When times get tough, the first and natural reaction for most companies is to focus on cost. It’s feel-good thing we can control. Next might be zeroing in on our large customers because we think that’s where we have the most to lose. Long-term plans are thrown out the window because we become focused on the storm right in front of us.
While there might be nothing wrong with such an approach, the benefits it generates are bound to limit. Worse, if this traditional approach is not executed properly, you could find yourself going backwards because you didn’t understand the implications of cutting the wrong costs. And cutting costs “across the board” is probably the worst approach of all. In fact, it’s clear evidence that someone has not done their homework.
A cost-reduction approach is also distracting you from customer-target focus. Do you understand who your best customers really are? And what about gaining market share? lack of pricing and “profitability analytics” can let you down because you failed to identify highly profitable customer targets – ready for picking, right now in this very climate.
Research shows that price management initiatives can increase margins by two percent to seven percent in 12 months, yielding return on investment of between 200-350 percent.
So if you are hung up on just saving costs, think again. Are your large customers really your best customers? What might your business look like if you could steal market share now? What would it take to make this happen?
How are leading companies approaching the area of pricing in current times?
Crisis or no crisis, leading companies are savvy in the area of pricing. They gain intelligence by using relevant, detailed and consistent pricing data which feeds into an organised, analytic process. The information used in pricing analytics is typically disaggregated to the core and is rich in all forms of relevant demographics.
Leading companies don’t start with pricing strategies – they start with accurate data. This drives pricing information, which in turn flows into pricing strategy. After this comes execution (eg, appropriately incentivising the sales force, backed with reliable results reporting), and then monitoring and revenue assurance, leading to even more data. Inspecting the effectiveness of price changes is vital because there are significant hazards in getting pricing wrong.
Armed with analytics, leading companies can be confident about outcomes which will result from pricing changes, and this is why they are not afraid to mess with pricing.
What if “messing with pricing” scares some of my customers away?
Yes, the ultimate outcome may involve losing few customers. This is normal. Losing customers for success might sound counterintuitive but it makes sense in tough economy when you need to free up resources to focus on more profitable customers. The idea is to send your unprofitable customers to your competitors, and attract their profitable ones to you.
Also, focusing your resources on growing existing profitable customers (even if they are small) will generate higher bottom-line results.
You mentioned revenue assurance earlier. What’s this?
Our work at price-savvy clients is showing that nearly all businesses suffer revenue leakage.
Through revenue assurance work, using modern audit tools, we are uncovering appalling practices that result in precious dollars being given away. This is often through bad pricing strategy, poor price execution (eg, systems-related), non-compliance with rate cards, sales culture issues or even tax-related pricing oversights.
You don’t need crisis to fix revenue leakage. It’s just low-hanging fruit that deserves constant attention. Just imagine what one percent enhancement in revenue can do to the bottom line of your business?
The message here is that if you haven’t undertaken revenue assurance before, it’s well worth look – and sooner rather than later too.
How do you stop pricing initiatives from failing?
Many pricing strategies fail at execution. Here are few things to watch:
• Most organisations suffer from “giving in” to customers’ sensitivities to price movement. We simply want to keep all customers and end up penalising the profitable ones. Resist this.
• Is your sales force incentive scheme misaligned to your pricing strategies. Don’t launch new pricing if your sales team will just turn around and do it the old way. Deal with the incentive programme first.
• Large discount options may be built into sales software. They should be there for purpose. Your revenue assurance programme should be able to identify abuse. This is huge issue in the retail sector.
• How well is your pricing aligned to customer segments? Have you defined the correct segments using analytics, or is it still based on intuitive definitions? Are there too many prices catering for too many segments, or are your segments not recognising critical customer traits? Revisit customer segmentation using reliable data.
• Has the organisation embraced the concept of rolling out pricing initiatives quickly? This is the best time to implement change. recession can be boon for people who are most motivated to change.
You mention customer segmentation. How critical is this in the New Zealand business environment at the moment?
The way you define customer segment could determine how you market, sell and price for all the customers in that segment.
Unfortunately, most organisations still define their segments based on intuition. telco may define segment as ‘business’ or ‘private’. Or it may use ‘landline with broadband’ or ‘only landline’. But there are hundreds of demographics which can be used to segment customers such as ‘form of payment’, ‘rural versus city’, age and so on.
So which combination of these demographics is most likely to define group of similar customers? And how many segments can you really market to anyway?
If you provide the data, modern analytics can show you the natural segmentation of customers visually. We use what are called “self-organising maps” to help our clients define the real strain amongst myriad of demographics. Nailing these traits will make all the difference.
In nutshell: get the segmentation right, and steal the right customers. Get it wrong and you end up with ineffective marketing and pricing, not to mention unplanned customer attrition.
For more information contact Faris Azimullah at [email protected]
GO GRANULAR
Matt McKendry is partner in the accounting and advisory team at Deloitte. His quick tips on understanding growth include:
• Growth has its vagaries; people strive for it, but too often little is really understood on what drives it.
• Too often we see people take simplistic view and measure it in terms of revenue and bottom-line growth at the business unit level, but this is not deep enough to really understand true growth.
• Firms need to take “granular analysis” of performance, and this is often below the business unit level.
• The drivers of growth are: (i) Strategic choices – the result of decisions to lead, or divert the firm into new business areas and markets; (ii) Market share growth – the level of performance in same markets as competitors, and (iii) M&A growth – the result of true merger and acquisition activity for the firm.
• Executives should be able to analyse and describe how their businesses units and product portfolios are performing in these three areas that drive growth. Research highlights surprising results for many managers’ ability to understand what drives performance.
This “granular” understanding is critical to making key strategic decisions, ensuring resources are being employed effectively, and making certain that the business foundations are in place to make the most of opportunities that may arise.
