A large, multinational company was aggressively addressing the discounting culture pervasive in the organization. With various verticals, multiple product lines and more than 10,000 customers they were struggling to measure the effectiveness of the various pricing initiatives and identify areas to prioritize efforts for maximum impact. Because of the magnitude and complexity of the organization, they got stuck in the weeds with day to day problems.
Basic analytics helped this organization to understand the holistic picture of the effectiveness of the initiatives and to help decide the direction of future price change. Here are 4 simple reports they created and began to repeat on a regular basis:
- A simple price plot. The company created a dual axis graph with list prices and realized prices on the dual y-axes and volume on the x-axis. The price plot helped them understand the actual discounting currently in the organization across the volume band and uncover the areas of opportunity by vertical and product.
- A Year over Year comparison of revenue lost from discounting by vertical. This showed how well the pricing initiatives were performing by vertical and overall in terms of dollar profit.
- A revenue waterfall analysis to understand changes from the previous year at a more detailed level. How much revenue improvement was contributed by vertical, by small customer versus large customer, by list price increases, and by reduced delegations. It also helped uncover where the initiative effect was maximum and minimum.
- A Pareto analysis to understand the top contributor to revenue improvement by customer and vertical versus budget, Year over Year or Quarter over Quarter. This helped us understand the top verticals and clients to focus on.
We shall focus on individual analysis, its variations and implications with greater depth later in the article. With some simple analysis and reporting in place, you can understand and share your pricing initiative results with other organizations and your executives. We recommend that you put in place basic analytics and reporting that can be repeated on a regular basis. In the long term, these simple reports will allow you to be more proactive and be able to prioritize your limited resources on the areas of greatest return. With more transparency in the results, pricing and sales can collaborate on targeted effort to gain maximum benefit for the company.
Discounting Control Tool of Choice – The Price Plot
The company started with a price plot to understand the overall discounting culture in the organization. While this price plot is very simple, it is very powerful in showing the overall discounting habits of the organization.
Generally, list prices and discounts are associated with volume, and segmenting the data based on volume breaks is a good way to look at discounting. The price plot above shows that the specific business unit is suffering from a discounting culture. All but at one volume band shows discounting used to close business. Once they had this high-level view, they were able to isolate specific transactions that drove the discounting results. In this particular case, they found that the higher realized price was due to a few clients and sales person’s capability, tenure, or selling approach. For the other tiers, they were able to isolate a few accounts that needed immediate review and support from the deal team to rectify the account.
Many companies are surprised just by looking at this simple graph. They believed they had discounting under control and delegations in place. However, when they performed the price plot they realized that the data did not align with their internal assumptions.
The main insights that can be gained by doing price plots are:
- Understanding the overall discounting culture of the organization.
- Identifying potential price improvements that the organization can realize.
- Uncovering vertical and use case differences in discounting, which may uncover best practices or point out a need to have use case specific price points with adequate fences.
- Monitoring progress over time to changes in discounting habits.
The price plot should become a part of the overall pricing dashboard and updated frequently to keep reporting on the organization’s pricing discipline and to provide sales support when needed to correct situations where procurement has ignored the value delivered by the supplying organization.
Pricing and Revenue Dashboards: Keys to Profit Improvement
In order to identify and prevent excessive discounting, pricers also need to learn how to develop pricing and revenue dashboards. These are again comparatively easy to develop, and will have a profound impact on decision-making in your company.
Here are two recommended dashboards to build out your standard set of reporting metrics:
1) A “bird’s eye view”- which is a top level organizational view of revenue results
2) A “worm’s eye view”- which is a customer level view in an individual vertical
In the “bird’s eye view,” you can get a ten thousand-foot view of the pricing practices and behaviors in your company, the profit that is left on the table as a result of a discounting culture, and, whether you are moving in the right direction.
A sample “bird’s eye view” dashboard is shown below:
In the dashboard above, the first column represents the vertical/division in the organization. The second and third columns represent the lost revenue due to discounting in 2015 and 2016. The final column is the difference between these two years. The difference can be negative if either the discount had increased or if the volume had increased or both.
The same dashboard can be done by year or quarter or month, whichever would best suit your organization. On a high level, this dashboard will help you understand the overall discounting direction of the company and the impacts of discounting from each division/vertical.
The second dashboard – the “worm’s eye view” – can uncover ‘why’ the division/vertical is performing the way it is performing.
In the “worm’s eye view” dashboard, you pick up the top 5 – 10 customers with the highest potential to increase revenue by reducing discounting and increasing pricing control. Remember the Pareto principle is usually true of discounting habits too: 20% of your customers will have the potential to reduce 80% of the discounting problem.
A sample of a “worm’s eye view” dashboard is shown below:
These two dashboards in combination will reveal a wealth of useful information and drive your team into action. The main insights:
- Understanding the profit left on table from discounting and driving the organization to validate and align on the rationale for the discounting, such as future revenue opportunities, increased partnership potential, or ability to sell important products into the market to market leaders.
- Identifying the top customers who create the maximum impact profit by reducing discounting, addressing the discounting culture by account, and addressing the trending discounting habits of the organization.
- Identifying the progress of pricing initiatives by division/vertical to reward positive change in behavior and to address areas that still need support to change.
Waterfall Analysis and Pareto Analysis – Price Analytics that Drive Decision Making
The final step for pricers is uncovering the drivers of discounting and the effectiveness of their organization’s profit improvement initiatives using a combination of waterfall analysis and Pareto analysis.
Once we understand the overall trend of our company using the price plot and the high-level pricing and revenue trends using the dashboards, the next step is understanding at a high level where discounting is occurring and compare it to best practices. Waterfall analysis and Pareto analysis are great tools to uncover why and where discounting is occurring and where to focus an organization’s limited resources.
We will be using the familiar tool (waterfall analysis) but in a different tact than a traditional account leakage view to understand how discounting has changed in a year and what were the contributors to the net change. An example of a waterfall analysis is shown below. The X axis is the customer category and the Y axis is the revenue lost.
The graph depicts revenue lost due to discounting. The revenue lost decreased from $612K in 2015 to $378K in 2016 (which is a good thing!). In this case, revenue improved by $365K due to improved discounting controls in 123 customers. Unfortunately, at the same time, discounting increased with 56 customers leading to an increase in revenue lost $126K for that customer set. Also, we see that with new customers discounting is leading to a revenue loss of $7K. The waterfall analysis shows how effective our discounting controls have been, whether they had an impact a specific set of customers or in a channel, and how our discounting habits may continue in some areas of the business – like the acquisition of a new customer in this example.
Next, to understand which customers contribute to revenue lost due to discounting, we do a Pareto analysis. A Pareto analysis for the customers whose discounting has increased is shown below.
The above analysis shows that the top 10 customers (20%) from customer A to customer H, contributed to 80% of the increase in discounting. The Pareto principle, which states that 20% of your customers cause 80% of revenue lost, is the truth in most of the cases. This means we can focus our attention on a limited set of customers to investigate root cause and make specific account plans with sales to address the discounting.
The combination of waterfall analysis and Pareto analysis can uncover a wealth of information. Major insights include:
- Understanding the change in the discounting trend.
- Uncovering best practices inside the sales organization to share with others in the team (by performing Pareto analysis on customers whose discounting decreased).
- Measuring pricing and profit improvement initiatives.
- Highlighting the top customers where focus in required to improve account profitability.
Clearly there are many, many other tools available to analyze pricing and profitability. It can be overwhelming. Start small and simple. Get your arms around the high-level of discounting controls, and over time, add more analytics to gain more and more insights. The key is to get started in measuring. What gets measured, gets done.