The True Value of Pricing from Pricing Strategy to Sales Excellence the True Value of Pricing

The True Value of Pricing From pricing strategy to sales excellence The True Value of Pricing

The challenge of value in price management

The world’s current political, economic and In this context, price management becomes In order to define a pricing strategy aligned social scenario poses major challenges, a powerful advantage to guide organizations with the organization’s goals, the Pricing including the political uncertainties brought throughout the changes, to boost their function must take into consideration not by the intensification of nationalist speeches performance and to maximize their earnings. only economic trends but also product and the increase of barriers to foreign With regard to strategic alignment, the differences and specificities in consumer trade. On the business side, the economic concept of Pricing is particularly relevant in habits in each region. This is the case of the recession has affected organizations which, the business world as it consolidates itself end-of-the-month discount policy, quite in order to continue to optimize earnings, as a charging practice intended to capture common in the Brazilian market, and that need to take into consideration drivers such the highest value from each customer by has a direct impact on the pricing and the as Gross Domestic Product unpredictability, addressing issues from strategy to sales margin of each product. high inflation, interest hikes and fiscal excellence, and aimed to maximizing adjustments, besides unemployment growth, profitability. Even though many organizations see Pricing and the customers’ higher indebtedness and as a back office function, there is a trend reduced income resulting from that. “The True Value of Pricing – From pricing in Brazil to boost its importance and its strategy to sales excellence” presents reach from a strategic point of view, while At the same time, the integration of the data about how companies from different differencing customer segments. In other digital world into the business environment areas manage and position their prices in words, this approach goes beyond the contributes to producing a new consumer the current economic scenario. The study traditional cost and competition analyses. profile: more connected, mature and also shares an analysis based on Deloitte’s informed about their own habits. These experience to strengthen the importance of changes create new opportunities for the pricing strategy and help companies to meet companies to develop a more agile and market demands with more efficiency. customized communication with their clients.

The concept of Pricing is particularly relevant in the business world as it consolidates itself as a charging practice intended to capture the highest value from each customer by addressing issues from strategy to sales excellence, and aimed to maximizing profitability.

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Among the main strategies, pricing based In this sense, by taking into consideration on the customer perceived value for a customer’s value perception and offering Table of contents a product or a service is gaining more a product or service that contemplates attention from global organizations’ the needs of each profile, good Pricing executives in recent years. However, our practices open the door for the right price What is Pricing? 4 analysis shows that this trade isn’t largely to the right customer strategy. On the Organization’s structure 6 disseminated in the Brazilian market yet. other hand, this reality requires a more Most of the organizations operating in customized approach from organizations, The costumer perceived value 6 Brazil set their prices based on their fixed which, in order to keep up with the business The right price for the right 7 costs, their margin and the competition’s transformations and grow sustainably at the customer price. While intuitive and easy to apply, this same time, must look into what customers practice does not take into consideration want and adjust their segmentations to Price segmentation 7 that the same product or service brings expand their profits. Pricing practices and experiences 8 different benefits for each type of customer. Sales force compensation 8

The economic and monetary stability Pricing policies documentation 9 that Brazil has acquired over the past two decades not only created opportunities Price management in the digital 9 for more strategic pricing policies in world corporations – as it was no longer necessary Pricing trends 10 to adjust prices according to the fast growing inflation rate each month – but it Contacts 11 also contributed to the development of a new consumer.

Survey sample

The analyses presented herein different sizes and segments. were prepared based on the market The organizations participated via experience of Deloitte’s Pricing an electronic questionnaire that was practice professionals and quantitative available from November 2016 to interviews with 58 organizations February 2017. operating in Brazil from the most

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What is Pricing?

The concept of Pricing, which is still rather Pricing Price shy in the Brazilian market, is becoming Strategy execution more relevant in the business world as it An efficient strategy reflects an integrated The processes based on which a consolidates itself as a price execution and pricing structure that supports business company sets and charges its prices and charging practice intended to capture the goals by capturing the value of an offer discounts. A correct execution ensures highest possible value from each customer compared to the competition and to the consistency of Pricing actions thus segment. customer demands, and by targeting collaborating to the dissemination of clear the organizations’ internal drive and its price communication, execution, analysis Six key pillars structure this function, communication to the market. and adjustment policies. comprising from strategy to sales excellence, in order to seek the highest Advanced analyses Corporate governance profitability: and pricing and alignment Performing advanced analyses allows Well-structured governance, integrated organizations to revisit past transactions with all company functions and aligned to understand and optimize the prices with the organization’s strategic goals, charged, thus improving profitability. ensures a more effective and continual price management.

Technology and Tax and regulatory data management effectiveness Technology contributes to analysis Tax laws can influence the way an automation and prices performance organization conducts its business in execution and optimization. Organizations different ways, including how information are increasingly seeking ways to integrate is captured in an invoice, where goods’ these tools into their technologic ownership is transferred to customers infrastructure to ensure that the upgrades and how contracts are negotiated and implemented by the management are performed. sustainable in the long run.

