Price Optimization: How Best-In-Class Performers Add To Both The Top And Bottom Lines

"Do you want to work smarter or harder?" This phrase does not represent a new concept in B2B sales effectiveness, but today's big data science capabilities add new layers of nuance to traditional methodologies for beating quota. This Research Report explores the value of price optimization solutions in contributing to more efficient customer management strategies. PRICE OPTIMIZATION: HOW BEST-IN- CLASS PERFORMERS ADD TO BOTH THE TOP AND BOTTOM LINES August, 2014  Peter Ostrow, VP and Research Group Director; Customer Management, Sales Effectiveness Report Highlights The number one business goal among sales leaders is now "higher margins." The leading reason why B2B sales deals are lost? Pricing. Best-in-Class companies offer 30% more sales rep-level flexibility, vs. other firms, in closing business deals. Price optimization users improve customer retention by 5.3% annually. Non-users lose ground at a 0.6% rate. p2 p4 p5 p7 www.aberdeen.com Price Optimization: How Best-in-Class Performers Add to Both the Top and Bottom Lines 2 As the end of any typical business-to-business (B2B) selling cycle approaches, sales reps and managers alike feel the growing pressure to "do whatever it takes" in order to get deals done, make the forecast predictions come true, and hit their individual and group numbers. These imperatives inevitably motivate the offering of deal sweeteners, pricing discounts, and enticingly soft terms-and-conditions arrangements as desperation and nerves set in at month-end. Is this, however, any way to run a successful modern sales organization? Is there any alternative? Times Have Changed: Introducing the 21st Century Sales Leader Aberdeen's newest Sales Effectiveness survey covering a variety of deal-closing technologies and processes is now revealing results that will be published in the pending "Got Friction? Workflow Fixes that Shorten the B2B Sales Cycle." One of the more surprising findings is represented by Figure 1, which details the top aspirations of the sales leaders and sales operations practitioners representing the majority of survey respondents. The unexpected data point here is that the most significant goal expressed by sales practitioners is to not just acquire business, but to do so profitably. Traditionally, the sole focus of sales organizations has been to sell as much product as possible, e.g. growing top-line revenue and letting everything else – such as profits – take care of itself. We know from Aberdeen's Marketing Strategy and Effectiveness research that marketing teams have, for many years now, been less accountable for activities (click-throughs, registrants, eyeballs, downloads) and more for results such as filling the pipeline and generating measurable revenue from campaigns. The unexpected data point here is that the most significant goal expressed by sales practitioners is to not just acquire business, but to do so profitably. www.aberdeen.com Price Optimization: How Best-in-Class Performers Add to Both the Top and Bottom Lines 3 Figure 1: Business Goals of Contemporary Sales Leaders: Focusing on Margin, Talent, Speed Source: Aberdeen Group, August 2014 On the sales side of the house, however, this sense of return- on-investment as represented in Figure 1 is the first time that our Sales Effectiveness research has revealed any significant sales leadership attention on running their part of the business… like a business. Taking such ownership of a profit-and-loss mentality in sales management is a big-picture attribute of the most successful sales organizations, as we will shortly see. The additional top goals in Figure 1 add to this more holistic approach toward enabling more agile and successful front-line sellers as well. Aberdeen research consistently shows that companies providing faster, stronger sales training and aggressive customer experience management strategies inevitably win more deals and do so at better margins. Prices and Discounts and Margins, Oh My! Now that sales leaders are apparently seeing the light regarding the need to focus on more than just the top line, how 44% 42% 40% 37% 36% 35% 31% 0% 10% 20% 30% 40% 50% Higher margins More educated sales force Faster sales on-boarding Improved customer satisfaction Faster response to sales leads Faster response to customer inquiries Improved ability to defend against competitors Pe rc en ta ge o f R es po nd en ts n = 143 All companies Taking such ownership of a profit- and-loss mentality in sales management is a big-picture attribute of the most successful sales organizations. www.aberdeen.com Price Optimization: How Best-in-Class Performers Add to Both the Top and Bottom Lines 4 does this new sensitivity toward margin jibe with the never- ending pressure to get deals done and make their number? If sales totals threatened to come up short this month, isn't it better to hit quota at a thinner margin level, remain a sales rep or sales team in good standing, and let the back-office folks take care of the rest? Aberdeen's research findings would indicate that the answer is no… and yes. As we will see below, sales organizations that react emotionally to the pressure of unclosed deals by throwing random price discounts at their prospects or customers perform poorly. On the other hand, sales operations practitioners who accept pricing flexibility as a reality of doing business, and then support this new normal with "working smarter, not harder," data-driven decision- making, create win-win-win results for sellers, bean-counters, and customers. The first step taken by these wise sales practitioners is to understand