Defendable Pricing: Align Price Structures

January 22, 2018

Defendable Pricing

How can companies deal with the price comparison websites that are popping up everywhere? Our price management experts, Hong-May Chen and Jos Eeland, explain why defendable price management is essential for making the right price decisions.

Never before have prices been so transparent. Driven by competition from online stores and mobile technologies, street prices can be checked via search engines and on price comparison sites everywhere and at any time. And price comparison 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 cause major legal risks. For example, if they are not transparent or defendable, or violate competition law.

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. Lower prices for identical products across borders became more transparent due to the internet combined with low import and transportation costs. At the same time, 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. These are essential for the company strategy, and are the basis for determining how a customer needs to perform 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. Pricing solution measures can vary from repositioning and renovations, to selective distribution or phase outs. Undefendable higher prices 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 only succeed if you take the best practice key success factors into account and share them with sales reps. These are top management support, data transparency and monitoring from the start, common language and aspiration level and structured alignment between sales teams in relevant segments, channels and countries.

Conclusion

Implementing Defendable Price Management is hard work. But it 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. It is essential 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.

Read more about price strategy at Simon-Kucher!