The Definitive Guide To Pricing Optimization

In this informative new eBook, you’ll learn
how to:
• Identify new customers
• Segment your accounts, so you’re focusing
  on the most profitable customers
• Use technology instead of adding more
  reps or hiring expensive trainers to boost your
  customer numbers
• Improve your visibility into sales and
  discounting so you know where you need
  to focus.

2 © 2014 PROS, Inc. All Rights Reserved. | The Definitive Guide for Better Pricing Contents Introduction   3 IdentifyingNewCustomers:WhereShouldYouStart? 4 HowCanCustomerSegmentationImproveYour PricingStrategy?   6 ForgetNewSalesRepsOrMoreTraining:PricingSolutions ImproveRevenueWithoutIncreasingSalesCosts   8 ImproveYourVisibilityIntoSalesAndDiscounting WithTheseMetrics   10 Conclusion   13 3 © 2014 PROS, Inc. All Rights Reserved. | The Definitive Guide for Better Pricing Introduction Growing sales and margins through better pricing doesn’t have to be an impossible task. By focusing on four key areas, businesses can build a solid pricing foundation that will help you create consistent sales and profit growth. This eBook will guide you through these areas, offering smart strategies and actionable tips to help you get started. Businesses need to start by defining how to identify new customers, so that your sales reps are getting the most value from their time. Follow that up by segmenting your accounts, so that you’re spending your time on the ones that offer you the best profitability, not just the biggest accounts that can be deceptively unprofitable. Maintain that customer base with technology to help you analyze today’s data- driven sales instead of looking to additional sales reps or more training to meet your numbers. Finally, improve your visibility into sales and discounting so that you can track your progress and identify the areas where you still need improvement. Better pricing doesn’t happen overnight, but with a consistent approach, you will see results. 4 © 2014 PROS, Inc. All Rights Reserved. | The Definitive Guide for Better Pricing Identifying New Customers: Where Should You Start? Every company needs to quickly identify the best potential customers and make sure it’s getting the best return on its sales reps’ time. The key is to first understand your existing customers and why they’ve purchased from you. In creating your strategy, here’s a model to consider: the self-driving car being developed by Google. Google’s driverless car needs to make turn-by-turn decisions as it navigates its environment. To accomplish that, it collects mind-blowing amounts of information about both its internal systems and its external environment, and connects and processes this information in real time. Similarly, commercial business-to-business companies need robust technology and processing power to integrate their internal information with external market data in a way that improves decision-making and leads the company in the right direction. Forward-looking companies are investing heavily in technology and solutions that connect sales transactions to customer data, product information and price quotes, as well as metrics for the competitive environment and market conditions. The first step is to understand your existing customers on a deep level. This process requires both qualitative and quantitative research. Many companies tend to focus on qualitative measures, such as user research surveys and buyer persona questions, but relatively few focus on the quantitative side. And that’s often a mistake. This quantitative research, which begins with analyzing the data that your company already has about existing clients, can help you truly understand your customers’ key attributes and behaviors. Here are some questions to explore. Summary In developing your strategy for identifying new customers, consider modeling your approach on the self-driving car being developed by Google. Like that driverless car, your business needs robust technology and processing to integrate internal information with external data, using these analytics to improve decisions and guide you toward your goal. 5 © 2014 PROS, Inc. All Rights Reserved. | The Definitive Guide for Better Pricing 1) Who is the customer? Don’t stop with the size of the overall company and the industry it serves. Pinpoint the department that purchases from you; the types of products it purchases; the conditions in which it sells the product; and whether it’s positioned as good, better or best in the market. 2) What did these customers buy? 3) How much did they pay for it? 4) What additional factors came into play? Did the customer require that you ship overnight by air or five-day by ground, and how did that affect pricing? By gathering and analyzing information, you can begin to identify the most common attributes within your existing customer base. These attributes are critical to developing a profile for your target market. Connecting these attributes with a company data list enables you to see which companies overlap the most with your current customers, and you can quantitatively score these prospects. When talking about using data science in pricing, it’s helpful to think of segmentation, forecasting and optimization in terms of three different types of analytics. 