Managing Pricing with International Customers

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.

Setting Pricing by Country

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 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.  

10 Ideas for Best Practice Pricing Analytics in B2B

1. Share, Share, Share. If you do not share your pricing analytics internally then it just becomes pretty charts for a small group of people. Pricing analytics is strongest when the insights are actually used for steering and changing the business. Sales people who have actionable insights will do much better than those who do not.
2. Establish a common vocabulary internally for how to measure prices, net prices, pocket prices, discounts etc.
3. Measure pocket price but realize that the (B2B) customer does not always recognize or accept this measure. It is your internal measure.
4. Include as many “pricing” elements as possible;including price, discounts, rebates, lump sums, “customer investment”, favorable terms and much more.
5. Build a proof of concept but make sure your analytics scale.
6. Make analytics repeatable without any discernable effort, otherwise it will not be done. This usually involves professional software packages, not Excel.
7. If your business is operating internationally, make sure your pricing analytics is too.
8. International analytics: make sure you can compare prices and discounts across borders but do not use it as an excuse to force changes to commercial terms on local markets (speak to Stratinis about how this can be achieved).
9. Use more than one pricing KPI. Pocket Price is important for assessing financial performance, but also use KPIs that are relevant for sales people and customers (who do not always look at Pocket Price).
10. Train and communicate internally: if your calculations (e.g. allocation of lump sums) become a black box you lose buy-in from the organization (read: sales) and you have not understood that pricing analytics is about sharing, not safeguarding.

5 Building Blocks for Giving Sales Bonuses on Price Performance

by Finn Helmo Hansen, Founder & CEO, Stratinis


B2B Pricing managers often complain that sales people  are not very good at pricing and that they must do better. While it should not stand alone, one tool to help with that is inclusion of price into bonuses.
1. As with anything that sales people are bonused on, it needs to matter. If it is either insignificant (price is one of 20 goals) or unachievable (you only get the bonus if you put through a pocket price increase of 50%) then they will of course not be motivated by it. Make it achievable and realistic, even if stretching for some of the sales team members.
2. Get senior management to support revenue/price-based bonus targets. It has the built-in advantage that price and profitability targets often go well with their own targets.
3. In pricing we often have several pricing/revenue key performance indicators, such as pocket price, pocket price increase, price index against competition, etc. While it can be tempting to include all these targets in some sort of basket of targets for the sales people to achieve, it also makes it difficult to understand and relate to in a negotiation situation. It is better for bonus purposes to have one single price KPI. You can have multiple KPIs that you communicate to the sales team, but only one should be bonus triggering (and with a discernible amount of money from it, see #1)
4. Some good KPIs for sales bonuses in B2B are:
  • Pocket Price: what do we make per unit at the end of the day.
  • Pocket Revenue: what do we get in at the of the day, multiplied by quantity, so not just focus on high price, low-volume items.
  • Pocket profitability: Takes into account that some products are more profitable than others.
  • Pocket revenue percentage change: still focuses on price and profit, but also pushes the sales people to do better.
  • Price performance against target prices: measure how well the sales person is doing against a set of target prices: below, on target or above.
5. Support everything you do with information and communication. Train the sales people not only what the bonus system is about, but how they can achieve it. Then they will see the light. Even ahead of bonus goals from other departments who haven’t communicated as well about their desired goals for their department.

To learn how Stratinis can help your business implement an effective pricing strategy and roll this out to your global sales teams, visit our website.

10 Ideas for Pricing to Global B2B Customers

When pricing to global B2B customers who buy from you in different places around the world there are many things to watch out for:

1) Global pricing does not necessarily mean global price. You can still keep a differentiated price based on local dynamics, willingness to pay, competitive level and other variables.
2) Establish internal transparency. Make sure you understand your full price waterfall in each market where you sell to this global customer. The customer will often know more about this than you. The investment ratio in global pricing tools is 7:1 between procurement and sales. In other words, the buyer spends 7 times as much money on knowing your global prices as you do.
3) Making data comparable between markets does NOT mean a single global price list.
4) Make the internal transparency a repeatable process. It is no good if takes you three months to collect spreadsheets from around the globe and consolidate the data.
5) Get a tool that will allow you to both a) collect data as frequently as you want; b) compare and consolidate without manual work; c) simulate scenarios; and d) make deals and quotes globally as well as locally.
6) Have staff who look after global pricing, but do not necessarily always appoint “Global Account Managers” or “Global Coordinators”. That is like painting a bull’s-eye on someone for the customer to target and negotiate with. If the customer can only negotiate locally but you have internal coordination, it puts you in a stronger negotiation position than if you have one single point of global negotiation.
7) Bundle global products with local products or services to muddle the price picture.
8) Consider moving discounts from on-invoice to off-invoice. Most buying organizations find it more difficult to collect and compare data on off-invoice elements.
9) Make local discounts (on-invoice and off-invoice) truly dependent on a counter-performance by the customer (e.g. supply chain, finance, sell-through etc). This makes it much easier to argue for net price differences.
10) In industries where global harmonization of prices is considered inevitable (I doubt it really is in most cases but for argument’s sake let us say it is so), try to maintain some local discounts, local services and acceptance of local business practices. It will give your more freedom to keep a differentiated price.
 

10 Ideas for Better Price Management in E-Commerce

  1. Spend time to identify value drivers: why should customers buy from you rather than from an online competitor or an offline competitor. Turn this insight into pricing action. Be worried if the only insight is that customers should buy from you because you are cheaper or offer free delivery.
  2. Build a model for your pricing that can be automated – but build safe-guards (see competitor prices)
  3. Make sure your software tool can both update prices daily, if needed, and be used for simulating prices & profitability before committing to the website.
  4. Include competitor prices in your model, but avoid getting into a negative spiral of you lowering prices when your competitor does and then they do the same when you lower your prices (all within the legal boundaries of non-collusion of course).
  5. Segment your products based on velocity, and use that segmentation for pricing. Update segments frequently.
  6. Run price promotions for short periods. You have no real costs of changing prices, so do so frequently.
  7. Consistently analyze price promotions for ROI. Use insights to promote where and when it matters, not just all the time.
  8. Gather as much data as possible about your customer and visitors to your site. Knowledge can help you price better.
  9. Differentiate prices (and offers) for known/registered customers and anonymous customers.
  10. Segment customers and use those segments for pricing. Update segments frequently.

10 Ideas For Controlling Net Prices In B2B

Here’s 10 ways you can control your net prices:

1. Identify all discounts, rebates, “marketing” contributions and other amounts spent directly with the customer. Map it all in a price waterfall.

2. Identify 2-3 key performance indicators from the waterfall (pocket price is just one) and communicate relentlessly about them internally.

3. Communication with the sales team is key. Explain reasons for the control. Solicit feedback and suggestions for process improvement.

4. Build a process that allows for exceptions with the right approval steps in place.

5. Ban exceptions that are not properly justified.

6. Consider if all pricing/discounting decisions must go through approval or if you can find thresholds that would allow for auto-approval. Otherwise, you might be bombarded with small approvals and commercial agility might be lost. Ideas for auto-approval can include: above internal target net price, X% above competitive prices or “market” prices, minimum customer size (order or annual value), pre-approved (by the pricing team) customer segments or product categories.

7. When going from a less-strict to a more-strict price controlling process, spend a lot of time (yes, more than you think you need to) on managing the change and resistance both from external customers AND internal stakeholders. You may otherwise be choking off key customer spends.

8. Use software to support the process – otherwise you overload on data and manual exceptions.

9. Allow for controlling differences per market / business unit / country when doing international business. There ARE differences in how we all do business around the world.

10. Keep in mind that being in control is not the same as optimization. Control is good where you otherwise leave money on the table or have risks from customers exploiting the lack of internal control.

See how Stratinis can endeavour to optimize and manage your prices through our pricing software

Should Sales People Know The Costs Of Their Products?

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
 
Confusion/Unknown.
 
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.
 
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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

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.