Differentiate the Value Your Customers Are Assigning You

In a challenging economy, most companies shift their focus to a survival mode and pursue every dollar of revenue — at any cost. While this approach may be effective in the short term, its long-term implications are severe and can yield significant margin compression and profit loss. Companies must adopt more strategic approaches and best practices to get more business while sustaining their margins. Effective pricing is a critical strategy to help address this challenge, yet it is traditionally underutilized by even the most sophisticated organizations. However, over the past few years, pricing has gained significant momentum due to three key factors:

• Measurable Results: Successful pricing strategies have delivered proven value across industries
• Untapped Opportunity: Only a small number of companies have realized the value of pricing
• Low Cost/High Return: For a low investment, companies can realize substantial value

So, how can organizations leverage pricing to increase revenues and sustain profits simultaneously? Here are five best practices to help your company reap the rewards of pricing and become more customer-centric.

1. Focus on Pricing-Decision Support

Almost every company has invested in a CRM system. However, for the most part companies use these systems for data collection rather than decision support. Over time, companies have collected a tremendous amount of transaction and deal data that, if leveraged effectively, can translate into better pricing and deal negotiation. For example, companies can use the transaction data to set more informed pricing targets, guidance and floors to support sales teams when they negotiate and interact with customers.

2. Segment Customers and Products

Companies commonly use a one-size-fits-all approach with buyers. This fails to differentiate between a highly profitable customer with great potential for future business and a highly unprofitable buyer with limited potential. In the same way, many companies do not differentiate how a customer values their different products. For example, Product A might represent a critical input to developing products in the manufacturing industry, while the same product might not be as important for the chemical industry. In such an instance, a company could segment the product based on end-use application. The pricing guidance for selling Product A in the automotive industry would be much more stringent (less discount due to higher value) than pricing guidance for the product's sale in the chemical industry.

3. Arm the Sales Team

When interacting with buyers, sales teams need critical pricing insights to make decisions that will increase revenues and improve profits. Often, discounts granted during deal negotiations are driven more by negotiation expertise than by the sales rep's knowledge of key facts about the customer's profitability, expected product value, purchase history and future potential. When firms arm their sales teams with pricing guidance based on specific customer profiles, reps can tailor negotiations on a case-by-case basis, providing pricing terms that are consistent with the customer profile. A fully armed sales team will win more deals to help the organization protect profits.

4. Improve Price Responsiveness

In today's highly competitive environment, timely price changes can mean the difference between winning and losing a deal. Sales teams that are negotiating with buyers at prices that are inconsistent with market conditions are at an inherent disadvantage relative to their competitors. In such instances, sales teams often have to resort to unnecessary discounting to level the playing field. Companies that sell thousands of products across industries, regions, and channels have to manage millions of price points simultaneously. Their ability to rapidly fine-tune prices in response to market volatility can help them win a deal at decent margin, versus winning it at a loss.

5. Invest in Technology

Few companies have made pricing a strategic priority or made the necessary investments to leverage it effectively when interacting with buyers. Existing CRM and enterprise resource planning (ERP) systems lack the needed capabilities to streamline pricing processes. To meet that need, price management and price optimization solutions provide robust pricing analytics, price setting and deal negotiation functionality. These solutions are well integrated with CRM and ERP systems and enable firms to improve customer interactions by implementing appropriate pricing strategies.

Final Thoughts

Businesses across industries need to embrace effective price management strategies — and technologies — as part of their overall strategic initiatives. In these difficult times, pricing provides organizations with an unparalleled opportunity to increase revenues, preserve margins, and beat the competition.

.

About the Author

Tapan Bhatt (tbhatt@vendavo.com) is director of marketing for Vendavo (www.vendavo.com), a global provider of price management and price optimization software for B2B companies.

.

Please note that the Viewpoints listed in CRM magazine and appearing on destinationCRM.com represent the perspective of the authors, and not necessarily those of the magazine or its editors. 

You may leave a public comment regarding this article by clicking on "Comments" below.

If you would like to submit a Viewpoint for consideration on a topic related to customer relationship management, please email viewpoints@destinationCRM.com.

For the rest of the May 2010 issue of CRM magazine please click here.