Value—not Volume—Drives Profitable B2B Sales
For the past several years, I have had the privilege of seeing innovative and thought-leading executives challenge the conventional notions about what sales teams should be doing. These pioneers in B2B manufacturing, high-tech, distribution, and other industries pushed their sales organizations to think beyond just growing top-line revenues to better understanding how customers truly value their offerings.
In part this was designed to create a more meaningful customer relationship, but ultimately the goal has been to capture the full value of what their companies provided to their customers. Yet, until recently, even I viewed these companies as the minority early adopters of a more enlightened sales management approach.
In reality, as demonstrated by a recent Aberdeen Sales Effectiveness study, as many as 57 percent of B2B sales organizations now identify growing their bottom-line profits as a top priority—hardly an early-adopting minority. It's clear that more and more sales organizations understand that they need to be contributing to bottom-line growth, not just top-line.
"This is a significant shift in focus for sales management," says Peter Ostrow, an Aberdeen vice president and research group director, and leader of the annual Sales Effectiveness research. "What this tells us is that sales organizations are getting it, and that it is no longer just about hitting their sales numbers, but also about creating profit."
The Aberdeen research also showed a strong correlation between the organizations that were best-in-class at delivering results and the use of price optimization and related capabilities. Enterprise sales organizations using price optimization brought in deals that, on average, generated 26 percent higher revenue than the deals made by those that did not. In addition, these enterprises reported that up-selling or cross-selling to existing customers increased by 69 percent, compared to an average of 34 percent for companies that did not use price optimization.
What's behind the growing adoption of advanced capabilities like price optimization and predictive analytics in B2B sales? I believe we're finally at a point where the availability of Big Data and analytics to support sales teams is being married with easier-to-use and convenient delivery mechanisms like mobile-ready apps and cloud-based quoting tools. In short, we're finally able to make it very easy to deliver the optimal price range to sales reps when and where they need it. And it also comes with relevant, contextual insights to justify the price range and stiffen their spines when it comes to deal negotiation.
The truth is that the best sales reps could likely already come up with an optimal price that balanced maximizing the revenue and profit of the deal with the risk of losing it. They intuitively understand the nuanced dynamics of a deal: what the competitive alternative looks like, how the customer will use what you provide, and what the economics are of the deal. In short, they have a pretty good feel for what the customer is really willing to pay based on how they value what’s being offered.
The problem is that as consolidation accelerates in many industries and everyone is perpetually asked to do more with less, these top sales reps are asked to sell an increasingly large portfolio of products and services. Add to that the brutal reality that—by definition—your best salespeople don't represent the bulk of your salesforce.
So the question becomes, then, how can we make all our salespeople as good as our very best at striking that optimal trade-off between winning the business and maximizing revenue and profits? That's what B2B price optimization capabilities do for these best-in-class sales organizations highlighted in Aberdeen's research.
Consider the compelling real-world example of a chemicals manufacturer with several billion dollars in revenue, hundreds of thousands of SKUs, and around 90,000 customers across a variety of markets and industries. This organization faced an interesting challenge: While its sales force sold its extensive portfolio of products to a diverse customer base, the company went to market with a simple set of target prices. In other words, its prices didn't reflect the variation in willingness-to-pay of its customer base.
To address this, the company set about creating a new pricing segmentation structure that utilized statistical techniques and common-sense business rules, optimizing pricing for all of these pricing segments. Once the new pricing guidance was established and validated, it was time to roll this out to the field.
One sales region was supportive and on board. The other sales region, however, favored a strategy that included more aggressive prices that were thought to drive increased volumes and overall revenues. Both regions had strong similarities in customer base, so what resulted was a fascinating tale of two regions as a test case.
The region that adopted the new, optimized pricing targets saw minimal reductions in volumes, but a strong lift of about 5 percent in revenues. The region that ignored the new, optimized pricing saw significant declines of about 6 percent in revenue, far outweighing the minor growth in volumes they recorded.
So the net difference in the regions—even after adjusting for any anomalies—was 11 percent in revenue. And since there was no incremental cost associated with that 5 percent lift in revenue, it meant that the additional revenue was pure profit.
By focusing on how customers really value their offerings, best-in-class B2B sales organizations are increasingly able to accurately assess a customer's willingness to pay. This makes for less gut-feel and guesswork, a smoother sales process, and, ultimately, optimized revenues and profits.
Alex Hoff is a VP of business consulting with Vendavo, working with customers to help drive significant value through price and margin management improvements. Hoff has been with Vendavo for seven years, working with customers in industrial manufacturing, process industry, consumer product manufacturing and business services. Prior to working for Vendavo, Hoff worked in various marketing and pricing roles for Fortune 500 companies in transportation, retail/consumer goods, and business services.