article | December 4, 2017
Sales Forecast Falling Short for Next Year? Update Your Pricing Strategy
It’s that time of year again when you receive your annual target. A big number is dropped in your lap and you are left putting the puzzle together of how you will hit your number. You evaluate adding sales headcount, realigning territories, and increasing quota. However, the numbers aren’t adding up.
One area to consider is unlocking value this year by updating your pricing strategy. Pricing inefficiency, also know as consumer surplus, represents billions of dollars in lost net income annually for companies globally. First, let’s diagnose if you have a pricing strategy problem then look at possible solutions. Complete the to self assess gaps and opportunities within your organization.
How do you know if your pricing strategy needs updating?
Review these statements and if one or more is true then you have a pricing problem:
If you find yourself nodding your head “yes” repeatedly to this list of items you are not alone. Pricing strategy is often left as a lower priority to the many other “burning platforms”. This problem is also rooted up-stream. Most higher education facilities do not offer pricing strategy courses. Pricing is often tucked away as a section in economics or marketing courses.
Without diligently updating and aligning your pricing strategy every year it will become out of alignment. When your pricing strategy becomes out of alignment with the market, lower prices, lower penetration, and lower profits result.
What are the results of an unaligned pricing strategy? The answer is “HUGE”.
Pricing strategy issues cost companies billions of dollars of lost net income. This amount is from leaving money on the table and also the large opportunity cost of lost sales. For every 1% value capture in price net income increases 3-8%. To match this 3-8% net income increase you would need to increase gross revenue by over 10%.
Let’s consider an example of a company with $100M in gross income and net income of 20%. This company updates and implements it’s pricing strategy resulting in gains of $2M in price. The effect on net income is 10%. How is this jaw dropping number accomplished? Because we are adding no costs to the business and are realizing more value from selling a similar quantity of products. Please see the graphic below:
Let’s examine if we were to try to realize $2M of net income by adding sales headcount. For this example let’s assume an average of $2M of sales revenue per headcount and a total sales force of 50. To increase net revenue by adding sales reps you would need to add 5 sales headcount. But wait, one caveat is we must consider sales onboarding. Assuming a full productivity ramp of 6 months you would need about 8 headcount to realize the same $2M in net income. This example demonstrates the power of pricing strategy optimization. I know what you are thinking, “updating my pricing strategy may be more difficult than throwing 8 more salespeople at the problem”. This may not be the case.
What is a pricing strategy and how do I update it?
A comprehensive pricing strategy is composed of six stages, going from most strategic to most tactical, they are as follows:
Neglect any one of these and it will cost you greatly. Many companies we consult have pricing organizations whose efforts are in stages 4-6 and very little activity in stages 1-3. This result of these unbalanced efforts are tactically executing against an unaligned strategy. This causes lower price, lower penetration, and lower profits. Further details in pricing strategy can be found here.
Steps to updating your pricing strategy:
First you need to assess what your pricing strategy against market Standard Operating Procedures, Best Practices, and Emerging Best Practices. This will enable you to benchmark your company against market leaders and assess gaps. What are these practices?
An Emerging Best Practice is a method being used exclusively by market leaders. They are not being used by everyone. Emerging best practices are powerful differentiators that cause revenue growth to accelerate. In contrast, average market participants use best practices.
A Best Practice is a method used by many companies, if not all. Best practices are not differentiators and do not cause revenue growth to accelerate. With many executives implementing the same best practices, often in the same industry, their ability to create market leadership does not exist.
Standard Operating Procedures are industry standards. They do not cause revenue growth to accelerate. However, if not in place, they may cause revenue to decline. Think of them as requirements.
SBI has made it very easy for you to assess your pricing strategy. For each of the six stages of pricing strategy we have identified emerging best practices. These are included in the SBI revenue growth methodology workbook in pages 144-230.
Steps to take action: