This discussion was prompted by Robert Sherlock’s book Daring Caution: The Executive’s Guide to Pricing Improvement.  The book provides a path for companies to find opportunities to improve their pricing decisions, get recognized and paid for the value provided to customers, and build greater pricing power.

Most companies swing back and forth between the twin horns of the dilemma.  First they try beefing up inventory levels so that order fill rates can be increased.  But before long, inventory investment goes up to unaffordable levels.  Then the companies stop ordering their fast-moving items to bring inventory levels down.  Order fill rates suffer, customers complain, and sales are lost.

Using the IdealInventorySM service developed by The ProAction Group, ProfitProgress can assist companies with an Inventory Assessment and implementation services.  Client companies consistently improve both their order fill rates and inventory turnover.

Good Company is a quick and interesting read, well worthwhile for C-level executives.

To find opportunities for differentiated marketing, we recommend:

1. Gain a fresh, deeper understanding of your market opportunities

• Segment your markets and examine competitive positioning

• Identify macro trends affecting and creating customer needs

• Find gaps in the market – under-served needs/wants

• Explore less price-sensitive market segments

• Include domestic and international markets

2. Assess product line strengths, weaknesses, and product rationalization potential

3. Generate ideas for product/service offerings that address underserved needs

Here’s a common management dilemma in companies with significant fixed costs: “Do we take that big order, even if the price has to be below break-even on a fully costed basis?”

Micro-economic theory will tell you to accept the lower price as long as you are getting a positive contribution toward fixed costs.

The flaw in this is that people are watching.  You set a precedent that your customers will remember.  Your company’s salespeople will correctly conclude that you are all talk when it comes to pricing improvement.  Your competitors observe what you did, and if you are at all a factor in your industry, you’d better believe it’ll affect their future behavior.

We need to take account of the longer-term effects of pricing management.

Bob Sherlock – Marketwerks

“It won’t hold an alignment,” Steve noted.  “This car is almost human.  It’s like it has a mind of its own.  But I can usually anticipate which way it’ll drift.  So long as I keep the speed under 55, we’ll be fine.”

After thirty miles my hair stood up straight.  Maybe it was just windblown, maybe it was due to using up another of my nine lives.  Either way, it felt good to get out and stand – well away from the road.  Made a mental note for my own future vehicle purchases:  Must be align-able so it goes where it’s pointed.

The Aligned Sales Force

When I was first given the opportunity to manage a sales force – 35 spirited, knowledgeable individuals who made it quite clear they had minds of their own – it became pretty apparent that there was no steering wheel.  I was as much a passenger along for the ride as I was controlling our direction.  Took me years to learn what makes salespeople tick, and how to use that understanding to steer the selling team in the direction the business needs to go.

It seems timely to share ideas on getting the most from the sales organization and go-to-market channel partners.  This is the time of year to make sure the Sales function is aligned with the objectives, and supported to succeed.  Addressing 3 common opportunities now – before finalizing 2011 plans, budgets and sales incentives – can set up better results.  I hope these thoughts will be helpful to you or someone you know.

1.  Align Incentives

In a multi-product or multi-service company, some orders are more profitable than others, and new products must be sold in.  Mix matters.  Yet some sales compensation plans treat all kinds of orders the same.  The risk, effort, and reward equation is then out of balance – over-rewarding the safer, easier sale, and under-incentivizing selling efforts on behalf of a richer mix.

A sales professional’s motivation to sell a given product line may be determined by the following factors:

• Expected Impact on Customer Satisfaction… how confident the salesperson can be in the company’s ability to deliver on his or her promises
• Self-Confidence in his or her own knowledge and capability to sell an offering
• Likelihood that it’ll require spending “Relationship Capital” to get the customer to try a product or service offering
• Required Time and Effort to sell it
• Probability of Getting the Order(s)
• Commission or bonus Payoff from getting the order(s)
• Speed of Payoff (i.e. sales cycle)

While the sales compensation plan is only one aspect of the set-up for success, it should be aligned with the mix the company needs.  We’ve developed a matrix for determining where differential rates of incentive compensation would be appropriate.  If you’d like a free copy of the matrix, please let me know.