the playing field on which their team competes. Aberdeen's survey asked end-users, "When your sales team loses a deal, what are the top two reasons why?" and the results, in Figure 2, tell an interesting story. Here, we see that the two dominant barriers to sales success represent both highly quantifiable and seemingly subjective rationales for losing deals: sellers are unable to compete with a lower, competitor-offered price, but just as significantly they fail to grasp the subtleties and nuances of their target companies that influence the selection of the ultimate winning provider. This finding reveals a conundrum facing sales leaders who try to optimize the chances for their reps to succeed. It is far easier to allow desperate, under-their-number sellers to reduce price in real time, than to retroactively teach them better prospecting and body language-reading skills. If sales totals threatened to come up short this month, isn't it better to hit quota at a thinner margin level, remain a sales rep or sales team in good standing, and let the back-office folks take care of the rest? www.aberdeen.com Price Optimization: How Best-in-Class Performers Add to Both the Top and Bottom Lines 5 Figure 2: Why Sales Deals Are Lost: Money and Politics are Intrinsically Intertwined Source: Aberdeen Group, August 2014 But is it wiser? When we divide all of the Aberdeen research survey respondents into high performers and not-so-good sales organizations, we see in Figure 3 that Best-in-Class companies (sidebar) are far more likely to respond with high values to "as the end of your typical sales cycle approaches, how much flexibility does your company provide to sellers in order to get deals 'over the finish line'?" This finding would initially seem to imply that a long discounting leash is a wise sales enablement tool, with Best-in-Class companies supporting 30% more (90% vs. 69%) rep-level independence near month-or quarter-end, because the natural path of least resistance for any salesperson trying to close a deal is to lower the price. Flexibility, however, is a concept that applies to alternative methods of influencing a deal decision – payment terms, delivery options, service agreements, or commitments to providing customer referrals – than merely adjusting the per- unit cost of goods sold when under pressure. Indeed, while we 49% 48% 21% 20% 19% 0% 10% 20% 30% 40% 50% Price Failure to diagnose, control internal politics in buyer’s organization Overly complex deal structure Competitive products are better Lack of knowledge about customer’s purchasing history Pe rc en ta ge o f R es po nd en ts n = 143 All companies The Lead-to-Win Best-in-Class Defined In June through July 2014, Aberdeen surveyed 143 end-user organizations to understand their sales best practices. The performance metrics used to define the Best-in-Class (top 20%), Industry Average (middle 50%), and Laggard (bottom 30%) among these sales teams are: • 84% of sales reps achieving quota, vs. 54% among Industry Average and 18% for Laggard firms • 17.9% average year-over-year increase in total company revenue, vs. 7.4% for the Industry Average and no change among Laggard respondents • 6.6% average year-over-year increase in lead conversion rate, vs. 1.4% and 0.3% decreases for Industry Average and Laggard respondents www.aberdeen.com Price Optimization: How Best-in-Class Performers Add to Both the Top and Bottom Lines 6 have seen that pricing is the leading reason why deals are lost, discounting is actually not a predominant contributor toward deals that are won. Figure 3: Should B2B Sellers Be Provided End-of-Cycle Flexibility? Source: Aberdeen Group, August 2014 In Figure 4, we see that Best-in-Class companies are 35% more likely than under-performers to have offered a discount in supporting a winning sales opportunity, but in fact, this data also shows that 63% of the time, top performers do not utilize a discount to win the deal. At first glance, these two findings seem contradictory, but this is where the deployment of price optimization solutions becomes relevant. In other words, there is a time and place for pricing flexibility and discounting, but leaving the selection of when and how to do so requires a data- driven approach rather than catering to the emotions of an individual sales rep falling short on their number. 40% 50% 10% 16% 53% 31% 0% 15% 30% 45% 60% Extremely flexible Very flexible Very or completely inflexible Pe rc en ta ge o f R es po nd en ts n = 143 Best-in-Class All Others www.aberdeen.com Price Optimization: How Best-in-Class Performers Add to Both the Top and Bottom Lines 7 Figure 4: Is Sales Discounting OK? Source: Aberdeen Group, August 2014 Price Optimization: Finding a Data-Driven Middle Ground So, if companies are losing sales deals because of pricing and politics, but not winning them with discounts, how do Best-in- Class firms achieve their superior results with more targeted discounting strategies? The answer lies deep in the research data, which reveals that 24% of top performers indicate that they are planning to increase their investments in price optimization technology solutions in the coming 12 months, compared with only 3% indicating a planned reduction. These products are relatively new to the B2B marketplace, although as consumers, most of us have, for years, unknowingly purchased airline seats, hotel rooms, and cruise ship cabins under the influence of price optimization tools. Today, however, providers of enterprise goods and services are deploying this technology with compelling business results – Figure 5. 