An Introduction to Price Management

September 23, 2020 Team Zilliant

 

What is Price Management? 

Simply put, price management is the function of creating and updating pricing within a business. It includes setting and managing pricing across a variety of price modes (or types of pricing that can occur in a business) such as list, matrix, negotiation, or customer-specific. Price management also includes updating prices when necessary, managing pricing segments, measuring key performance indicators (KPIs) and more.

For mid- to large-size B2B companies, manual price management is increasingly impractical. Yet, complicated spreadsheets continue to be the go-to method of managing prices, even though this method is not effective in giving pricing teams the control, flexibility and speed they need to respond quickly when price changes are warranted.

The number of factors to consider when managing prices on a wide scale has revealed some critical limitations to the traditional approach of using manual spreadsheets and calculations for price management. In B2B, the task of updating prices due to cost changes, margin objectives, or other market factors is an onerous, time-consuming, and manual one, prone to errors and inevitable frustration. Even for the most skilled pricing professionals, simply aggregating the appropriate data into a usable format, having enough processing power to manipulate massive amounts of data, understanding the implications of each price change, and seeking the necessary reviews and approvals can take weeks to complete.

Increasingly, B2B companies are utilizing more robust price management software to help the pricing team tackle price management and administration challenges, streamlining previously burdensome tasks with a flexible, highly configurable price management application.

How Does Price Management Work in B2B and Why is a Better Way Required?

B2B pricing must simultaneously meet the goals of the business while meeting customer pricing expectations for each unique circumstance. Yet, the complexities of modern B2B companies make setting the correct price difficult. The sheer proliferation of the numbers of product and customer combinations to price paired with factors that influence price such as cost, competitive dynamics, and much more makes setting prices extremely challenging.

In addition to the complications of setting prices, as market conditions change prices must be updated throughout the business. A seemingly simple change to list price causes a cascade of changes throughout the business. How will this new price list impact discount structures? How do you ensure that matrix prices stay aligned in a rational fashion? What about customer agreements – can they be renegotiated to reflect the updated pricing structure? How quickly does a price change get communicated to the sales team, and how are reps held accountable to the new pricing? Today, many B2B organizations manage all this with manual processes, from decentralized spreadsheets to by-hand ERP data entry to sales team email blasts that go unread. 

External pricing triggers are just as troublesome. The modern market keeps B2B pricing teams on their toes, with fast and furious curve balls like tariffs, frequent cost changes, inconsistent demand, competitive price threats, disruptive eCommerce trends, price pressure from increasingly disloyal customers and more. When a new trigger is introduced, a tangled web of people and processes gets activated. Before an updated price reaches customers, so much time is spent navigating this labyrinth that the new price is often made irrelevant by the next incoming trigger.

b2b pricing

It’s difficult to effectively address these market forces without a proper internal process powered by a price management solution. The promise of price management software is that it aligns teams, smooths out the pricing process and enables flexible, rapid responses to external triggers.

Read more: The Road to Price Management (eBook)

How to Manage the Most Common B2B Price Modes?

price managementA price mode is a framework for understanding how a company arrives at a price for a given customer, which typically takes on similar forms across many industries in B2B. Price modes (pricing architecture) each carry out a specific purpose but, over time, tend to drift from their original design and lack consistency. Here are the four main price modes and the price management ramifications of each:

List Price

Price lists tend to quickly become stale, as product-value relationships, such as good-better-best and private labels are not reflected, and cost changes are not pushed through intelligently or quickly enough.

List prices should be a company’s reference point for discounts. However, the increasing number of products, relationships and competitive considerations often render the list price meaningless when managed manually, and therefore unusable as a reference price.

B2B companies often further complicate list prices by artificially inflating the price to try to influence pricing decisions made by sales reps — a tactic that rarely works in practice.

Tip: Use price administration and management software for setting and managing list prices. These tools make it easier to add and price new products, handle end-of-life product pricing, manage and adjust product good/better/best relationships, make updates due to cost changes or other competitive and market factors, and cascade list price changes to other price modes.

Matrix/System Price

The pricing grid where groups of similar customers and products are assigned to specific matrices or tiers. Often sales reps have the power to reassign customers to more favorable price tiers, causing nearly all customers to get the lowest price. This, combined with stale list price reference values, causes customers to be mis-assigned and receive prices that don’t reflect their relationship with the company.

Further, matrix prices often lack the proper level of granularity to ensure the prices are market-aligned and competitive enough to win the deal; thus they are ignored by the sales reps in favor of overrides and special price exceptions. Data-driven price segmentation is required to achieve the necessary granularity to make prices relevant and gain market adoption.

Even when the process of updating matrix prices is relatively efficient, if a small percentage of revenue is transacted on the matrix, companies may only realize a small portion of an intended price increase, as other price modes are harder to immediately affect.

Tip: Price management software is well-suited to help you set and manage matrix prices. It should allow pricing teams to: segment and assign customers and products into relevant matrices, manage customer and product assignments over time, set order quantity breaks, make updates due to cost changes or other competitive factors, and cascade matrix price changes to other price types.

To ensure the values in the matrix are set to achieve the desired P&L objectives, price optimization software is highly recommended and can be used in conjunction with price management software.