2.  Align to the Full Scope of the Sales Role

From time to time we’ve heard sales forces given a simple charge: “Back to basics: The job of the salesperson is ‘Go get orders!’”

A big problem with “Go get orders!” is it ignores important aspects of the sales role.  Investing selling time to go after the right mix of orders is only one aspect of alignment.  The role of the sales professional necessarily extends beyond getting the orders.  The role also includes sales and service processes, especially gathering the right info to enable the company to perform for the customer.  There are dozens of little pieces of information required to prepare proposals / quotes, then get orders fulfilled correctly and on time.  Many of those items of information must be gathered by Sales and channel partners.  As we work with companies on business process optimization, we often find tension and conflict when this aspect of the Sales role isn’t well tended.

When Sales and the other functions are not meeting each other’s needs, customer satisfaction suffers.  That’s a barrier to sales growth to be cleared away!  The risk of customer dissatisfaction goes way down when the company carefully defines:

• How to determine the right product or service for each need and usage situation
• The decisions to be made (in quotation and the order fulfillment process flow) for various types of customers and transactions
• How those decisions will get made
• The business processes with which the work will be done
• How people will communicate in the course of getting the work done.

In particular, work out in advance what information and actions Sales needs from the other functions, and vice versa.  Treating each other as “Internal Customers” can help!

3.  Use a Well-Orchestrated Campaign to Generate & Handle Leads

When developing new accounts is an important part of the objectives for 2011 – as it will be for most companies – an integrated marketing and sales campaign is essential.  The Internet has created terrific new options for cost-effective lead generation.  These options can be powerfully integrated with outbound selling and traditional marketing communications approaches.  It’s now possible to generate more inquiries and better orchestrate a productive response, with measurements, tracking, and calculation of ROI.

Bob Sherlock

Sure you have.  You’ve no doubt avoided many mistakes – even disasters – when you did so.

Along the way, though, have you not tried something that you actually could have done, misperceiving it as riskier than it really was?

Me too.  But as a young alpinist, I learned a lesson about what is possible when you think it’s possible.

Baxter’s Pinnacle stands apart from a mountain wall in Grand Teton National Park, Wyoming.  It’s one of the classic technical rock climbs in the park.  My buddies wanted to do it, and its difficulty rating in our climbing guidebook placed it just within my ability level.  So off we went.

The easier section on Baxter's Pinnacle

The first 400 feet up the cliff went easily enough, but then came a section of rock more difficult than the guidebook indicated.  Worse, falling at that spot would result in a 20 foot drop before the rope would stop me, whereupon I’d be dangling well away from the cliff in thin air.  While not catastrophic, that would have its drawbacks.  I hesitated, trying different handholds and footholds, but couldn’t find the moves to confidently attack the problem.

Voices from below called “You’ve done routes this hard before!” which spurred me to just get going.  Clinging to the small holds, I made it past the crux without falling and soon ascended to a safe ledge.  I whooped, breathed easier, and anchored to belay the others as they ascended.  What a great day in the mountains!

Two years later came a call from one of those friends. “Have you seen the new climbing guide to the Teton Range?” he asked, audibly amused.  “Remember that climb on Baxter’s that you thought was much harder than the rating?  It’s been re-rated – three levels of difficulty higher than in the old guidebook!”

I had to laugh at myself.  The lower rating in the old guidebook had strongly affected my sense of the possible – made me believe the climb was doable.  And that belief made all the difference in attempting the route and overcoming its challenges.

Business Implications

Great outcomes may be out there if we stretch beyond what we reflexively feel is doable.  I don’t want to over-extend the lesson from the pinnacle, though.  How do we know the difference between an achievable stretch, and a disastrous gap between aspiration and reality?

