A Guide to Picking the Right Price Consultant Service
You've decided that you want to engage a price consultant service. Now, that's a good decision. But not all price consultants are the same. So, in this article, I will talk about what you can expect from a price consultant and what results you can expect.
First, let's talk about business consultants who are not pricing consultants yet are engaged to help companies with their pricing strategy. If your company is among the Fortune 2000 companies, you'll probably engage one of the top five or six business consultants, as they will all have a pricing practice. Once your company is engaged with the consulting firm, at least half a dozen people in business suits will sit in one of your conference rooms for months, maybe even half a year. They will suck resources out of your organization and produce a report in the form of a stack of paper at least a foot high. It will contain lots of data but with very little practical advice, and their work will cost six to seven figures. (I recently heard from an investor/board member that one of these top four or five consultants charged a company seventeen million dollars for a pricing project with no clear outcome or succinct recommendation. Another company I spoke to paid one of these consultants three million and asked for an additional one and a half million to help the company implement their recommendations.)
So, who will work on the project then? Most, if not all, of these firms' partners, are career consultants. They have consulted with many companies, but many (not all) do not have much business experience. The likelihood that you will work with any of the partners is low. Most individuals engaged in your pricing project will be newly minted MBAs or lack experience from a legion of consulting projects. Maybe even more disturbing is that, for reasons I outlined in other articles, what they learned about pricing in business school is wrong. But, engaging any of these consultants is a low-risk engagement. Suppose the company follows the advice of one of these large consulting firms, and it does not work. In that case, the individual who engaged them can always justify their decision: "They come with the best reputation. I made the low-risk decision." Passing the blame and keeping their job.
It's a different story if your company is more of a mid-market company or a small company. You probably don't want to spend millions on one of these huge consulting firms and want a good return on investment. Instead, maybe you consider one of the many small general business consulting firms. They can often help a company think through issues and process development, but they are not experts in pricing. And since pricing affects a company's profitability more than anything else, using pricing experts is essential.
3 Activities of a Price Consultant Service
So let's get to the topic of this article: how to pick the right price consultant service for your business. Generally speaking, there are three different activities that a price consultant service can do. Some companies specialize in one or two pricing activities leading to different specialized price consultants. Let me outline what I mean by that.
Pricing Process
The first activity is the pricing process. Every company already has a pricing process. It may not be a perfect process, but it does exist. For example, a not-very-good process may consist of the following:
We met with sales and product management and felt that price X would be the right price, which is what is going into our pricelist/website.
We looked up competitor Y online and set the same price.
We calculated the cost of the product/service and doubled that to define the price.
We asked the sales team what the market would bear and used that info for the pricelist.
These pricing processes are guaranteed to leave money on the table, which is not what any CEO would want to happen in their company.
So instead, a better process can be developed. Different companies will have different goals. And companies already have business processes that may or may not include how to set and distribute prices. So, for every company that uses a price consulting firm to develop a pricing process, it will be a custom development. In many cases, the firm will develop and document the process and specifically train employees on the process. In addition, it may require new supporting software or reconfiguration of existing software and employees with different skill sets. In some cases, employees' positions may change, or their work descriptions may change. And, like any business process, the pricing process will need to be documented. The process also needs to be supported by authority, which often means the support of the company's CEO. The implementation of a better pricing process also needs to have the appropriate resources. And finally, there needs to be specific business goals for pricing.
But, like any other business process enhancement in any company, the risk of failure is significant. Simply because it requires people to change, and change is challenging. Further, process development takes a long time to develop and implement, maybe nine months or perhaps a year, for a midsize company. Some companies have taken two to three years to develop a better pricing process. Now, what can we expect in terms of results here? Typically, going from a simplistic to a more elaborate pricing process will yield about two to four percent additional revenue in the company, of which most will be profit-added revenue. Not bad, of course, but it's also a very involved exercise. And an exercise, as with other business process development, with a significant risk of failure.
So why then "only" a two to four percent increase in revenue? Well, because, by definition, a pricing process deals only with pricing. It does not deal with customer targeting, product-to-market fit, marketing channels and messages, sales channels, and sales methods. It does not discover if there are better ways to do the activities mentioned above. It views "pricing" as it would exist in a vacuum and not integrated with the entire company's activities.
Part of the pricing process is to do something called a pricing waterfall. While the process, as mentioned above, is about setting, distributing, and communicating prices, a pricing waterfall looks at prices from the opposite side - it examines what happens with cash from the invoice to what is received in the company's bank account. A price waterfall is about ensuring that profits don't leak out throughout all the steps in the collecting process. A profit leak could mean things like there is no sub-process to ensure that the correct shipping costs are invoiced to customers, and therefore, sometimes the wrong shipping cost is charged to the company's customers. Or that there is a sub-process to ensure the correct currency conversation rate is used for international business. Or that the correct quantity discount is used, so customers are not invoiced the "1000 unit" price when they buy 100 units. A price waterfall also examines off-invoice rebates, kickbacks, and SPIFFs to ensure the correct amounts are used and accounted for. And, of course, to ensure the sales organization is using the current and appropriate price list and is discounting within limits set by the company.
Sales Transaction Data Analysis
The second kind of price consultant service analyzes a company's sales transaction data. From that, and highly dependent on that data, it may be possible to assess the effectiveness of a company's sales and price-setting portion of an organization. It may also be possible to evaluate historical price elasticity and coefficient of determination. The latter measures establish how important the price is for the market's purchase decisions.