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Pricing operation models Understanding the market dynamics, Price management provides a structure to based on the analysis of customer profiles, An integrated support business goals by capturing the product nature and distribution strategies, value of an offer compared to competitive is the key to designing a framework for the approach to alternatives and customer demands. Pricing function that can be organized into supporting good several levels, from a fully centralized model to a fully decentralized model. Pricing practices

The interaction between the Pricing pillars contributes to a higher Centralized Operation Implications Maturity ability of the function to create The Pricing function Fewer resources; and capture sustainable results, sets the prices for all products, as More executive and leadership strengthening the competitive well as the policies support; advantage in an increasingly that the sales and Centralization of resources for all dynamic market. business functions business units; must apply – in alignment with the Unified methods, language, and whole company. revenue management in the entire company;

Less autonomy for sales and Pricing Corporate business functions. strategy governance and alignment The Pricing function Access to resources established makes analyses and by the core Pricing functions (e.g.: Advanced Technology analyses and data recommendations, statistics); and pricing management supporting the sales and business Unified language and revenue areas, which remain management throughout the responsible for company; setting the final price Need for additional resources; based on each unit’s reality Potential for non-unified methods.

There is no Pricing Total autonomy for the sales and function; the sales business functions; and business areas have their own Need for more resources; representatives to Less alignment between the sales manage pricing and function and the business function to develop sales policies Methods, language and revenue management are not unified. Decision-making

Decentralized

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Organizations’ structure

The challenge In Brazil, due to the market’s maturity level Good Pricing practices and the organizations’ lean structure, the company’s Pricing functions are commonly linked to the sales, finance and marketing An efficient pricing strategy suggests as sales, finance and marketing, and areas. This could contribute to corporations more control and more agility in aligned with the company’s strategic aiming a sales increase based on volume the decision-making and in fighting goals, is the first step to establishing and sales targets rather than on profitability. competition through the alignment a management framework capable Furthermore, a process that is not widely of the main stakeholders. Having of maximizing profit from goods or disseminated by an organization can result a function responsible for prices, services. in failing to follow through with decisions integrated with other functions such made by the team in charge of pricing management.

The costumer perceived value

The challenge Most analyzed market data for Pricing Prices are differentiated by… As a way of optimizing results, the Pricing decision-making (among the survey’s (among the survey’s strategy is key to making the connection respondents) respondents) between a company’s long-term goals and Product lines the tactical plan put into practice by the Competition price sales force. However, many organizations Markets/Geographies Demands operating in Brazil still strive to structure Sales/Distribution channels this function and to align it with its business Supply Types of customer/Segmentation goals. Despite the growing importance of Source: Survey conducted by Deloitte (2017) the consumer’s role for the Pricing strategy, the survey conducted by Deloitte with organizations operating in Brazil indicated Good Pricing practices that competitors’ prices are still the main factor analyzed when making pricing Cost, profitability and competition channels segmentation. When a decisions. This behavior of prioritizing the are major factors for a strategic price company acknowledges that a same competition can trigger guerrilla strategies analysis; however, the concept of value product or service can bring different in the market, drifting away a consumer- is the key to defining the consumer’s benefits to different customers, it focused practice. tendency to buy a product or a service perceives the supply and demand curve for the stipulated price. Organizations in a broader sense and thus enhances can still improve product differentiation the potential of its profitability. practices using customers or sales

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The right price for the right customer

The challenge Although usual among survey respondents, Good Pricing the pricing approach focused on cost, 54% of the surveyed margin and competition is no longer organizations factor costs, margin, practices consistent with the social and economic and competition prices in their transformations that have taken place in pricing strategy The global scenario and the the last few years. The Brazilian market consequent changes in consumer still shows remnants of a period when profiles, coupled with the growing inflation and fast price changes pressured of the 50% technologic innovations, have organizations to resort to immediate pricing organizations in the sample contributed to an increasingly – based on costs – in order to avoid the include customer perceived value segmented vision, focused on depreciation of their products and services. in their Pricing practice the individual expectations of It is possible, however, to identify a slow each customer, and to a strategy transition towards Pricing maturity, with the Source: Survey conducted by Deloitte consistent with corporate goals and gradual inclusion of the customer perceived (2017) guidelines. value in their price management strategy.

Price segmentation

The challenge Quantitative methods most commonly Price segmentation per type of sales and of the surveyed used to set prices (among the survey’s distribution channel is a widely disseminated 45% organizations use quantitative respondents) practice within the organizations operating methods to manage prices in Brazil. It is necessary, however, to Profitability analysis avoid conflicts between the channels, i.e., (per SKU and customers) incorrectly set lower or higher prices. Price band Elasticity Customer Pareto Promotion efficiency Good Pricing practices analysis Waterfall Product Pareto To minimize the impact of possible data manage to value their margins for conflicts in prices segmentation each one of the customers, geography Source: Survey conducted by Deloitte (2017) between the distribution channels it and product levels. As a result, they is necessary to take into consideration have a better price management, the costs associated to each medium, great agility to adapt to the market, including the service costs. The and a more accurate identification organizations that create intelligence of customers that cooperate to based on transactional quantitative increasing or decreasing their profits.