This all came to mind in recently getting to know a new client.  The company did analysis last year which led them to believe they could selectively raise prices to improve profitability.  Slow economy notwithstanding, they implemented the increases – with very good results.

Credit them with daring to make price adjustments, at a time when concern about losing orders on price keeps so many other companies from correcting even their least profitable prices and terms of sale.

Couldn’t more companies do something similar?  After all, pricing improvement can be a powerful source of revenue and profit growth.  A 1% improvement in price yield often delivers 10% or more in operating profit improvement.  And there’s a downside to assuming that the right price for every transaction, on every product/service, to every customer, must be at or below the current price.  Such assumptions may be costing your company, or one that you know, funds that are urgently needed for surviving and reinvesting in growth.

How can companies assess whether selective increases would be a canny business decision, or a blunder?  What can be done to get a truer sense of what’s possible with pricing, and get the commercial team ready to execute?

To find and act on lower-risk opportunities to address pricing, we suggest:

Convert transactional data into information. Deep analysis is a great antidote to subjective assumptions and apprehension.  For example: In companies selling to more than a handful of customers, a visual scatter diagram showing prices paid By Product, By Cumulative Volume, By Customer, is great for highlighting variations in actual prices paid.  There’s usually more variation than companies expect.  You can see an example here. In a scatter diagram, the outliers become visible.  After seeing the prices that various accounts are paying, the team often gains confidence that they can make commercially appropriate judgments on selective corrective actions.

Price exception reports; margin trend reports; and estimates of the economic value of the company’s products/services to customers are also useful in identifying where to take action.

Regularly reviewing these reports and analysis at the senior management level facilitates discussion of where to “set the bar” by customer type and by account.  It can also spotlight where to value-engineer an offering to hit a lower price point.  And reviews reinforce that company leadership believes that optimal pricing is important.

Assess the company’s power position. Few companies in B2B and consumer markets are pure Price Takers (where products are true commodities and prices are set in exchange trading) or pure Price Makers (able to set prices with little concern for competitive levels).  We’ve been putting together some considerations for assessing if a company is in a position to make upward pricing moves in the short term.  If you or someone you know would like a copy, please let me know.

Help the sales team with the story. Share the logic with the team to build belief, then help Sales to prepare the story behind any price increases and changes in terms of sale.

Align recognition and rewards with what’s being asked of the team. The sales team may undermine the effort if left to see themselves as bearing all the risk of optimal pricing moves, while receiving none of the rewards.  Whether it’s done with compensation plan changes, Management Awards, or other recognition, senior leadership can ensure that better pricing outcomes for the company will mean good things for the people who help make it happen.

Even in a tough economy, companies can’t afford to assume that their current prices are the best they can do.  Pricing has a significant upside that makes it worth taking careful, manageable risks.

Here’s to striking a well-informed balance between daring and caution in the months to come!

Bob Sherlock

Here are some brief thoughts on two classic strategies to boost sales and profits.  Which to choose may depend on your company’s source of competitive strength.

1. Expand Your Markets

Is your greatest strength an exceptional capability to solve a certain problem or produce a result?

If so, growth opportunities can be identified by asking “Who else would value this capability, and where are they geographically?”

Geographic Expansion

Within your domestic market, are there geographic areas you have not served or penetrated?  What about in international markets – could this be the time to research countries/regions where you aren’t playing, or aren’t achieving your share potential?

What stands in the way of going after geographic expansion?  Could there be creative ways around such barriers that’d make the profit and ROI attractive?  Potential go-to-market partners that weren’t interested in boom times might be quite receptive now.   What you need from a go-to-market partner might be narrower now than in the past, with search-based buying processes more common.  Consider the customer functionality you can put online – how might a multi-lingual, product database-enabled web site enable you to expand your served market?

Market Segment Expansion

A segment is a cluster of prospects/customers with similar characteristics affecting buying behavior or usage behavior.  It can be worthwhile to go through your customer and prospect lists and study them to look for patterns.  The customer segments you focus on today may be the outcome of your past channel choices, leaving one or more segments under-penetrated.  You can try grouping customers and prospects by different criteria, then assessing whether there may be new customer development potential.   (If you’d like a free checklist of possible market segmentation criteria, just let me know.)

