I was privy to an interesting discussion this week about the promise and perils of price optimization. PROS, a company that got its start in the 1980s in the airline industry and today offers pricing and profit management software for manufacturers and others, gathered a small group of individuals who focus on pricing practices every day, and the ensuing conversation revealed much about entrenched business practices and companies’ ability to change their customer-facing practices.
Participants included Noha Tohamy, a pricing analyst at AMR Research, now part of Gartner; Mike Simonetto, who founded Deloitte’s pricing practice, and his colleague John Norkus; and Kevin Wholey, vice president of North American sales at Arrow Electronics who oversees $1.2 billion worth of sales for the $3 billion electronics distributor.
In a stately conference room in the iconic New York Stock Exchange building on Wall Street, we talked about the fear salespeople have of the analytical calculations of a software system, the reluctance of companies to admit that they’re using pricing technology, the tendency to “SWAG it” when it comes to product or service pricing, and the stigma attached to firing customers.
Arrow’s Wholey framed the discussion succinctly when he said, somewhat defensively, “Arrow has never fired a customer.” That statement gets to the thorny truth at the heart of price optimization practices: When a manufacturer evaluates its product pricing empirically instead of by gut feel, the close examination inevitably reveals that it is serving some customers at a loss. Firing those customers outright is a bold step that few companies are willing to take — and with good reason, since such a move can damage a company’s reputation. The answer, the experts advised, is to raise prices so that unprofitable customers either begin to pay their way or look elsewhere for business.
Simonetto of Deloitte said the process requires an inversion of the usual value equation, from the traditional inside-out perspective — i.e., what value do I create for the customer? — to one that looks outside-in. A company must determine “what value does that customer create for me, and [then] price according to that value,” he said.
All agreed that this is much easier said than done. Any effort by manufacturers or distributors to improve pricing must go through the sales team, and many initiatives without strong executive support don’t make it through that sieve. At Arrow, the pricing effort started at the top. Wholly said the CEO wanted names of salespeople who weren’t in compliance with the new pricing guidelines. And Arrow installed someone to act as policeman to keep the sales staff from going rogue. “She just will not allow [deviation],“ he said.
Before the company installed the PROS pricing software, Wholey said, “we SWAGged it” when making pricing decisions for new products. Now, the system uses similar existing products as a baseline and helps Arrow create better pricing parameters for new products.
Tohamy said many companies lack a single executive or manager who oversees pricing practices, and without that kind of governance structure, most salespeople feel free to price based on instinct. Wholly said companies that institute a pricing system “need to guard against the salesmen’s perception that their IP has been removed from the equation.”
When all is said and done, everyone seemed to agree, companies must push past issues of ego and complacency and do what is good for the business. That may mean installing a pricing manager, analyzing your pricing decisions more diligently, or using a software-based pricing system. But it definitely means a closer look at the value your customers give to you.
What do you think? Are you ready to fire your underperforming customers?
3 Comments
I attended the PROS event. It was very timely to hold it at the NYSE and to focus the conversation on how companies improve stakeholder value. Numerous presentations by manufacturers and distributors outlined how powerful pricing solution was in their ability to improve margins. It still surprises me that pricing solutions continue to have the stigma that they will be used against customers. In reality, pricing merely allows the company to stop making pricing decisions without the facts. In the past 15+ years where I have covered the pricing space, I cant think of many companies that used their pricing initiatives to get rid of customers. Rather, successful companies use the solution to be conscious of the trade-off that must be made on every transaction among many corporate goals, including customer satisfaction.
Good post Chris. I too attended PROS event and found the examples of successes and challenges along the way to be good fodder for the pricing community.
In terms of your question about ‘firing’ customers, I think companies are too afraid to do it, but need to go down that path. Using pricing software as an enabler (although not a prerequisite), the data typically exists within companies to get a true view of customer profitability (after accounting for rebates, back end $, cost to serve, etc.). If you see that customers are not profitable you are not doing your job (are serving your shareholders) to blindly continue to serve them. There are situations where this isn’t the case, such as a need to keep a plant operating or the intent of growing the account (although this is overused by sales teams all the time). However, eventually that plant needs to generate contribution dollars, so companies need to have a plan on when and why they accept negative contribution customers and business. Too many times I see companies say that once the business grows for the account they won’t be unprofitable anymore (it’s a ‘strategic account (wink, wink)), but the prices inevitably never increase and the mix of products purchased doesn’t expand to more profitable SKUs.
A sales team and company needs to look at profitability and walk away points more closely and actually act on this instead of justifying it away with the promise of future margin.
EVERY customer is valuable. Pricing should represent a Bell Curve where the majority of the customers fall in the profitable range. There will always be those customers that are unprofitable or marginally profitable, but those will be offset by the other side of the curve where you have highly profitable customers who require little or no sales or support efforts.
Many new customers are only marginally profitable or unprofitable. It’s a good sales team that supports those customers with service and suggestions that help THEM grow their business to the point of higher profit to your company. This has been my policy for 25 years, and has never failed me or my companies.
Too many of the younger generation of sales management wants a mathematical solution to a PEOPLE problem. It’s not just numbers in a spreadsheet.