Several years ago, an Ohio-based specialty metal business made the decision not to charge for freight costs, even though their products were extremely heavy. The rationale? None of their competitors were charging, so they couldn’t either.
In reality, this company was No. 1 in the industry, so all those competitors were actually just following their lead. When the company realized what was going on, it had the opportunity to change the policy for its entire industry.
And so it did—collecting more than $1 million in additional revenues.
Smart companies know pricing strategy isn’t just about the price on the invoice. To have an immediate impact on your bottom line without formally raising prices, here are three areas to tackle first.
1. Freight Costs
If you’ve been operating for decades, your freight policies have probably been in place just as long. Maybe you don’t charge for freight at all, or fees are the same across all territories—or you charge the same as you did 50 years ago even though shipping rates have risen dramatically.
This post originally appeared on INSIGHT2PROFIT.com.
Welcome back to INSIGHT2PROFIT’s 2019 Pricing Challenge! Each article covers a common pricing challenge faced by businesses and provide some tips to help improve your profitability.
Now that we’re about halfway through 2019, let’s talk about the plan you set for the year. How have you performed thus far relative to your plan?
If your performance hasn’t matched your financial projections for this first part of the year, what happened? Maybe you’ve looked at your financial reports, and you see that your customer or product mix isn’t what you were expecting, or that you have been impacted by tariffs, and your profitability has suffered because of it.
That’s a start – having a rough idea of the shortfall – but you need to get to the root causes. Has a shift in your mix driven down margin rates? Are you falling short of plan due to a volume slowdown, or are pricing shortfalls eroding your revenue growth? How does that vary by market segment or by salesperson?
Analyzing the gap down to the customer-SKU level can yield clear, actionable intelligence about your problem.Well-run businesses have a strategy, and the budget is the road map to execute it. Planning at the same level of granularity as your sales allows for a healthier understanding of what’s happening within your business, why, and how to act. By having a detailed budget, you are creating a source of accountability for your team and a path for success for your business.
Accurate revenue planning and measurement is tough to do, but it’s one of our specialties. Every engagement includes strategy, a client-specific model, a detailed plan and road map to execute it, and measurement to achieve the set goals. All while leveraging our DRIVE technology platform.
What’s your pricing challenge?Talking about pricing challenge, with tariffs ever present in the news, you may want to download our 3 Steps to Navigating Tariffs Guide.
This post originally appeared on INSIGHT2PROFIT.com
Welcome to INSIGHT2PROFIT’s 2019 Pricing Challenge! Each month we’ll discuss a common pricing challenge faced by businesses and provide some tips to help improve your profitability.
First up, let’s talk about price leaks. You’ve set your product pricing, but after considerations like discounts, freight costs, program allowances, rebates and payment terms, how much of that price actually reaches your bottom line? Today we’ll look at how just one factor – expedited orders – can dip into your profit margin and how you can quickly address that challenge.
Has this ever happened to you? Your customer calls and says they need their product in three days instead of the usual two weeks. You jump through hoops to make it happen – interrupt your production cycle, delay other customers’ orders, pay extra for freight, pay overtime – and you do it for free to keep your customer happy. You just offered your customer tremendous value; you should be getting paid for it. How might you go about making that happen?
First of all, ensure your customers have a clear understanding of what your standard lead time is. If they ask about expediting, and your production team says it’s feasible, let your customer know there will be an associated surcharge.
Based on our historical tracking of expedited order requests, one of two things will happen:
You’ll save money. When faced with a fee, about half of your customers will decide they don’t actually need the order that quickly and can deal with the regular lead time. You neither disrupted production nor incurred additional expenses to meet a need that wasn’t real.
You’ll make money. The other half of your customers will appreciate that you offer the option to expedite orders and will gladly pay the surcharge, because it’s a small price to pay for being able to meet their critical need.
What practices could you adjust to stop price leaks and have an immediate impact on your company’s profitability? Download our 50+ Most Common Price Leaks Infographic to identify other areas in which you might be leaving money on the table instead of putting it in your pocket.
Does this sound familiar? A new customer promised they would place a $30,000 order, but only at an average price per unit of $0.16. The sales rep ran the requested price through their internal process, and because $0.16 was above the required 20 percent margin, the sales rep approved the discount. End of consideration.
But here’s where the story gets interesting. After looking at the average price points for the top 20 customers of this product, the pricing manager determined that significantly bigger customers – with purchase volumes in excess of $100,000 – were paying $0.18 to $0.22 per unit on average. In fact, the third largest customer, at $468,000 in volume, was paying a $0.22 average sale price.
What was the justification for the lower price for the smaller customer – other than the fact that the customer simply asked for it?
For many companies, pricing decisions are largely made in a vacuum, without regard to pricing data, market circumstances, product value or customer differentiation. The situation is usually exacerbated by a compensation structure that rewards revenue and volume over margins and profitability.
