Learn how to improve gross profit margins
Has anyone in your business been formally trained to manage your most powerful profit lever: pricing?
- Are they aligned to the right pricing strategy?
- Do you have the right pricing tools and techniques set up to drive more profitable pricing decisions?
- Do your teams have the right skills to improve prices and profitability?
- Are you selling on value, or negotiating line item invoice discounts?
- Do you have the right pricing structure in place to maximise profitability?
One of the most common pieces of feedback we get when we talk with clients is the challenge of having everyone on the same page and aligned to the right pricing strategy.
If you ask your team what is the difference between mark up and margin you may get very different answers. If you set prices based on a 100% mark-up, then offer price discounts of 25%, you have essentially halved your profitability.
Has anyone in your business been formally educated in pricing strategy and tactics?
The answer is that they most likely have never had any kind of education in your #1 profit lever. It has all been learnt on the job.
This informal learning in the school of hard knocks has some value, however the effect is an inconsistent pricing strategy and poor execution.
These inconsistencies become sources of margin erosion if left unchecked.
When cross functional team members are not clear on strategic pricing objectives or aligned across category or key account strategies, margin leakage occurs.
We regularly come across clients where excessive discounting is relied upon to make the sale. There is a lack of confidence in the value of the product or service which leads to price concessions at the first sign of customer pushback or negotiation demands.
The end result is often a vicious cycle of discounting to make sales, expectation by customers that the discount will continue and fear on the part of the sales force that without discounting, sales will not be made.
One of our clients several years ago, told us a story of a major bid they undertook that they did not expect to win. To their surprise the customer rang them within 48 hours, asked them to confirm the pricing and then awarded them the contract.
There was some cause to celebrate.
When the first quarterly review came around after 3 months there was much surprise that the projected gross margin targets that were modelled in the spreadsheets did not even come close to the actuals.
What happened was the commercial analyst who set the prices used a 30% mark up on cost to set the prices instead of an expected 30% margin on sell. Big difference.
In fact, if your costs were $100, to make 30% margin on sell you would need to sell for $142.85.
If you used a mark-up on cost method your sell price comes to just $130. Because this company’s cost of doing business ran at about 25% of sales, the actual EBITDA margin was now negative 2.0%, instead of positive 5%.
Pricing arithmetic errors happen every day and often go unnoticed.
They go unnoticed because people are not trained to look for them.
Sometimes human error creates margins issues because they are too focused on the wrong data to make decisions. One client had an analyst who would reduce the prices of a certain category of products because “the gross margins seemed too high”. He said we can’t make 50% points from this category. He did not realise that his procurement team had just beaten up the supplier for margin rebate and margin relief.
Pricing can become a strategic asset to drive earnings growth. You can empower your team to make more profitable pricing decisions with a structured approach to skills development and education.
By educating your teams on the fundamentals of pricing strategy and tactics, you enable them to think more clearly about the value exchange process and they come to understand that they have more pricing power than they realise.
Price mastery covers a highly structured approach to pricing strategy and operations. We apply the 10:20:70 model for learning in a slightly different way. We undertake needs analysis and diagnostics to identify required course outcomes.
We issue learning materials to students several weeks in advance so they have time to review and consider materials in a way that is relevant for the daily challenges at work.
We then run the Price Mastery workshop in a practical way to allow students to apply key frameworks to solve real business problems.
Post the workshop, there is follow up testing and evaluation to identify potential areas for further development at an individual level.
STEP ONE – Identify pricing challenges
Identify the current pricing challenges you are experiencing in your business. These challenges then become part of the focus for learning as the learning program becomes goal directed and specifically relevant to solve your commercial challenges.
STEP TWO – Nominate learners
Identify the relevant staff who will benefit from training and development. This is typically a combination of staff from sales, marketing, finance and operations functions.
STEP THREE – Agree on dates & locations
Nominate dates, locations and durations for the Price mastery workshop. Our ideal duration is 1.5 days as science shows us that deep brain learning takes place overnight and ideas can be consolidated on day 2. However, some clients have only one day to spare and this can also work by enhancing preparation through online course completion and pre-work.
Price mastery is designed specifically to help clients solve the following problems:
- Sales and marketing teams not quite aligned on pricing strategy,
- A view that you may be losing margin due to excessive discounting.
- A sense that value is not being communicated to the customer, resulting in prices and margins under pressure.
With practical frameworks and case studies developed from real world commercial situations, your team will learn pricing principles to drive margin expansion specific to their commercial situations.
To find out more about how Price Mastery will empower your teams to make more profitable pricing decisions, please email firstname.lastname@example.org or call + 61 2 8226 8621 with your details and potential times for follow up call.