To assess the sales organization's effectiveness, the possible results depend highly on a company's data in its ERP, accounting, or sales systems. For example, each sales transaction must be tagged to a specific sales channel, region, salespeople, sales manager, discount rate, payment terms, payment methods, customer contact method, etc. The more data, the better. Thus, with the correct data in the system, companies can assess how good their sales organization is. This is done by examining these sales transactions and where the profits come from. However, one issue is "profit" on this level implies that corporate overheads must be allocated in detail, which is almost impossible to do accurately. So instead, it is possible to use gross margin as a proxy for profits.
Consequently, it is about understanding how gross margins may differ among sales channels, regions, salespeople, and sales managers and how discounts and payment terms are applied. Further information can also be obtained if the company knows where the customers come from, how they learned about the company, and how the contact was made. Suppose the company does A/B testing in marketing, which is tracked together with sales transaction data. In that case, it is possible to find out what marketing channels and messages are the most effective in driving sales.
The other aspect of sales transaction analysis is examining what products or services are more profitable than others to understand what products or services need to be discounted more than others to be sold and to see the relationship between sales volume and gross margin. It may be discovered that some products or services suffer from both low sales volume and low gross margin. The issue then becomes finding out why. Is competition especially strong for these particular products or services? Or is it just that salespeople discount these too much? Or that they don't really meet the needs of the market?
And that means that you may be able to assess what products are more profitable than other products. What regions are more profitable than other regions? What salespeople are likely to discount more than other salespeople? What sales channels are more profitable than other sales channels? What resellers or distributors are more profitable than other resellers and so forth? Once this information is established, it is about asking the big question: Why? Sales transaction analysis does not provide answers. Instead, it generates a lot of questions in a price consultant service.
Imagine that you have two similar-ish products. One is sold at a price that generates a meager profit, and the other high profits. Then the question is why? You may find that certain salespeople discount more than other salespeople. And again, the question is, why? Are they operating in different markets with different competition? Is it just that certain salespeople are more prone to discounts than another? Does that mean the company can provide training on how to defend prices to those that discount too much? Or is it a breakdown in the sales process? Do they have different managers with different views on how much discounting should be allowed? Then should the managers be trained? Are some salespeople new to the company and others are not? When questions like these are answered, it will lead to changes in the company. Maybe the organization needs to change. Maybe certain people need particular training. Maybe processes need to change or, if not existing, need to be developed.
Likewise, sales transaction analysis can identify products or services that are discounted too much and what products lead to sales of other products. But, again, this leads to questions: Is the product or service a complete commodity, so does it lack pricing power? Or does it include features and functions that differentiate the product or service from similar products or services in meaningful ways to buyers?
Furthermore, sales transaction analysis can identify what products drive sales of other products. We call this the halo effect. Sometimes you need to have low-margin products only to complete a product line so that you can provide what's called the "whole product" to your clients. The "whole product" means that the client gets something valuable from one supplier and does not have to source different parts from different vendors.
Marketplace Willingness-to-Pay
The third and final kind of price consultant service understands the willingness to pay in a market. Very few price consultant services do this. In fact, to my knowledge, none can measure willingness to pay with the precision and depth we can in my company. We are unique here. From our willingness to pay for research, we can predict sales volume and revenue at different prices for a product or a service. But we don't stop there. We take that prediction and segment it into different customer profiles so we can advise our client what customer profiles would support higher sales volume and higher prices, and higher profits than other customer profiles. We segment by product or service features, functions, and benefits. So again, we can advise our client what product features, service features, benefit statements, and so forth support higher prices than others, allowing the customer to focus on those features and benefits that support higher profits. Likewise, we can tell our customers what marketing channels, marketing messages, positioning and benefits statements, and so forth support higher sales volume and profits than other marketing channels and messages. This means the company knows how to target and focus its marketing effort. And likewise, with sales, we can tell our clients which sales channels, and with sales methodologies, which sales messages and so forth, lead to and support higher, more profitable prices than other sales channels and other sales methodologies. And finally, of course, from the hard data, we develop a pricing strategy that often is stratified in some way but leads to minimum sales friction and maximum profitability, sales volume, and revenue.
3 Methods In Comparison
If we compare these three methods, developing or enhancing a better pricing process yields a few percent improvements in revenue that are all profits; likewise, if you do sales transaction analysis. Not bad, of course, but not as impressive as when proper willingness-to-pay research is conducted. In fact, from our customer's feedback, we know they often see a doubling of sales growth and 25 to 40% higher margins. This is because willingness-to-pay research, the way we do it, enables a company to develop a holistic approach to pricing, which means that companies become aware of how to target the most desirable customers with the most effective sales and marketing and the best product/service to market fit, and a pricing strategy that minimizes sales friction and maximizes sales volume and revenue.
So what does this mean? It means that with higher margins, the company gets additional resources. Resources to develop more products or products that better meet the market's needs. Resources to define new services or create new product and service bundles. Pick your favorite descriptive word to target the most desirable customer segments (or categories, personas, or avatars) to increase marketing spending and market development resources. It will enable the company to increase competitiveness, better serve its customers, and even hire the best and most expensive people.
It is like the company is pulling itself up by the bootstraps. Additional margin and sales volume are like creating something from nothing, value it did not have for the benefit of the company, investors, and, most importantly, its customers.
That is why it is not unusual to see companies using willingness-to-pay research to double in size over a couple of years. But some manage to quadruple or quintuple. Not overnight but over a couple of years because of their additional resources. Who would not want that growth?
I trust that this review of the most common activities of price consultant services enlightened you on the topic. Now, what will you do?
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