Mean Time / 1700 Central European Time / 1100 Eastern Time / 0800 Pacific Time, and will last approximately 45 minutes with the opportunity for participants to ask questions.
While we hope you will attend as you can ask questions of the host, if you cannot, please note that the webinar will be recorded and will be available soon afterwards for viewing online at your convenience
For more information and to learn how sign up, visit the Stratinis website.