Customer-Specific Prices

Two types exist in this category, customer-specific price exceptions and customer agreements, which may or may not be contractual in nature.

B2B companies often see a proliferation of customer-specific price exceptions when matrix prices are not market-aligned. These often lead to margin leakage due to poor initial price setting, poor record creation/management, lack of a thorough approval and ongoing review process, and a fundamental lack of strategy behind the process.

It’s not uncommon for hundreds of thousands to millions of these pricing records to exist in a business, creating an overwhelming administrative burden, and making it difficult to impossible to execute price changes as costs or other dynamics change.

Many price exceptions are set with no expiration date, at a net price level or a generic markup over cost and fall victim to the “set-and-forget” conundrum.

These same challenges often plague customer price agreements. Often reserved for key customers, sales reps are very protective of them, which makes it challenging to enact a price increase.

Tip: A combination of price optimization and price management software should be used to generate and mass update customer-specific prices. The key is to ensure you have a robust deal or agreement management software that seamlessly connects to the price management/optimization applications so that sales reps are alerted to customer-specific price changes and can take action.

Negotiation, Spot and Override Prices

Prices that, for any number of legitimate reasons, are deviated from list or matrix in a one-off, negotiated capacity. The trouble is, these can lead to rampant over-discounting, inconsistent prices from rep-to-rep, and misaligned prices.

Reps tend to resort to rounding to the nearest dollar, margin percentage or rule-of-thumb markup. For example, all discounts from a system price appear as round numbers, such as a 30% discount, when perhaps a 28.7% discount would have been sufficient. Without proper pricing guardrails in place, sales reps will continue to rely on these rule-of-thumb methods when the need to negotiate arises.

Tip: With price management software, companies can create and manage a price segmentation structure and set pricing guardrails for negotiations and overrides.

Practical Applications in B2B

To put price management concepts into practice, let’s explore three real-world applications.

Global and Country List Price Management

Selling thousands of products across many different countries or geographies creates significant price management complexity. The time-intensive process of manually aggregating the right data, sorting through good-better-best product relationships, and adjusting prices based on market dynamics and cost changes creates headaches for corporate price and category managers.

Effective price management is the “easy” button for global and country list prices. It makes arduous tasks repeatable, centralizes essential data sources (i.e. currency exchange rates), applies rule-based strategies for intuitive price updates, and allows users to build KPI cards to understand the calculated impact of price changes across lists.

Watch:  Reimagine Global and Country Price List Management (Webinar)

Cost Pass-Through

One of the greatest challenges for B2B pricing teams in the last several years has been reconciling tariff costs with their end customer pricing. As tariffs push costs upward, businesses are often unable to pass it all on to customers. In addition to the financial burden, tariffs become a price administration nightmare. Coupled with increasingly frequent raw material and supplier cost changes, simply updating prices — across all price modes — to reflect new costs has become an unwieldy process.

With price management tools, teams are able to set up cost pass-through strategies for any price mode at any level of granularity. For example, a pricing team may update matrix prices as a function of supplier cost changes at the customer group and product sub-category levels, in addition to identifying all of the impacted customer price agreement lines and performing a mass agreement update. This allows for prices to be updated quickly in a central location and delivered to sales quoting and agreement tools transparently, so price changes can easily be calculated, tracked and communicated.

The right tools eliminate guesswork and help capture more margin and manage cost fluctuations in any environment. When unpredictable tariff actions disrupt the ordinary flow of business and threaten margins, these capabilities are the difference between leaders and laggards.

Read more: Talking Tariffs – Pricing Strategies to Hold the Line on Margin

Real-Time Market Pricing for eCommerce

The fastest-moving sales channel in any B2B business is eCommerce, where competitive prices are constantly changing and customer loyalty is fleeting. If a company’s eCommerce prices are misaligned with the market or inconsistent with offline channels, buyers will quickly move on to a competitive site. But how does a pricing team keep this channel consistently market-aligned given the increased frequency of external pricing triggers? How can eCommerce pricing be differentiated to honor existing customer relationships?

The answers lie in dynamic pricing, which only becomes possible to attain with modern pricing software. Instead of the slow and cumbersome spreadsheets and disconnected data sources, price management software allows companies to dynamically set prices using a variety of inputs, including transaction data, cart abandonment data, inventory position, web-scraped competitive prices and any other reliable data source.

The result is Real-Time Market Pricing that reflects the current market price, meets customer expectations for a competitive price, and achieves the desired P&L goals. eCommerce is a fundamental shift in B2B; it must be met with a fundamental shift from reactive to proactive pricing.

Watch: Real Time Pricing Strategy (Webinar)

How Zilliant Helps B2B Companies Reimagine Price Management

Zilliant Price Manager™ was designed to alleviate the growing pressure on pricing teams by putting pricing power back in their hands. This highly-intuitive tool provides greater control over pricing while facilitating a better, more collaborative pricing process. Price Manager aggregates data from disparate sources, processes massive amounts of information, reveals the implications of each price change and transforms the tangled trigger-to-transaction web into a clear and decisive straight line.

Read more: Zilliant Price Manager Datasheet

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