When half of your orders are selling below the ”floor”, how do you build up margins?
At the largest flooring products manufacturer in the U.S., an internal Six-Sigma study of pricing performance revealed that more than 50% of sales orders were transacted below the lowest approved prices because sales management accepted nearly all requests for larger discounts from the 300-plus person field sales force. This approach produced wide variations in prices and margins, and was in direct conflict with the newly announced business objective of growing market share by 15% while increasing margins by 5%.
Misaligned Price Guidance Was of No Help
A central operations team generated annual price lists for over 400 product groups, with up to 15 price points per group to account for different product styles. Over the past several years, the industry had shifted away from contractor price lists published in advance of any construction jobs, and toward job-specific quotations. Since the previously agreed-to price lists took no account of the specific circumstances for the individual job, sales frequently ignored them. Instead, they relied upon “gut feel” when pricing new business — primarily anecdotes about recent deals with seemingly similar customers, competitive pressures and job sizes.
With no formal quotation tools in place, and sales cycles of 6 to 18 months, sales reps did not track prices they quoted or keep them aligned with the prevailing market dynamics, fluctuating raw materials costs, and overall corporate objectives. But who could blame them? Their job is to sell, and sell they did. Making matters worse, territory managers had little or no visibility into the margin performance of individual deals as they were being quoted, and therefore lacked any basis for supplying sales people with better pricing guidance.
Treating the Root Cause, Not the Symptoms
After careful consideration, this company rejected solution approaches that only treated the symptoms of bad pricing, such as creating additional pricing approval steps, which merely adds more subjectivity to the mix and slows down the quoting process, or generating rear-view mirror reports that highlight instances of bad pricing which occurred last month, when it’s too late to make any difference on the business you just sold. The manufacturer recognized these simplistic mechanisms are no help at all when your goal is to guide current and future deals toward consistent profitability and improve profits.
Market-Aligned, Job-Specific Prices Lay the Foundation
Zilliant MarginMax identified several critical deal attributes that predicted a customer’s response to the quoted price. In all, over 6,500 unique pricing segments were revealed and for each segment, MarginMax determined optimal price recommendations to guide reps during long running, multi-stage negotiations. This guidance was refreshed regularly to keep prices aligned with local market conditions, product mix fluctuations within the business, and predicted cost changes. Now, sales reps see precise, deal-specific prices in real time within a Salesforce.com® quoting system deployed on laptops and handheld devices. Through the advanced predictive capabilities of MarginMax, managers see the forecasted impact of these prices well before the prices are active in the market, instead of just at the end of the quarter. And they use the built-in scenario capabilities to explore alternate price actions and their predicted revenue and margin outcomes.
The Numbers: 5.1% Margin Improvement and 90% Compliance
Providing relevant, up-to-date, data-driven price guidance boosted the negotiating confidence of the front-line sales force and allowed them to spend less time pushing spreadsheets back and forth with their managers and more time discussing their product line and its value to the customer. The initiative demonstrated more than a 5.1% improvement in margin dollar lift across the pilot regions and was quickly deployed companywide.