6 © 2014 PROS, Inc. All Rights Reserved. | The Definitive Guide for Better Pricing 1) Descriptive: A form of descriptive analytics, segmentation is a way to describe what happened. Previous sales transactions data is the core of this analysis. 2) Predictive: Falling under predictive analytics, forecasting is a method for describing what you expect to happen. Here, sales transaction data might be analyzed alongside larger external information sources to draw some conclusions about the business, such as expected product growth. 3) Prescriptive: Offering prescriptive analytics, optimization outlines what decisions to make based on what’s expected to happen. By pulling all this data together, you can recommend which products and prices to offer. Today, companies need technology and strategic solutions that connect internal data (sales transactions, customer data, product information and quotes) to the outside world, incorporating data on your competitors and the changing market. These tools can help your company, like the Google self-driving car, to automate and streamline complex decisions in a way that guides you toward your goals. How Can Customer Segmentation Improve Your Pricing Strategy? Every company has preferred customers who receive the highest level of care and attention. These top customers will always get your newest products, your best pricing and other star treatment. In most organizations, sales operations and pricing are focused on the biggest accounts, because each one has such a large effect on sales numbers and profit. But how can you be sure that your largest accounts are also your greatest potential for revenue growth? Typically, when you’re trying to determine which types of accounts and market segments to pursue, you want to focus on the big picture, or “the long tail.” When deciding how to segment and prioritize customers for your pricing strategy, you have to analyze the ROI for many different factors. On the most basic level, do you want to spend a lot of time for a lot of benefit on a very large account? Or do you want to spend a little time for a little benefit across thousands of small accounts when the cumulative impact could be huge? Summary We all realize that the biggest accounts get the most attention because each one has such a large effect on sales. But until you analyze the data, how can you be sure that your largest accounts are also your greatest potential for revenue growth? 7 © 2014 PROS, Inc. All Rights Reserved. | The Definitive Guide for Better Pricing The problem for many sales teams is that they’re so used to focusing on the largest accounts that they’ve neglected to get a firm grasp on the smaller transactions that make up perhaps 80 percent of sales. The number of variables that go into pricing small and medium accounts is too complex for most organizations to manage effectively. For example, a given group of customers will care about the pricing details for a handful of products. For a medical distributor, cardiologists will always want to know they’re getting the best price on EKG machines; general practitioners will always want to know they’re getting the best price on latex gloves. With those combinations of customer and product, you’re not going to be able to move the needle of pricing significantly. With other combinations of customers and products, however, people tend to just accept the price, so long as it appears reasonable. Instead of asking themselves, “Is this the best price for this product?” they ask, “Is the price close enough to what I’d expect so that I’m not going to question it?” Most of your products or customers probably fall into this category, which creates a huge opportunity to shift prices. The key is to be able to identify these less-sensitive areas and optimize the pricing. Most companies don’t focus on that at all due to lack of bandwidth. The complexity of pricing optimization requires a dedicated software solution — a tool that can analyze all the smaller transactions and produce recommendations that drive revenue. 8 © 2014 PROS, Inc. All Rights Reserved. | The Definitive Guide for Better Pricing It’s common for a company’s sales operations and pricing to focus on the biggest accounts because each one has such a large impact on revenue. Most of the time, when companies hire pricing or sales operations people, it’s because they are facing an acute need on one of their very large, sensitive accounts. You might be able to squeeze another $500,000 in sales from your largest customer, but you may prefer to achieve the same result by changing your prices by just a few pennies. At the end of the day, the impact on your business could be the same. But with a pricing software solution, optimizing sales to the more numerous, smaller accounts can be equally profitable and result in long-term growth. Forget New Sales Reps Or More Training: Pricing Solutions Improve Revenue Without Increasing Sales Costs It’s a new year, and your company’s sales goal for 2014 is higher than last year’s. For the sales department, the increase means it needs to decide on a way to reach that number. But it’s not so simple. The question for the CEO and the company as a whole is more complicated: How do we increase revenue — without increasing the cost of sales? When sales leaders are asked to increase revenue, they typically suggest one of these three ideas. 