Customer-Specific Prices: The Silent Source of Margin Leakage
For many B2B companies, the creation, maintenance — in response to cost changes and low volume compliance — and renewal of customer specific price exceptions and agreements present an opportunity to either inadvertently give away margin or capture the fair and appropriate value of customer relationships.
In creating customer-specific agreements, sales teams often override existing pricing structures and guidance, in many cases over-discounting. Without proper oversight or pricing controls in place, long-term agreements may be fixed at unit or net prices with no end date or an end date needlessly far into the future. In fact, it’s not uncommon in Zilliant’s conversations with prospects and conversations, to see a high percentage of customer-specific price agreements with an end date of 2099 and a fixed unit price! Compounding these challenges, is the lack of an easily accessible, central location of the agreements— with many stored and managed in Excel spreadsheets or worse yet, in cumbersome, legacy ERP systems.
The result is a “set-and-forget” scenario: companies have little to no visibility to the status of active price agreements. In the current business climate, when costs increase, pricing teams lack a proactive and scalable mechanism to communicate needed prices changes to sales teams. Furthermore, when agreements are up for renewal or customers fail to meet volume commitments, there is no alert system in place to prompt a discussion with the customer. Upon renewal, sales reps are often faced with the time-consuming task of manually updating hundreds or thousands of lines on a single agreement.
Thus, the proliferation and under management of these agreements have become a significant source of margin leakage. To plug the leakage and also address operational inefficiencies as a result of current processes, many B2B companies are taking steps to proactively manage customer-specific prices, from creation to renewal.
Arm Sales with Relevant Customer Price Guidance
For B2B companies where customer-price agreements are needed, the days of not providing customer-specific price recommendations to sales reps are numbered. Price optimization software can take into account a customer’s price sensitivity to each item on the agreement, the market price for similar customers, and the customer’s previous agreement price to provide a meaningful price recommendation.
This customer-specific guidance helps reps in three key processes:
- The creation of an agreement
- When vendor or raw materials costs have increased, and
- Upon renewal.
It can further help sales reps recalibrate prices based on a customer’s actual or projected volume as compared to the customer’s committed volume.
Make Pricing Guidance Easy and Actionable
The tension between pricing and sales teams is acutely felt in most B2B organizations. Sales wants to control all aspects of the customer relationship, and maintain and grow their book of business, while the pricing team is focused on maximizing profitability and streamlining pricing practices. The good news is these two goals don’t have to be at odds with each other. While providing customer-specific price guidance is the first step to aligning these goals, creating a mechanism that makes it easy for the pricing team to suggest actions to sales reps and even easier for reps to act on those actions is key.
A growing number of B2B organizations are consolidating customer-specific price agreements into easier to use web-based systems outside of ERP systems. Better yet, some are moving spreadsheet-based agreements to this digital format. A more flexible digital technology tool, when powered by intelligent price and deal guidance generated by the pricing team, can alert reps to specific actions they need to take to maintain and renew existing customer agreements, and assist in the creation of net new price agreements.
Take the need, for example, to update existing agreements as a result of a vendor cost change. Rather than individually checking and updating each agreement in an ERP system, web-based price management interfaces can pinpoint all of the agreements impacted by a cost change and enable reps to mass update prices for a given set of items across hundreds of agreements with only a few clicks.
A more flexible application also allows for reps to see easy-to-understand analytics on the performance of their new and existing customer price agreements, revealing the margin health of an agreement line or the overall agreement. It can also help sales reps monitor other health metrics, such as volume commitments, to determine if customers are cherry-picking a few line items on the agreement.
Putting advanced tools in the hands of the sales and pricing team to actively manage customer prices can ultimately help rid companies of “set-and-forget” pricing and stop avoidable margin leakage.
This week’s post is by guest author Emma Vas, Senior Director of Product Marketing & Campaign Management for Zilliant, AI software that uses machine learning and predictive analytics techniques to deliver prescriptive intelligence that maximizes customer lifetime value. You can connect with Emma on LinkedIn and follow her on Twitter. Learn more about Zilliant’s Customer Price Management Solution that helps best-in-class companies manage customer price agreements for profitability.