3/16/2020 5 Ways to Escape Pricing and Sales Pressure through Digitalization

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5 Ways to Escape Pricing and Sales Pressure

through Digitalization
January 31, 2020

Digitalization is changing the marketplace and new factors are influencing pricing success.
Drawing on the results of Simon-Kucher’s Global Pricing Study, I share five ways companies can
escape growing pressure and instead turn digitalization into an opportunity.

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.

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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. 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 – 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 automate the sales
process and streamline the buying experience for the customer, to more complex targets such as tap
into different markets, install dynamic pricing, and customize 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.

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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 crucial 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 US, 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 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, salespeople love it when customers purchase digitally. It will free them up

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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 sales person 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 sales people 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.

Want to ensure sustainable profits and satisfied customers in a digital world? Join us at TopLine
2020, Europe’s biggest top-line-focused event!

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