Can’t Raise Price? Market Too Competitive? Try This?
By Joanne Smith
If I only had a dollar for every time I have heard “We can’t raise price, our market is too competitive”! That is the prevailing story from most of the businesses I have worked with on pricing. 99% of the time, I prove them wrong…to their delight. Certainly, there are good reasons when raising price is likely the wrong move (e.g., during a major recession when your material costs are dramatically dropping and market demand is down), but the excuse of “our market is too competitive” is probably not one of them.
When I dig into a business’s experiences and practices I generally find their own behaviors are a major part of their problem. And thus, when they learn to change their own behaviors they successfully raise price (often to their own surprise).
Behaviors That Hurt Price
The behaviors that hurt suppliers’ ability to raise price tend to be things like…
- Lacking confidence and skills to raise price
- Excessive discounting with many accounts
- Undercutting competition to grow share
- Volume based incentives and culture
- Saying you are raising price but not following through
Your customers directly feel these behaviors and take advantage of them. They correctly assume you are afraid of losing volume and have no confidence nor conviction in implementing your price increase. They learn that the harder they push on price, the more likely you are to back down and drop price. Your own behaviors have created price aggressive customers.
Your competitors are indirectly watching your behaviors. They may see a price announcement from you but the customer base is telling them “No, they are not giving me an increase”. They may lose some share to you or buyers are threatening to take away share because “they have a lower price elsewhere”. Your own behaviors have created price aggressive competitors. These competitors, afraid that you are trying to use price to take their share away, begin to back off their own prices. Buyers waste no time letting you know that competitors are not increasing price and may even be dropping price. Your confidence falls even further and the cycle continues.
Changing Your Behaviors
When you learn how to consistently 1) change your behaviors to those that encourage higher market prices, 2) price fairly, 3) predictably follow through with price increases and 4) gain the skills you need to have confidence and conviction in sales negotiations you begin to defuse the aggressive market place. Customers begin accepting your price increases and competitors are much more likely to follow with their own increases.
There are certainly times where discounting and/or not passing along the full price increase makes good business sense however, these times are far, far fewer than most sales and pricing professionals believe. Furthermore, how you negotiate a needed discount goes a long way to mitigating (or unfortunately accelerating if done poorly) an aggressive price environment.
Pricing resources, along with sales teams, need to learn these practical and powerful skills.
If you would like to learn these skills as well as many other best practices for price execution, join me at the 2017 Professional Pricing Society Conference, in San Diego, October 25th, where I will lead an all-day workshop titled “Partnering with Sales: Best Practices for Price Execution.”
7 Key Habits of Price Increase Success
By Joanne Smith
The majority of B2B businesses have low success when it comes to raising their price; often achieving only 30-40% of their targeted increase. Yet companies that use best practices for increasing price achieve a far higher success rate; 80 – 100%. There are seven key habits that must be evident to ensure high success.
- Willingness to risk volume: The business must be willingly to risk some volume loss. Without this willingness, your odds of high success go down dramatically. Being willing to risk volume does not mean that you will lose volume! In fact, it is likely to be a very rare occurrence if you follow these seven habits.
- Fairness and trustworthy: Customers through distributors (and even competitors that are watching on the side lines) must feel the price increase is fair. They don’t have to like it but they do have to feel they are being treated fairly. They must view your increase rationale as fair and they must trust that you are treating all customers in the same manner.
- Communication: Communication is key to demonstrating fairness and trustworthiness. Public and/ or written communications that articulate your increase rationale and intent are imperative. Then follow this up with conversations and actions that are consistent with your written message.
- Conviction: The sales team must execute with a conviction that the increase is fair and they are committed to make it stick. This conviction should be felt by the buyer through their words and actions.
- Courage: It takes great courage to increase price. The buyer is no doubt trying to convince you that he will not accept this increase and will go to another supplier. The moment he senses that the sales person does not have courage, appears unsure or not committed to the increase, is the moment the buyer doubles downs on his threats to buy elsewhere. Yet when he sees you standing strong on your position he backs down; be begins to believe the increase is both fair and being fairly executed across other customers.
- Preparation: As a sales team, identify your potentially toughest customer negotiations. Pre-think out your responses to their toughest questions. Consider role playing.
- Know your Pricing Power: There are times when the customer might be seriously planning on walking away (versus just saying this as a buyer tactic). You need to have the skills to accurately evaluate if the threat is real or a tactic; does he have the power or do you have the pricing power? You need the skills to know when to walk away, when to hold or when/how to find a middle ground; one that does not under-mind your creditability as a value-pricer or under-mind the overall price increase initiative.
If you are interested in learning more about increasing your price execution skills, please join my workshop Partnering with Sales; Best Practices for Price Execution at the PPS European Pricing Conference, December 1, 2016 in Berlin, Germany.
Price drop decisions made easy!