36.8% 27.2% 20% 25% 30% 35% 40% When your sales team wins a deal, what percentage of the time was a price discount offered? Pe rc en t n = 143 Best-in-Class All Others It is far easier to allow a desperate, under- their-number seller to reduce price in real time, than to retroactively teach them better prospecting and body language-reading skills. But is it wiser? www.aberdeen.com Price Optimization: How Best-in-Class Performers Add to Both the Top and Bottom Lines 8 Figure 5: Annualized Performance Improvements Achieved by Price Optimization Users Source: Aberdeen Group, August 2014 So how do price optimization solutions actually work? Providers of these technologies generally have extensive experience in the hospitality industry scenarios like those described above, but today are extending their reach into the B2B space. We know from Aberdeen's Big Data for Sales: Are We Ready? (March 2014) that the emergence of "big data" utilization across virtually every line-of-business sector is still in an early adoption phase among sales leaders, but nevertheless, this research shows Best-in-Class firms deploying "predictive analytics for sales forecasting" at three-times the rate of Industry Average and Laggard firms (27% vs. 9%). What this means for the price optimization space is simple but elegant: if we have a more concrete and data-enriched understanding of what sales tactics, messages, content, and of course prices have been successful in the past, we can far more accurately predict which of the same variables will help us win deals – at acceptable margins – in our current and future opportunity pursuits. Price optimization tools are utilized to impact both the top and bottom line, by enabling sales leaders and also individual contributors to know where to draw the line on 11.2% 5.5% 5.3% 4.2% 7.5% 1.6% -0.6% -0.2%-2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% Annual corporate revenue Reduction of errors in contract / proposal generation Customer renewal rate Lead conversion rate Ye ar -o ve r-y ea r ch an ge n = 143 Price Optimization Users All Others There is a time and place for pricing flexibility and discounting, but leaving the selection of when and how to do so requires a data-driven approach rather than catering to the emotions of an individual sales rep falling short on their number. www.aberdeen.com Price Optimization: How Best-in-Class Performers Add to Both the Top and Bottom Lines 9 discounting, far before the stress-filled last few days of the month create a tense, fire-fighting sales culture. As a result, adopters of this technology stack not only perform better from a metrics point of view, but also demonstrate in Figure 6 a superior level of sales speed and competence: Figure 6: Better Business Results, Stronger Sales Competencies Source: Aberdeen Group, August 2014  Few of us truly enjoy receiving a request-for-proposal (RFP) from the procurement office of our target account. After all, we noted in Figure 2 above that sales deals are lost just as frequently due to lack of political insight as they are over price, and most RFP scenarios tend to diminish a seller's ability to work through their personal connections or use their sparkling personality to influence sales outcomes. Aberdeen's Reducing Friction in the Sales Cycle: Best Practices in Sales Contract Management (October 2013) showcases how 72% 55% 52% 48% 45% 50% 42% 40% 22% 17% 0% 15% 30% 45% 60% 75% Rapidly, effectively responding to RFP’s Generating complex quotes in a timely manner Managing pricing by exception: automated "guardrails," triggers On-boarding, training new salespeople Avoiding “no- decision” sales losses Pe rc en t i nd ic at in g 4/ 5 on 1 -5 s ca le n = 143 Price Optimization Users All Others Price optimization tools are utilized to impact both the top and bottom line, by enabling sales leaders and also individual contributors to know where to draw the line on discounting, far before the stress- filled last few days of the month create a tense, fire-fighting sales culture. www.aberdeen.com Price Optimization: How Best-in-Class Performers Add to Both the Top and Bottom Lines 10 Best-in-Class companies rapidly and effectively respond to RFP's using both technology platforms as well as prospecting best practices to understand both the human and data-driven influences on buyers' behavior. Price optimization users replicate this skill set by leveraging pricing templates, processes, and automated analysis of historical transactional data to take the emotional stress and pricing unknowns out of RFP response activities.  Price optimization users report a 31% higher competency level (55% vs. 42%) than non-adopters around rapid complex sales quote development. We know from Configure-Price-Quote: Best-in-Class Deployments that Speed the Sale (July 2013) – another research report title specifically focused on getting sales deals closed more rapidly and shrinking the enterprise sales cycle – that automating the process of formal quote development is a hallmark of top-performing sales organizations. Enabling your sales team with templates to negotiate with their prospect or customer is enhanced by price optimization solutions that empower sellers with real-time market data and competitive intelligence that help them choose, as indicated above, the right time and place to yield on pricing pressure. As Kenny Rogers would say, "you've got to know when to hold 'em, and when to fold 'em."  