Never before have prices been so transparent. Driven by online competition and mobile technologies, street prices can be compared everywhere and at any time. And comparing pays off! Consumers can save significant sums of money if they shop for the best deal weighing up offers from different vendors, channels or countries.
Moreover, both consumer buyers and professional buying departments are increasingly comparing prices internationally to get the best deal; all of which results in negative price spirals and decreasing margins due to channel blurring and an increase in cross-border trade.
Who is to blame for these often undefendable price differences? In fact, it is the suppliers of these goods themselves. Lack of proper price management across countries, channels and products causes price levels and margins to erode.
How can you improve credibility with your customers, decrease harmonization risks and increase margins? Three words: Defendable Price Management.
Defendable price management
Often differences in cost structures, competitive landscapes or willingness-to-pay are brought up as possible reasons for different prices across retailers, countries and channels. Although sometimes understandable, these price differences involve major risks. Price erosion and the loss of credibility towards multinational and multichannel customers greatly affect revenue and bottom line profits.
Additionally, discounts and trade terms that benefit one supplier over another without any good reason, i.e. not transparent and defendable, violate competition law and cause major legal risks.
Defendable Price Management, in essence the streamlining of pricing for multiple customers, channels and countries, has become highly important over the last years.
The emergence of this field of pricing went hand in hand with the rise of globalization. When lower prices for identical products across borders became more transparent due to the internet combined with low import and transportation costs, parallel imports (cross-border and cross-channel) grew significantly. Additionally, the centralization of (retail) purchasing departments and increasingly powerful buying groups resulted in huge harmonization (or exposure) risks. The lowest purchasing price over different channels and countries became the basis for new negotiation rounds.
As globalization surges, the related risks of undefendable price differences will grow accordingly. Parallel import and harmonization risks form the main drivers of street price erosion.
An optimization strategy
Defendable Price Management is crucial for fighting price erosion and hence maintaining or even increasing margins. It is the optimal compromise between aligning where necessary and differentiating where possible.
The optimization strategy entails five steps:
1. Create a uniform price waterfall across countries, channels and products. A uniform price waterfall is essential in order to align recommended list prices, trade terms and net prices across countries. Setting clear definitions and creating transparency on the break-down of every product price is at the core of defendable pricing.
2. Setup a conditional trade terms. A pay-for-performance discount and trade terms structure offers better possibilities for defendable price conditions and increases internal transparency. This requires alignment on demand and cost drivers which are essential for the company strategy, as basis for the objective counter performance of customer in return for better prices.
3. Implement differentiation strategies. Differentiation in price is unavoidable and desired as performances delivered vary per product, channel and customer. For example, offline retailers can be rewarded for on-shelf visibility while online retailers may receive rewards for supplier banners on their website. A defendable price management approach takes elements into account which integrate differentiation in the trade terms structure.
4. Cope with outliers. Identify and resolve price outliers on customer, country/channel and product level. Solution measures can vary from repositioning and renovations, to selective distribution or phase outs. Undefendable price differences need to be managed, solved and prevented. This requires an active process, and often takes a multi-year period in the transition phase.
5. Integrate contracts and train the sales force. Installing Defendable Price Management is above all a change management program. In the end, implementation will succeed only if one takes the best practice key success factors into account: top management support, data transparency and monitoring from the start, common language and aspiration level and structured alignment between sales in relevant segments, channels and countries.
Implementing Defendable Price Management is hard work, but will pay off in terms of lower price erosion, lower harmonization risk, increased credibility with customers and an increasing margin.
Defendable Price Management is crucial for every company operating in a multinational setting to overcome the risks related to different prices for comparable products across countries and channels. Harmonizing the price and trade terms structure, managing differentiation strategies and outliers and finally bringing it into practice during implementation are essential steps in the process of optimizing a company’s price approach.
Simon-Kucher & Partners has identified seven pricing trends for 2018:
Trend 5: Defendable Pricing: Align price structures