By Joanne Smith, September 11, 2015
One of the toughest challenges in B2B pricing is minimizing the price leakage that occurs in the negotiation process. There are valid reasons for discounts but far too often the sales person is negotiating discounts too frequently and too deeply. Even when the sales team relies on their pricing group for guidance the optimum price is not often achieved. In addition, once a decision to drop price occurs, it is often done in a way that sets you up for more aggressive price pressure in the future.
Key reasons for poor price decisions: Three top reasons for poor price drop decisions include weak skills, lack of courage and the high complexity involved in smart decisions. Skills and courage work hand in hand. Weak skills lead to weak confidence in decision making and thus weak courage. The end result is a default to dropping price; it is perceived to be the easier and less risky decision. Furthermore, the high complexity involved in making a smart decision can overwhelm even skilled and courageous people.
For most pricing situations you need to consider 10 or more factors and these factors differ for different pricing situations. You need to ask different questions if the price drop rationale is about a change in market dynamics versus a competitive match situation or a share gain situation. To add to the complexity, often these various factors suggest opposing pricing actions. For example, you may have competitive pressures suggesting you drop price on one hand but on the other hand this account has lower price than similar accounts suggesting you hold or even raise price. Managing this complexity in a practical, on-going and disciplined way is tough!
Unable to deal with this complexity, many organizations resort to basing all their pricing decisions on the same 2 or 3 factors; perhaps the size of the account and the accounts price relative to the price of similar deals. Two or three factors don’t provide sufficient knowledge to make your best choices.
The Challenge: Building courage comes from increased confidence that you are making the best decision. The right training courses can build the foundational skills and immediately improve decisions. The challenge comes in assuring that the sales and pricing teams can fully and appropriately analyze each situation with high skill, time after time, given the complexity of these decisions. If the decision process is not simple, practical and easily reinforced newly developed skills will decline over time and behavior will revert back.
After years of working with hundreds of businesses and continually enhancing training and tools to aid better decisions, I have designed the Price Drop Decision Tool to make smart decisions easy and practical every time.
Price Drop Decision Tool; Make it Easy: This simple excel based tool provides a list of the key questions you should be considering under different price drop scenarios then balances your responses to provide a suggested price drop decision. If the decision is to drop price, the tool then provides easy-to-use suggestions to be sure you optimize your profits for this deal as well as future deals. To learn more view the video below or contact www.price2profits.com.
If I asked your marketing and sales organization whether they thought the pricing organization was more partner or more police, what would they say? If I asked the pricing organization what they aspired to be, partner or police, what would they say? Ideally they would aspire to be partners. Most pricing organizations go through the growing pains of initially “being the police” however the organizations that add the most value (by far) are the ones that grow into partners. Click on the link to view more.
We have to learn to crawl before we can walk, let alone run. If you want to be a professional sports player, it takes years of investing in our skills and equipment and it takes coaches, sponsors and strong motivation. It’s the same if your company aspires to be world class in pricing. There is no silver bullet. It takes hard work, dedication, passion, investment and years to reach your full profit generating potential. But here’s the good news…
As a CMO, where does pricing and margin enhancement fall in your priorities?
by Joanne M Smith
As a CMO owning the 4P’s, where does pricing improvement fall in your priorities? How about margin enhancement; is it one of your top goals? If margin enhancement is a key priority for you, chances are you are investing in innovation—product innovation. Over the long haul, product innovation that creates differentiation sets the stage for premium prices and higher margins. But is there a better, shorter term approach you should be tackling in addition to product innovation? For most companies, especially business-to-business, the answer is yes. The fastest and largest impact to margin comes from improving your pricing performance and capability. In general, it is 2-4 times more effective at improving profits then volume, variable cost or fixed cost improvement. Companies that invest in product innovation are lucky to achieve 5-10% per year of their product line coming from new products. Even with tremendous price premiums on these new products, you will likely have greater impact working on the pricing of the 90-95% of your product line that comes from existing products. For example, to equal the profits from achieving a 1% improvement in your existing products, you would need an approximately 95% price premium in your new products. The fact is most B2B companies fail to optimize their pricing thus leaving large profits on the table. Even their innovative products are quite often underpriced. If you are serious about margin or profit enhancement, begin to focus on advanced pricing capability in the three foundational elements: transactional, value-based and strategic pricing. The CMO should be the company leader and advocate for pricing. Why? Because pricing done well quite often results in changes to your business and marketing strategies, market and customer segmentations, offering design and even channel. It influences innovation, especially non-product oriented innovation. For that to occur, marketing must be up front and center in driving pricing. Additionally, there is arguably no better way for marketing to quickly gain company credibility then by quickly delivering large profit gains. My new book, The Pricing and Profit Playbook; A Practical and Strategic Guide to Achieving Superior Profits Based on DuPont’s Success, discusses the critical role of the CMO in pricing and explains the five plays needed for superior profits. It is available on amazon.com and barnesandnobles.com.