Automated exception pricing is another hallmark of price optimization users providing them with the strategic selling advantage. Let's face it: plenty of goods, and especially professional services, are initially priced by product marketers with a tacit understanding that discounting is a reality of contemporary B2B selling As Kenny Rogers would say, "you've got to know when to hold 'em, and when to fold 'em." www.aberdeen.com Price Optimization: How Best-in-Class Performers Add to Both the Top and Bottom Lines 11 environments. We have seen above that Best-in-Class sales leaders offer their team members plenty of flexibility – sometimes, but not always, in terms of discounting – and the data shows them to be more than twice as likely as All Others (70% vs. 34%) to deploy automated "guardrails" that permit certain percentages of allowed rep-level discounting, supported by triggers and red flags that pop up for management to address when those limits are exceeded.  In Figure 1 above, a top-three sales business goal was faster sales rep onboarding. Companies deploying price optimization solutions report more than twice the competency level (48% vs. 22%) compared with non- users; this is because the solution enables reps to more quickly ramp-up their selling skills and product knowledge, without having to develop their own anecdotal understanding of how to effectively price their goods and services. Instead, they benefit from the company's historical understanding of how to inform future pricing decisions. Considering Aberdeen's research findings that B2B sales people typically cost over $29,000 and take more than seven months to replace with a fully productive contributor, price optimization proves its worth as another crucial element in controlling enterprise sales cycles. Conclusion and Recommendations Ultimately, the ability for any enterprise sales organization to quote, price, and sell effectively is determined by the right mix of people, process, and technology. Price optimization tools leverage an organization's vast opportunity to collect, analyze, and leverage their big data around the entire customer acquisition and retention lifecycle. When they take advantage Times have certainly changed for B2B sales, considering that ROI and margin are suddenly of concern to leaders formerly expected to simply push more product out, and more deals over the goal line, regardless of the related expense. www.aberdeen.com Price Optimization: How Best-in-Class Performers Add to Both the Top and Bottom Lines 12 of this knowledge to better predict how individual sales deals will play out, and scale this talent to an enterprise-wide level, price optimization users win at every stage of the customer experience – Figure 7. Figure 7: Advanced Analytics Impact Every Moment in the Customer Experience Source: Aberdeen Group, August 2014 Times have certainly changed for B2B sales, considering that ROI and margin are suddenly of concern to leaders formerly expected to simply push more product out, and more deals over the goal line, regardless of the related expense. Converting and closing more leads, controlling the sales cycle, enabling more successful individual contributors, and certainly retaining more customers ‒these are enviable Best-in-Class attributes that price optimization users are enjoying with data- driven, scientific approaches to modern selling. 22% 41% 61% 88% 14% 38% 59% 77% 10% 30% 50% 70% 90% Lead conversion rate Lead acceptance rate Reps achieving quota Customer retention Pe rc en ta ge o f A tt ai nm en t n = 261 Big data/analytics applied to deal velocity All others If we have a more concrete and data-enriched understanding of what sales tactics, messages, content, and of course prices have been successful in the past, we can far more accurately predict which of the same variables will help us win deals – at acceptable margins – in our current and future opportunity pursuits. www.aberdeen.com Price Optimization: How Best-in-Class Performers Add to Both the Top and Bottom Lines 13 For more information on this or other research topics, please visit www.aberdeen.com. Related Research Would You Fire a High-Performing Sales Jerk?; July 2014 The 21st Century Buying Experience: Say Farewell to the Sales Cycle; July 2014 It’s a Marathon, Not a Sprint: Best-in-Class B2B Sales Training for an Ever-Changing Market; June 2014 Gamification in B2B Sales: Is it Time?; April 2014 You Win Some, You Lose Some: How Best-in-Class Sales Leaders Learn as They Go; April 2014 Incenting Success: Best-In-Class Sales Management; April 2014 Sales and Marketing Alignment: A Primer on Successful Collaboration; March 2014 Big Data for Sales: Are We Ready? ; March 2014 Sales Enablement Technologies: Some Things Old, Some Things New; March 2014 No More Spaghetti against the Wall: How Best-in- Class Sellers Use Social Relationships to Build a Better Pipeline; February 2014 Mobile Sales Enablement: Fulfilling the Promise of Untethered Selling; February 2014 Enterprise Social Collaboration: Best Practices for the Connected Sales Team; January 2014 Beyond the Quota: Best-in-Class Deployments of Sales Performance Management; January 2014 Making the Most of Your CRM: How Best-in-Class Sales Teams Maximize Revenue and Customer Experience; June 2013 Author: Peter Ostrow, VP/Research Group Director; Customer Management, Sales Effectiveness [email protected]) About Aberdeen Group Aberdeen Group conducts research focused on helping business leaders across sixteen different B2B technology disciplines improve their performance. Our process is simple – we conduct thousands of surveys every year to identify top performing organizations and uncover what makes them different. We share these insights back with the market in the form of in-depth research reports and content assets to help our readers build business plans capable of driving better results with the right set of tools to help them get there. This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc.