In the unending quest to secure the revenue that fuels their companies’ growth and meets their personal quotas, industrial B2B sales professionals need flexibility in pricing to adapt to competitive or customer pressures (real or imagined) in the highly dynamic markets that they serve. If salespeople don’t have flexibility, they may fail to acquire new customers or drive share-of-wallet with their existing customers. Unfortunately, sellers don’t always know what the customer’s alternative suppliers and associated prices are, but they still have to propose pricing to secure the business.
So, how can companies provide flexibility to sellers to win in the marketplace while not giving away all the profits in the process? For most sales organizations, the answer is to give sellers both guidance and flexibility to determine and manage prices.
How the Customer-Specific Pricing Problem Arises
Most companies set up special pricing records, or Customer-Specific Pricing (CSPs), in their ERP systems to ensure the consistency of customer pricing at order entry. The CSP records establish at the product line or even SKU level what prices, margins or discounts will apply for a given customer. These CSP records take precedence over other pricing mechanisms (such as matrix pricing).
Over time, as sales reps add customers and products to the CSPs in their ERP system, the sheer volume of records and associated share of revenue grows, often exponentially.
Let’s consider a sample company (or region of a company) with $50 million of revenue and 50 sales reps. For a sales rep with 50 assigned accounts, if each account buys 100 SKUs or product lines, that rep’s CSP files will have 5,000 line items. These accounts will require periodic maintenance and review as vendors raise costs, competitive and share-of-wallet conditions change, costs of doing business increase, etc.
If our sample company has 3,000 customers and 10,000 active SKUs, it will have 30 million potential customer-product pricing permutations to address.
Without analytical and workflow tools to review, prune and adjust thousands of CSP pricing records, the cost of consistent customer pricing drastically increases.
Reserve CSPs for Competitive Products and Key Accounts
Though they aren’t aware of the customer pricing dynamics that require CSPs, pricing managers or IT managers may be tasked with maintaining them so that sellers can focus on selling. How can this activity possibly be delegated and centralized? Most of the time, it can’t. The usual outcome is friction and an eventual stalemate between sales and pricing teams.
The key is to deconstruct the problem and design a manageable system that combines, and limits disciplined CSP pricing structures. The system should focus on truly competitive products in each customer’s market basket, while deploying pricing matrices to simplify and increase the profitability of each customer’s less sensitive (but more fragmented) “tail spend.”
Most customers have a relatively narrow, easy-to-shop subset of planned-purchase, core products where pricing and availability drive their choice of primary vendor. Those products require a sales rep’s knowledge of customers and competitors to set the pricing. Though these products aren’t truly “loss-leaders,” their pricing and margins are appropriately lower than those of their long tail-spend items.
Differentiate Between CSP Pricing and Your Pricing Matrix
Unplanned, non-core, tail-spend items, by nature of their unplanned purchasing, fragmentation, frequent churn, and lesser price sensitivity, lend themselves to matrix pricing, where customers of similar buying and competitive positions can be grouped. Each matrix can contain discount or margin factors at the vendor/product group level.
The secret to mastering CSP pricing is to first identify the role of CSP pricing versus the role of matrix pricing. CSP must be restricted to the small set of products sensitive to each customer, and the related product families. This requires a metric called coreness: the relative price sensitivity of a particular SKU or product family to an individual customer or to a peer group of customers. Once we have a reliable measure of coreness, we can determine which products belong on a given customer’s CSP pricing versus matrix pricing.
When we work with clients who navigate this process, the CSP SKU-level pricing for core items is maintained on what we can call a “front card.” The “back card” provides pricing for the vendor/product families that the front-card SKUs belong to. This pricing is expressed as discount or cost multipliers that maintain identical or similar pricing for oddball products a customer may buy. A simple example would be if a customer is consistently buying blue widgets on the “front card,” the discount or margin multiplier for green (or other) colored widgets on the “back card” would approximate that pricing.
This process provides predictable, competitive pricing on the most competitive items while preventing the company from falling into bad habits that make ongoing CSP maintenance a hassle.
Build Processes that Make CSPs Work for Your Company
Going through this process and properly utilizing CSPs allows the sales reps a high degree of flexibility in setting “front card” products and prices, accepting that some will be good, average or poor. The pricing manager will set the required “back-card” multipliers that align the requisite associated product families’ multipliers. You can accept this bargain because you will enforce standardized matrix pricing on the non-core tail-spend and carefully control it.
CSP pricing is a fact of life. Sellers need it to meet the demands of the marketplace. The real question is not whether to have CSP pricing, but how to master it.