1) Increase headcount: “You increased my sales number by 10 percent; to meet it, I’ll need to hire 10 percent more reps than I had last year,” a sales manager often says. Usually, the CEO will be looking for ways to increase sales with current staff. 2) Increase training: To make existing staff more productive, the solution might be to add more training in negotiation, products and selling strategy. But if the company recently invested in additional sales training, the CEO may ask, “Why do we need to do that again?” 3) Increase marketing: If you already have the staff and the training, the problem could be the marketing content. “We have messages that don’t resonate; they’re not reaching the right audiences,” the sales leader Summary Sales teams everywhere are asking themselves, “How do we increase revenue — without increasing the cost of sales?” A pricing solution can control sales costs by making everyone in the organization more effective, driving revenue while changing business strategy on a deep level. 9 © 2014 PROS, Inc. All Rights Reserved. | The Definitive Guide for Better Pricing might say. “We keep hearing about content marketing, but are we doing anything with that?” Again, the drawback is that new marketing takes a lot of time, effort and resources. Increasing headcount, training or marketing may boost sales revenue, but they do so by increasing the cost of sales. So how do you grow sales if you don’t have any more money to spend, or if you’ve already tried these three approaches? To increase revenue without increasing your sales costs, companies should focus on sales effectiveness, not sales volume. Effective selling begins with examining each sale for ways to improve. Could you have negotiated a better price? Did you sell everything the customer was probably going to buy from you? Did you sell the standard brand product when you could have sold the premium product? Effective selling means supplying reps in the field with the customer intelligence they need to negotiate the best deals. This intelligence can be found within the existing sales data; the trick is having it handy in the moment of truth, when the rep is talking with a customer who needs your product. Sales leaders always want to know how to take the knowledge and expertise of their best reps and replicate it across the rest of the organization. While your best sales reps may have 20 years of experience, they can’t analyze a year’s worth of transactions and provide recommendations on the fly. But imagine if they could. 10 © 2014 PROS, Inc. All Rights Reserved. | The Definitive Guide for Better Pricing The only way to do provide this intelligence in the field is through pricing technology. You can think of pricing solutions software as a recommendation engine, something like a GPS device. It knows where you are; you tell it where you want to go and it helps provide guidance toward that goal. Pricing software leverages your internal data by connecting it to external data about your customers and the market, analyzing the results to provide recommendations at the time of negotiation. Without it, it’s like trying to find your way by going to a convenience store and picking up a map. Pricing technology helps sales leaders to track and analyze sales, and to identify corrective actions. It allows you to glean insights from the wealth of experience you’ve already had selling your products, and then provide recommendations based on best practices — the sales that have resulted in higher profits, a better product mix and larger deals. It helps each and every rep get into the head of the most experienced reps. In the end, if you want to increase your company’s revenue without driving up your sales costs, you need to invest wisely. And a pricing initiative generally offers a better solution than increasing your marketing, training or headcount. You can start a pricing initiative for roughly the same cost as hiring two new sales reps, and still get more than enough ROI to fund the rest of the project. Investing in a pricing solution also makes everyone in the organization more effective; you’re making changes on a strategy and philosophy level. Just hiring two new reps or training a few employees can’t accomplish that. Improve Your Visibility Into Sales And Discounting With These Metrics When two of your customers are essentially comparable — the same industry, same size and same spending levels — your company should ideally earn the same margin from these deals, right? If you’re seeing a margin difference of 10 percent between these two similar customers, it doesn’t take Einstein to realize something else is going on with your pricing and discounting. There may or may not be a good reason for this pricing difference, but a lot of companies don’t even start asking these hard questions. Three common obstacles prevent them from analyzing their sales and discounting information in a systematic way, resulting in lost revenue: fear of the unknown, faulty assumptions and misunderstanding of pricing technology. Summary Many companies don’t even begin to ask the hard questions about pricing discrepancies. Three obstacles prevent them from systematically analyzing their sales data: fear of the unknown, faulty assumptions and misunderstanding of pricing technology. Focus on four key metrics to get the visibility you need to track your growth and profitability. 