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Pricing practices and experiences

The challenge Most common segmentation criteria Among the organizations approached to (among the survey’s respondents) Good Pricing respond Deloitte’s survey, the practice of segmentation per volume is the most practices common, which points to a market that can Volume still develop its pricing practices based on a Sales Segmentation based only on deeper analysis of concrete data that reveal potential volume can conceal the true value the sales potential and the profitability of Profitability and importance of each customer. each product or service. Source: Survey conducted by Deloitte (2017) In this sense, good Pricing management practices take into consideration sales potential and profitability to increase earnings.

Sales force remuneration

The challenge Most common criteria used to calculate The compensation and incentive actions the sales team’s variable compensation Good Pricing and the conduct of performance evaluations (among the survey’s respondents) are directly related to the sales team’s practices performance. Variable remuneration is the most common method used by the Volume The variable compensation organizations that took part in Deloitte’s method should emphasize survey. The principle mostly used by Profitability profitability and it should be aligned these organizations to calculate variable Price with the volume and with the compensation is sales volume. The fact strategic initiatives aimed by the that variable compensation is influenced Source: Survey conducted by Deloitte (2017) organization. Adopting profitability by volume over profitability could lead to a as a segmentation criterion is drop in product margins, because the sales consistent with the global trend of force would be more focused on increasing applying detailed analyses from the its variable remuneration than on the contribution of each customer and corrosion of the product’s profitability. each product in an organization’s portfolio. Accordingly, setting targets based on the profit margin of each sale could contribute to a more important engagement of the sales team in the Pricing practices.

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Pricing policies documentation

The challenge We have identified in our survey that a of the Good Pricing significant portion of the interviewed 61% surveyed organizations has a organizations has a documented sales documented sales policy that practices policy that seeks to reflect their pricing seeks to reflect their pricing strategy. However, only a small portion of strategy An integrated, periodically reviewed these organizations fully enforces such sales policy reflects a more effective policy. Source: Survey conducted by Deloitte (2017) price management plan. An active and coordinated communication process and the enforcement of the existing policies are the most appropriate paths to achieve the goals set by an organization.

Price management in the digital world

The challenge The adoption of technology in price Good Pricing practices management enables the creation of new types of interaction between the organization’s different business areas Big data is a powerful foundation on the consumers’ relationship with and its customers, and contributes to the for organizations that wish to keep the goods or services offered by the continuous improvement of the organization up with the global trend of having organization, this technology can itself. The use of technologies on a daily a Pricing strategy focused on the collect data on the behavior and the basis takes organizations to a new level of value perceived by each customer. expectations of potential customers. efficiency in the design of strategies aimed Besides allowing the analysis of data to setting, analyzing and monitoring prices.

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Pricing trends

The challenge segmentation strategy steered away from In the Brazilian market, good sales and the organization’s strategic goals. This Good Pricing price management practices are constantly scenario contributes to the lack of stability evolving. The strategies targeting Pricing of price execution and to an increased practices reflect a structure that is growing, maturing, dependence of each organization on the and creating an identity for itself, while being sales negotiations conducted by its sales In order to both keep up with tied to the organizations’ sales, finance team. By analyzing the key pricing challenges global trends and assure their and marketing departments. The full cost existing in the Brazilian market, we could see growth, organizations must align of serving is still poorly exploited in the that there is more of willingness to design an themselves not only with social pricing strategy, which results in the real efficient pricing strategy than the need for a and economic changes but also profit margin being unknown and not being system solution. with the consequent change in efficiently acted on, resulting in a Pricing consumer behavior as part of the digital era. Technologies such as big data and customer and product portfolio analysis are very powerful tools to reach price management excellence, while maximizing profitability by optimizing prices and analyzing market data.

Main difficulties faced by the Pricing function Competitive advantages of a good Pricing management Brand strengthening and correct and structured product Competitors’ prices are not captured positioning in the market It does not have systems to set, analyze or monitor prices Enhancement of customer, product and market segmentation Allocation of the correct cost and a clearer pricing policy per Costing or apportionment problems may impair or lead to customer; a more structured process with appropriate outcome an incorrect pricing strategy monitoring Price management-related processes are neither Alignment of the corporate strategy with the sales and marketing standardized nor followed strategy, increasing decision-making agility It has customer segmentation but without differentiating A more appropriate Pricing strategy for the different sales channels service level and discounts and customers that optimizes value capture

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Contacts

Heloisa Montes Partner of Consulting area and Strategy & Operations leader at Deloitte Brazil [email protected]

Marco Chaves Consulting director and Pricing practice leader at Deloitte Brazil [email protected]

The True Value of Pricing – From the pricing strategy to sales excellence | 2017 Edition

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