The solution, therefore, typically requires a completely new mindset for the sales team and organization—one focused on margins over top-line revenue.
It All Begins with Pricing Data Visibility
The beauty of the role of data in pricing decisions is that it lends an important clarity to difficult choices. A sales rep is naturally inclined to want to make the customer happy. But if you are armed with the right data, you can not only rationalize why a price discount might be a poor decision, you can also provide informed alternatives the sales rep can present to the customer – providing an opportunity for the sales rep to save face, the customer to get a great price and your organization to get the margin it needs.
In our story above, for example, you can start by showing the sales rep the list of average price points. This puts the requested price discount in animportant context– that the discount amounts to asking the organization to offer better treatment to a relatively small customer than it offers to its third largest customer.
The Power of Informed Pricing Options
You can also take this reasoning a step further. Rather than saying “No” outright, you can provide alternatives. For instance, the sales rep could tell the customer that $0.16 is possible, but only with a certain volume of purchases. If the customer is willing to increase the size of its order, you’ll be happy to provide the more favorable price. Or, if the customer is unable to purchase more than the anticipated $30,000, the sales rep can offer a price in the range of $0.18 to $0.19 – still a significant discount, but more in line with the organization’s average selling prices.
Always Look at the Big Picture
When it comes to pricing, you should never make decisions without looking at the big picture. Think it through. Take the time to look at similar customer segments so you can see the prices and margins other customers are paying. And always make sure the volume justifies the price.
After all, the goal in business is not to just gain market share. It’s to gain profitable market share. Consistently offering a low-ball price eventually hurts everyone in the industry; ultimately, you’re creating pressure to make prices so low no one will be able to compete profitably – and everyone will lose. But with the right data, you can make more informed decisions and provide the options that will help your team win the sale without giving away the house.
Recently, INSIGHT2PROFIT worked with a manufacturer that had not executed a price increase in nearly three years. There had been individual negotiations, but overall, pricing had remained relatively flat. While the company was a market leader, it was ignoring the pricing lever for profitability.
Our team worked with theirs to determine a plan for strategic price increases, as well as a process for conditioning customers to expect those increases.Here are the steps we took, which you can utilize to ensure your own success in communicating price increases to your customers without losing business.
Step 1: Start Addressing the Issue Informally First
You know sales is all about building relationships, so leverage yours. Instead of waiting for a letter to be sent to everybody, which does not make anyone feel like a priority, start reaching out. Whether it is over the phone or over lunch, start the conversation: “I wanted to let you know we are looking at a pricing initiative to better reflect the value our organization is providing.”
The more you can do to ensure your customers are not surprised with a price increase, the more successful you will be. Taking that a step further, developing a cadence for price increases can help guarantee pricing excellence: Communicating with your customers to an extent that they expect a price increase every year or six months (or whatever period fits your business model), the conversation shifts from “why are you raising prices?” to “what is the price increase?”
Step 2: Create Supporting Documentation
Given that it had been several years before the organization’s sales team had gone before a customer and said, “We’re going to raise our prices,” INSIGHT2PROFIT helped to build an extensive communication package. It covered a draft of the letter that would communicate the change to customers, as well as a sales script and FAQs personnel could use to combat concerns.
The purpose was not for reps to read the script or answers word-for-word, but rather to instill confidence in their responses. When the sales team used their own wording but projected the agreed upon message, fewer customers questioned the change.
Step 3: Role Play, Role Play, Role Play
If you have not completed a price increase in a number of years, you haven’t had that difficult conversation in a long time, and it can be hard to handle. That is why we insisted on a lot of role-playing with the company’s customer-facing staff members.
We got them into the room and said, “I’m the purchasing manager, you are the sales rep. Tell me why I’m getting an increase,” and they practiced. The first round was less than ideal. By the third iteration, the team had gained confidence and were incredibly convincing. Several of the staff told us how powerful the preparation was and that they knew exactly what to say when faced with an unhappy customer. Ultimately, they were confident enough to go into the marketplace and deliver the increase.
When practicing with your team, cover these bases:
Read through the sales scripts, encouraging staff to use their own words
Role play questions and answers
Reiterate selling based on value, not price
After doing so, our client began getting 90 percent of what they asked for when, in the past, they historically achieved just 50 percent of their ask.
Step 4: Don’t Back Down
Continuing to educate and condition customers regarding your pricing initiatives is just as important as training your staff. The first time you cave when a customer pushes back, threatening to take their business elsewhere, you have set a precedent that will ultimately set your pricing initiative up for failure.
Think of it like giving in to a child because they were crying after being told “no.” If you roll prices back even once, you have taught your customer not to take your increases seriously. The better behavior is to remain respectful and professional while sticking to the increase.
There is obviously risk, and you may even lose a small amount of business. But we believe the bigger risk is backing off and setting a precedent for price locks.
