July 12, 2016
In B2B pricing, reacting to customer requests and market changes are often the daily tasks that can keep us from long-term, strategic initiatives that so desperately need attention. So, how does one wrest control of the levers that drive our prices and margins? The answer: have a plan for every customer.
The “plan” is to actively manage each customer’s pricing through agreements. Customer agreements aren’t necessarily contracts requiring formal language and signatures, but, rather, a master list of all active quotes for a single customer or group of customers that share the same pricing—distributors or dealers, maybe. The key features of an agreement or contract, aside from the owner, are the effective dates.
Think of it as an anniversary or birthday when the customer receives an updated or revised agreement. Working with the customer, determine the most appropriate timing for their business. Many times it is aligned with their fiscal year or could simply be calendar year. Regardless, help ensure the agreement/contract dates align with their particular situation.
Maintain a comprehensive record of all customers with their anniversary date. This helps manage the agreement renewal process and workload. Typically, customers require advance notification of any price changes—30, 60, 90 days, or more. Understandably, customers have systems to load with new pricing. Therefore, consider the time needed to perform an analysis and prepare the new agreement, working roughly 45 to 120 days out may be necessary.
For the customer analysis, understand the prior 12-months’ performance: overall margin, product mix—line-item margins, core vs. non-core products—volume compliance, win-rate (in dollars and percent), and value quadrant score. Oftentimes, there could be other factors specific to the businesses that should be included such as input costs from raw materials or labor, for example.
The case for managing pricing through agreements is supported by the primary benefits of control, visibility, and measurement. Working ahead of the anniversaries will provide a view of potential margin opportunities and pricing improvement dollars. Perform a calculated effect analysis on all price changes by a customer to reduce excessive variation, optimize prices, and maximize profit.
Developing a plan for every customer enables the creation of a commercial information flow system to subsequently develop value-based and needs-based customer agreement/contract review processes and price adjustment plans. Finally, having a plan for every customer allows the business to respond quickly to commercial forces regarding products and customers to protect the bottom line.