Emerging Industries

You might also ask:  “Are there new types of customers that have emerged recently?”  For example, wind turbine OEMs are building out their North American supply chains, creating opportunity for B2B manufacturers and distributors of everything from tiny fasteners to 50 meter towers.  The need to move power from wind farms in the Great Plains to markets in Eastern North America is likely to create major new transmission line projects over the next 5-10 years, creating additional supply chain opportunities.

Likewise, the emerging business in electric vehicles and plug-in hybrids represents an opportunity for a wide range of manufacturers and services suppliers.  This new business will need a web of B2B and B2C companies to be involved in development, manufacture, marketing and sales, charging, and maintenance of vehicles.

2. Expand Your Offering

If your greatest strength is tight relationships with channels or end customers, then revenue growth might come from trying to expand the assortment of products and services you bring to market.

Note that it’s not always necessary to actually expand your offering.  The offering may be big enough as is.  Many companies have products and services that their extended marketing and selling team doesn’t talk about.  Is there sales growth opportunity in conducting a different marketing and sales conversation?  A more consistent one?

If actual expansion is in order, you might look at services before products.  Take a fresh look at how your products fit in the customer’s business.  There may be opportunity to earn more business by addressing the customer’s needs and wants surrounding the product:

• Selection
• Procuring
• Receiving & Storing
• Transporting
• Owning
• Reselling
• Installing
• Using

The services surrounding your product can create quantifiable economic value in the customer’s business – a great topic for customer conversations.

For product line expansion, ask what other products and services your channel customers and end customers buy – especially using the same buying process, with the same buyer(s) involved.  Is it feasible to commercialize some products and services now in your development pipeline?  Can you partner with other companies to bring a better offering to market?

Take the case of products sold for installation in homes, offices, and factories.  Manufacturers in more mature categories often have very strong channel relationships, but with demand depressed are mutually suffering with their channel partners.  Meanwhile, manufacturers in newer product categories may be struggling to build effective field representation and distribution.  The strengths of the first may hold valuable solutions to the needs of the second.  Who could you team up with for mutual benefit?

Additional Moves

The foregoing options are strategic.  Two additional paths to improved revenue and profit are:

1. Streamlining your customer-facing business processes to enhance the customer experience, supporting the resulting growth without adding people http://www.marketwerks.com/AligningBrandReality.php
2. Analytically find where you can selectively raise prices for some products, some customers and some transaction types http://www.marketwerks.com/PricingAndRevenue.php

Here’s to finding new sources of revenue growth this year!

• Before making changes, document how work gets done now and how decisions are made.  Involve the cross-functional team to explicitly spell out what is currently done, when it’s done, by whom and in what roles, and the output of each activity… in a way that makes it all visible to everyone involved.
• Once the Current State has been documented and made visible, identify and prioritize the shortcomings.
• Develop ideas for a Future State that addresses both past shortcomings and expected new realities.
• Define how decisions on these changes will be made, including building support within the company and getting approvals where needed.  Set target dates for making the decisions.
• Divide responsibilities for researching the changes, identifying pre-requisites, and implementing agreed changes.
• Decide in advance what provisions must be made to sustain the changes.
• Assign a project manager to shepherd the implementation process.
• Execute, assess, and make refinements.

If you grew up in a cold climate, you might remember that when you were a kid you could make a huge snowball, that on any kind of slope would take on a momentum of its own.

How might a company achieve that kind of momentum? Sell and serve Great Fit Customers, and make sure that the Brand Experience in doing business with your company is aligned with the Brand Promise you’ve defined.

If you aren’t currently in that differentiated marketing position, it’s time to assess where you are falling short and make a plan to get poised for snowballing sales revenue growth.

For ideas on how, please visit us at http://www.marketwerks.com