Selling: Pricing consistency. So what!
There was a time not so long ago that prices varied geographically, and it was generally accepted that these were simply due to the cost of doing business, and in any case comparing prices globally was complicated. The advent of AI enhanced Contract Management Systems has changed the game. Real-time dashboards spotlight ambiguities, and algorithms actively search them out. All this equates directly to negotiating power especially if the other party is ill-equipped to answer. Simply asking a Sales Rep to explain why an identical product costs X in one location and Y in another is often enough to make them defensive, and give the buyer the negotiating advantage, even if the differences are quite legitimate.
Whilst buyers are embracing AI to improve their contract cost analysis, many suppliers have not changed the way they construct their prices and find themselves in a continually weaker negotiating position. So, what can they do about it?
Simply put, introduce some logic into their pricing. The buyer’s question is quite legitimate and often sincere. In a globalized world it is in not acceptable to be unable to answer this question coherently. Beyond the base production cost, tax regimes change, logistics vary and operating costs differ from one place to another. There are multiple ways to explain the differences; as long as they are confident their pricing structure is coherent. We will look at 3 of the big ones.
A workable coherent pricing methodolgy, needs as a minimum, that all ways to present pricing comes from a common source. This could be competitive proposals, unsolicited offers, price books or the way the offering is monetised within the contract such as sale, rental or packages. It takes a simple click of a mouse to compare competitively tendered prices with any associated price book, or across geographies. Any unexpainable difference will be negotiated away.
Some people will argue that such an approach removes the supply and demand element from such discussions, but this still remains, and is simply a function of negotiating power at that moment in time; but dont be surprised that your customer actively encourages competition in order to avoid being exposed the next time around.
Let’s turn to pricing premiums, that are frequently linked to the introduction of “New” technology which could refer to a game-changing and exclusive product or service, but can also be an internal classification of something new to the supplier but not the market.
In the first instance this premium may partly reflect the exclusivity, but is also a function of the upfront investment made to develop it. No company can continue to invest in innovation if there is no way to recover the cost. Unfortunately, all too often suppliers consider new technology price premiums to be the same regardless of the market and their position in that market. If the supplier has brought differentiating innovation to the market that delivers tangible and recognizeable value to the buyer, there is a justifiable premium. However if this same product or service is only filling a portfolio gap, and brings nothing new to their customers, this cannot justify the same premium, even if it is new to them.
To compound this, such ‘new technology’ is often considered “new” for a set number of years and is reported as such; however this also ignores market reality. If a competitor introduces the same or a better offering after 1 year, there must be a mechanism to reduce the pricing premium accordingly.
A coherent pricing methodology must therefore recognise the competitive differentiation of each of its product families and assess this objectively and regularly, essentially following the product life-cycle.
Finally we will look at geographical variations. When building a coherent global pricing structure there are three things a supplier needs to take into account. Firstly the variation in their own costs, such as tax, logistics, overheads, which will establish a floor for their pricing, secondly the value they bring to the customer compared to available alternatives, in the form of a price premium; and finally a reasonable understanding of the local market rate, which serves as the reference point for their (or a competitor’s) pricing premium, expressed as a percentage above or below the market rate.
The starting point of such an approach is the global reference price for each item, naturally higher than any single region’s sales price; and built up based upon factors such as production cost, overheads, transportation, importation and the competitive differentiation factor. By breaking the reference price into its component parts, any variations in these factors can be tracked and accounted for in the future. This is not the mammoth task it first appears as most of these factors apply equally to all lines.
Once established, the same item in any region can be “discounted” to reflect the region’s market conditions. If the local market is highly competitive with low operating costs, the discount could be larger than for an area where operating costs are higher and competition lower.
From here further adjustments could be made for an individual tendering exercise to include the evaluation model, operational environment and competitors.
Now the supplier’s pricing window is coherent and adjusted by practical criteria which can be refined as more data is collected. Such an approach means that their pricing will be sensible, justifiable and competitive. They will also have built a database that will allow them to defend their pricing with confidence and transparency.
All that tremains is to connect this to a front end pricing tool such as the Mbrace Price Optimisation workbook, and you are ready to go