11 © 2014 PROS, Inc. All Rights Reserved. | The Definitive Guide for Better Pricing Most companies can achieve reasonable visibility, but only with their biggest clients and biggest deals. Anyone can analyze their major accounts using a spreadsheet or offline analysis. But too often, companies lack this same visibility into the sales for thousands of smaller customers that are buying tens of thousands of products. Unless you can analyze all of these transactions and provide recommendations for your sales reps, your company will miss out on many smaller opportunities for getting a better deal, whether that consists of a better mix, more products or better pricing. To increase revenues across all sales requires visibility across possibly tens of thousands of transactions. To do that, you need to approach the problem systematically, using pricing optimization technology. Unfortunately, this is where many companies run into three common obstacles. 1) Fear of the unknown: Once you start digging into sales data for the first time, who knows what you’ll find? If your sales department has tended to operate with a free hand when it comes to pricing and discounting, it may resist the additional oversight and scrutiny introduced by a pricing initiative. 2) Faulty assumptions about sales: In many sales departments, there’s an unspoken belief that every deal is unique in some way, which leads to the assumption that the people involved must have negotiated the best price from that customer at that time. Few people want to admit to shortcomings, and that’s understandable. But attributing a certain mystique to closing the deal only makes it harder to pinpoint these opportunities for improvement. 3) Misunderstanding of pricing technology: For sales leaders, the idea of using pricing analytics may sound overwhelming. The good news is that you don’t have to be a data scientist to analyze sales data. But you do need to go into a pricing initiative with a clear sense of what problems you want it to solve. “I need to understand why I’m getting so many 12 © 2014 PROS, Inc. All Rights Reserved. | The Definitive Guide for Better Pricing customer complaints,” might be one example; another could be, “I need to be able to understand why sales are dipping.” Pulling the data together isn’t necessarily the obstacle — it’s making sure you understand the pertinent questions before you start a pricing initiative. And that’s where purpose-built software has an advantage over a generic analytics platform. It’s optimized to provide what salespeople need from a recommendation engine. Well-designed pricing software focuses on one thing: How can technology and data science help me grow sales? Since the software has been designed to solve that problem over and over again, it can ensure the most relevant questions are answered. With pricing software in place, companies can apply common sales metrics to gain visibility into all of their sales, instead of focusing on the big customers and hoping the rest will just work out. Some metrics to look at include the following. 1) Win rate: How many quotes do you provide to prospects, compared to how many transactions ultimately result from them? 2) Deal size: Knowing the average deal size can help you identify the exceptions and determine best practices for getting larger deals. 3) Revenue versus discounts: How does the discount or price you give affect how much revenue you’re getting from each customer? 4) Customer lifetime value: Do customers buy something but choose not to grow their business with you, or do you see a positive trend where you’re able to continue growing the relationship and ongoing revenue? Fear of the unknown, faulty assumptions and misunderstanding of pricing technology are three barriers that are fairly universal. Organizations have to first get over them to start the process of gaining visibility into the sales process and boosting revenue. With purpose-built software, salespeople can have confidence in the recommendations, and use them to make the most of every customer relationship — not just the biggest ones. 13 © 2014 PROS, Inc. All Rights Reserved. | The Definitive Guide for Better Pricing Conclusion Creating a pricing strategy that helps support your growth and profitability comes down to four key areas. By using the strategy and tips offered in this eBook, you can start optimizing your pricing. By focusing on identifying new customers and segmenting them into groups where your time is more valuable, you won’t need to add new sales reps or invest in expensive training to continue growing. Keep your sales team focused on that growth by improving your visibility into your pricing and discounting. Technology solutions ensure that you can get the most out of your data and that you always know where your numbers are and what areas need more attention. By using the tips and strategy in this eBook, you’re well on your way to optimized pricing and improved profitability. Thinkothersmaybeinterested?SharethiseBook: