The recommended steps to secure a fair pocket price
By Michelle Vestergaard
In part 3 of our series on price realisation, we’re going to focus on how to secure a fair pocket price in a B2B environment. With the pocket price referring to the final amount a company receives after all discounts, promotions and price adjustments are factored in, many companies suffer price erosion by concentrating purely on the list price. In a bid to remedy this, we’re going to discuss three effective steps that not only protect pricing integrity but help businesses capture the full value of each sale.
Step 1: Link and coordinate the entire value chain
One of the key challenges in securing a fair pocket price is the lack of coordination between various departments. Pricing decisions are often made in isolation, without considering the interlinked realities faced by sales, finance or customer service teams. This siloed approach has a habit of delivering inconsistencies and missed opportunities to capture value.
If we look at sales teams, for instance, they’re often hesitant to enforce higher prices, fearing it may damage long-term customer relationships and increase churn. Without proper incentives, tools and support, they may feel pressured to offer discounts that hurt profitability.
To overcome this, companies need to equip their sales teams with well-aligned incentives, clear pricing strategies and the training needed to deliver them. Sales reps need to understand why price increases are necessary and how to communicate this effectively to customers.
Some of the critical links that can easily break through-out the value chain are outlined below:
Bottom-line-boosting incentives
Sales teams shouldn’t be motivated solely by revenue targets as this can lead to unnecessary discounting to close deals. Instead, companies should align their incentives with absolute profits, focusing salespeople on the overall profitability of a deal. It’s a change that will encourage sales reps to negotiate better terms without resorting to discounts.
Customer segmented pricing
A pricing framework should be built around the customer segmentation. Each segment has its own pricing preferences which could warrant variations in levels of discounts, types of discounts, types of rebates. Similarly, some segments warrant variations in service levels, which is indirectly tied to pricing, if it is thought of as ‘total value realisation’ rather than ‘pricing’ alone. A high level of customer service, e.g. physically available service teams who can be reached around the clock to resolve any issue, can be thought of as giving away free services which could have been packaged, priced and sold.
Product & pricing strategy
Without a clearly articulated breakdown of product and service components, it is nearly impossible to establish a solid framework for pricing and discounts. Pricing and discounting must happen at the lowest possible unit of measurement – the SKU level. If this is not well-defined, well-documented, well-agreed in one product hierarchy, the subsequent pricing framework will be messy and subject to interpretation, which will make it near-impossible for salespeople to execute it.
Psychological factors
A common characteristic of salespeople is that they internalise customer complaints about prices, especially when competitors offer cheaper alternatives. This can create a mental barrier to asking for a higher price even if it’s entirely justified. Training a sales force to focus on the value provided—such as superior service, faster delivery, or extended warranties—can help overcome this. Pricing teams need to provide sales reps with data and tools that frame price increases as a demonstration of a product's exhaustive long-term value, not just a higher number.
End-to-end transparency and automation
It’s no secret that manual processes have a habit of resulting in miscommunication and errors. Implementing CPQ software (Configure Price Quote) that automates price calculations, discount rules and approvals ensures that pricing policies are consistently applied across an organisation, both sales, contracting, fulfilment, service, billing, and settlements. Integrating pricing across the entire value chain allows companies to reduce human error, prevent unauthorised discounts, maintain consistency between what is contracted and what is delivered, and ultimately keep everyone on the same page. In addition to reducing errors, it simplifies and reduces workload for downstream departments such as fulfilment, field service, customer service, and finance
Step 2: Expand the definition of pricing
As mentioned, a common mistake in B2B pricing is to focus solely on the base product's price, ignoring the full range of pricing conditions that can impact profitability. Expanding the definition allows companies to capture more value from each transaction by monetising services, enforcing favourable terms and tailoring pricing strategies for different customer segments.
Beyond the product price
In B2B settings, pricing is often limited to the base cost of the product, even though many elements contribute to the final pocket price. Product add-ons or features that provide a higher perceived value by customers should be monetised. Services like installation, maintenance, spare parts, and after-sales support, are key to the customer experience. However, companies often provide these services for free or at reduced prices, resulting in "value leakage." It’s important to monetise these services to make sure businesses are compensated for the full and true value they provide.
Terms and conditions
Payment terms, shipping conditions, or rebates, to name a few, can also have a major impact on profitability. For example, offering extended payment terms is equivalent to giving the customer a loan, which incurs costs for the company. Tightening payment terms or charging for extended credit allows companies to protect their cash flow and overall profitability. Additionally, shipping conditions, such as offering free or expedited delivery, should be carefully considered and monetised where appropriate.
Segmented pricing
A point which bears repeating is that not all customers require the same level of service or support. Some customers may need frequent repairs or technical assistance, while others might be more self-sufficient. Segmenting customers based on their needs and adjusting pricing accordingly means that high-maintenance customers contribute more to the bottom line than those who require minimal support – and allows businesses to capture value where it's most needed.
An example of the methodology:
On the far left side of the diagram above, we start with a list price, a figure typically established by the head of pricing.
A product might be priced at 100 kr., with guidance suggesting it should not be sold for less than 90 kr.
As negotiations progress, various discounts may be applied. These could include volume discounts, complimentary shipping or adjustments to payment terms.
However, complexities can arise during the ordering process. For instance, when selling complex products like enzymes or catalysts, the shipping cost can vary significantly based on packaging size.
If free shipping was offered initially but a customer later requests a larger package, the additional shipping costs might necessitate further discounts.
Rebates also present challenges. For example, if a discount is tied to a purchase commitment of 1,000,000 units but the actual order falls short, tracking these commitments becomes vital. At the end of the contract period, discrepancies in the total units shipped may mean the customer should not receive the agreed discount. However, follow-up on these agreements is often lacking.
Lastly, companies sometimes offer complimentary products or services, which can inadvertently add costs without a clear understanding of their impact on overall pricing strategy.
“Without ongoing alignment and engagement, even the most insightful pricing analysis will remain just that: an insightful analysis.”
Step 3: Moving from a one-off instance to an ongoing strategy
Too often, companies treat pricing as a one-off project – something that can be solved by simply hiring a consultant to provide a quick analysis. While this can undoubtedly uncover valuable insights, the approach falls short if it ends with a slide deck in a drawer.
To drive real results, pricing strategies need to be continuous and ingrained in a company’s processes. It's not just about identifying where you could optimise pricing, it's about making sure those optimisations are implemented, adhered to, monitored and adjusted over time. This requires collaboration across all teams – from sales, to ordering, to finance – with everyone understanding and acting on the same pricing strategy.
Without ongoing alignment and engagement, even the most insightful pricing analysis will remain just that: an insightful analysis, with its potential left largely on the table.
Ultimately, a fundamental prerequisite for ongoing and transparent end-to-end pricing is technology enablement. Continuous coordination and repetition of well-designed processes require technology to help data flow from one department to the next. Relying on individual humans to hand over information is a fragile method that will fail, especially in large global businesses.
Conclusion
A 3-step solution makes setting a fair pocket price sound like an easy thing to achieve – and in principle, it is. To quote Albert Einstein, however, “In theory, theory and practice are the same. In practice, they are not.”
As can be seen in the example we gave in Step 2, it’s remarkably easy for elements that impact pocket price to enter the arena and wreak havoc with your profitability. While these elements can be better managed with cross-departmental coordination, proper monetisation of all value elements and ongoing analysis, one factor remains that can undermine the whole thing: the human factor.
In the final part of our blog series, we’re going to look at closing the gap between price setting and price getting – and how important technology is to the process.
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