How Best-in-Class Companies Create, Maintain and Renew Customer Prices to Maximize Profitability
How Under-Managed Customer-Specific Prices Cause Margin Leakage
For many B2B companies, the proliferation and under-management of customer-specific price exceptions and agreements have become a significant source of margin leakage. The creation, maintenance — in response to cost changes and low volume compliance — and renewal of these agreements poses a risk to inadvertently give away profit margin or fail to capture the fair and appropriate value of customer relationships.
In creating customer-specific agreements, sales teams often override existing pricing structures and guidance, usually by over-discounting. When there is a lack of oversight or proper pricing controls in place, long-term agreements may be fixed at net price values with no end date or an end date needlessly far into the future. In fact, it’s not uncommon for Zilliant to see a high percentage of customer-specific price agreements with an end date of 2099 and a fixed unit price. Compounding these challenges is the lack of an easily accessible, central location for the agreements themselves— most are stored and managed in Excel spreadsheets or in cumbersome, legacy ERP systems.
The result is an all-too familiar “set-and-forget” scenario, where companies have little to no visibility to the status of active price agreements. Acutely felt in the current business climate when costs increase, pricing teams lack a proactive and scalable mechanism to communicate needed prices changes to sales teams. Furthermore, when agreements are up for renewal or customers fail to meet volume commitments, there is no alert system in place to prompt a discussion with the customer. Upon renewal, sales reps are often faced with the time-consuming task of manually updating hundreds or thousands of lines on a single agreement. All of these things compounded lead to missed opportunities to grow incremental revenue and increase profitability.
Recognizing the margin leakage and operational inefficiencies as a result of current processes, many B2B companies are taking steps to proactively manage customer-specific prices, from creation to renewal.
Generating Relevant Customer Price Guidance
For B2B companies where customer-price agreements are used, the days of sending sales reps into battle without customer-specific price recommendations are numbered. Price optimization software takes into account a customer’s price sensitivity to each item on the agreement, the market price for similar customers, and the customer’s previous agreement price to provide a meaningful price recommendation which grows profit margins without putting the agreement at risk.
This customer-specific guidance helps reps make faster, better pricing decision in three key stages of the agreement lifecycle: the creation of the initial agreement, the maintenance of that agreement over time when vendor or raw materials costs have increased, and the agreement renewal. It can further help sales reps recalibrate prices based on a customer’s actual or projected volume as compared to the customer’s committed volume.
Making Price Guidance Easy and Actionable
The tension between pricing and sales teams is acutely felt in most B2B organizations. Sales wants to control all aspects of the customer relationship, and maintain and grow their book of business, while the pricing team is focused on maximizing profitability and streamlining pricing practices. These two goals don’t have to be at odds with each other. While providing customer-specific price guidance is the first step to aligning these goals, creating a mechanism that makes it easy for the pricing team to suggest actions to sales reps and even easier for reps to act on those actions is key.
As such, a growing number of B2B organizations are consolidating their customer-specific price agreement activities into easier to use web-based systems outside of ERP systems. Or better yet, they are moving spreadsheet-based agreements to this digital format for the first time. A more flexible agreement management tool, when powered by intelligent price and deal guidance generated by the pricing team, can alert reps to specific actions they need to take to maintain and renew existing customer agreements, and assist in the creation of net new price agreements.
Take, for example, the need to update existing agreements as a result of a vendor cost change. Rather than individually checking and updating each agreement in an ERP system, web-based price management interfaces can pinpoint all of the agreements and line items impacted by a cost change and enable reps to mass update prices for a given set of items across hundreds of agreements in their portfolio with only a few clicks.
The new breed of technology also allows reps to see easy-to-understand analytics on the performance of their new and existing agreements, revealing the margin health of individual agreement lines and the overall agreement. With the increased visibility into missed profit margin and incremental sales growth opportunities, sales reps can better manage an account’s profitability. It can also help sales reps monitor other health metrics such as volume commitments, to determine if customers are cherry-picking a few line items on the agreement.
Putting advanced tools in the hands of the sales and pricing team to actively manage customer prices can ultimately help rid companies of “set-and-forget” pricing and stop avoidable margin leakage.
Learn more about Zilliant IQTM for Customer Price Agreements here.