The last decade has seen lots of changes in pricing. Companies are investing in new software to make decisions and are using tools that are custom-developed according to their business’s DNA. Meanwhile, dynamic pricing and digital price tags allow prices to react to supply and demand in real time (in as far as the customer deems acceptable). Teams are stronger than ever, and today pricing is recognized as a science that can be studied in MBA courses across the globe. Last but not least, in a more digitalized world, being able to monetize innovations is key. For superior pricing strategies to pay off, companies must first develop products from a perspective of what buyers are willing to pay for.
However, despite major advancements in pricing, margins are being squeezed more tightly than ever before. In Simon-Kucher’s Global Pricing and Sales Study, conducted every two years, we asked companies about the pricing pressure they experience. An alarming number of companies told us they were dealing with increased pricing pressure, and over half were involved in a price war. This is not surprising. Just look at pricing behavior on Amazon and you will see about 60,000 price wars every day. With algorithms making the decisions, price wars start and end rapidly, but they are much deeper and costly.
This is one you can all try at home: take any product on Amazon and see what happens to its price point in a given timeframe. Watch how it moves up and down. Then compare it to a competitor product, and see how they both interact.
So how do companies plan to escape this pressure? An overwhelming majority told us that they intend to increase prices over time, yet low price realization rates do not support this ambition. These companies fail to increase prices as planned, and that’s a huge threat to margins. In the meantime, buyers are increasingly purchasing their goods through digital channels and companies that are unable to serve customers online face a severe risk of losing out to competitors.
Where can digitalization add value?
Digitalization has a lot to answer for. However, as a top-line expert, my ultimate focus is on where it adds value. Yes, digitalization is intensifying pricing pressure and making everything more transparent and comparable. But if your costs are increasing and you can’t effectively pass on price increases, then you’re not “doing digital” right. Digitalization is an opportunity, both on the seller side through reduced cost-to-serve and lower barriers to entry, and on the buyer side through increased efficiency and transparency. Here are five key ways digitalization can actually help companies escape price pressure.
1) Define what you actually want to achieve with digital
The number one pitfall with digital transformation is that companies invest in the wrong initiatives because they see digital as an IT project rather than a change management exercise. In our study, we identified the two most profitable initiatives: 1) using big data to optimize pricing and 2) monetizing new digital products and services. However, when we looked into the initiatives that companies were focusing on, we saw that these revenue drivers were much lower on the agenda than they should be.
To ensure digitalization is a strategic initiative rather than an IT problem, you need involve the right people and make it a C-level topic. This is the best way to properly define strategic objectives, prioritize them, and track achievement. Objectives can range from simple goals such as automating the sales process and streamlining the buying experience for the customer, to more complex targets such as tapping into different markets, installing dynamic pricing, and customizing product offerings. Excellent companies invest in a professional pricing organization. They give enough importance to pricing per se, and have digital experts reporting to the right people.
2) Build goals around new revenue streams and value-driving opportunities
Let me recommend you a book: Monetizing Innovation (if you haven’t read it already). It explains how in the innovation process, engineers and R&D are brought in to design the next best product, but don’t necessarily focus on the customer, what creates value, or how it translates into willingness to pay. The same is true for digitalization. The idea behind your initiatives should be to increase the value you’re delivering to your customers. A lot of people think digitalization is exclusively about self-service, when actually your goals should center on new revenue streams and value-driving opportunities. In our study, we asked companies about their investments in digital initiatives. A high majority were investing in digital initiatives, and were doing so with the aim of driving top-line growth. But when we asked about measurable success in driving the top line through digital, the figures suddenly dropped to under a quarter. That means one in four companies actually earn money through digital. The rest fail.
3) Really understand the impact on a customer and product level
Every time a company shifts customers from an analog to a digital environment, there will be winners and losers. In the analog world, there is already major price inconsistency across customers. Digitalization will make these inconsistencies transparent, opening the door for customers to game sales into giving price concessions and lowering price points.
You need some type of strategy in place. Creating transparency in advance is a crucial step in order to start cleaning up any internal mess. I’ve worked for companies that didn’t go through that exercise and just switched from day one. The result? They were bleeding cash because they didn’t understand which customers would trade down, who would suddenly receive a discount overnight, or how it would impact neighboring countries. If you implement a digital strategy in the U.S., it is very likely that customers in Canada will compare price lists and vice versa. If there any discrepancies, those who are paying more will request refunds. It is a global market, so you have to really understand the impact on your customers.
4) Spend a lot of time preparing both customers and your own organization
Don’t underestimate the entire preparation process. There are a lot of stakeholders involved in a digital migration, from your own pricing and sales teams to your customers. You’re trying to influence their behavior so that you can reach the desired outcomes. Have a detailed migration plan for the difficult accounts and test reactions in simulation exercises. Make sure everyone knows how to handle customers that get huge price decreases or increases. Is it a one-time switch? Who visits them? Who tells the story? How? Often what works is incremental change.
There might be internal resistance when it comes to the impact on commissions and incentives as you move across channels, and this should be included in your strategic planning. If you are concerned about the challenge of convincing sales of a new structure, start with a pilot market to test the response. You may discover actually that salespeople love it when customers purchase digitally. It will free them up from having to spend their time responding to simple quote requests, and they can instead focus on higher value sales, which brings me to point five.
5) Focus sales efforts where it counts
In our study, we also asked companies how they expected the role of the sales force to change, and how relationships in sales would evolve. While we did not identify any patterns by industry, there were significant differences between customer types. For large customers, the importance of the relationship was expected to increase dramatically. For small customers, it was expected to decrease. That clears up one lingering fear: digital will not replace the sales force, but rather help them to make the right decisions for large accounts.
While processes can be automated for smaller, less important accounts, there are pockets where automation doesn’t really help much yet. For example, extremely customized products have long lead times and require lengthy interactions and common sense from human beings. New technologies like Artificial Intelligence and Machine Learning can help to analyze data and find patterns, but large accounts expect more customized and personal treatment.
Rather, digital technologies free up the salesperson from repetitive activities so that they can offer higher value, spend more time educating customers, and focus on new product lines and complex products. It’s about moving from order taking to actually explaining the differential value of a product or service. In our survey, we also asked for the top skills that salespeople will have to develop in the next five years. The number one skill by far will be value communication. So in fact digitalization can enable the salesperson as well as the pricing professional to get more satisfaction out of their work through more strategic efforts and greater value delivery.
Digitalization, threat or opportunity? You decide
There’s a lot of opportunity in digitalization, with very interesting working models that don’t have to hurt your top and bottom lines. However, if you don’t embrace digitalization, it will likely cost you your livelihood: innovate or die. If you don’t innovate and improve as a company, your competitors will and the market will evolve. The purchasing patterns of your buyers will change. If you keep your business model constant, in the next 10 to 15 years, you might just disappear from the market.