A European Beverage Manufacturer increased list prices last year 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 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list price to pocket price, and they are therefore unable to identify the ones that need to be revised, negotiated or withdrawn.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.