For nearly two decades, CLIENT’s business unit enjoyed strong revenue growth and cash flow by improving its manufacturing efficiencies and enjoying the benefits of stable raw materials costs. The robust performance of its sales team allowed CLIENT to capture significant market share, offsetting the challenge of steady or declining prices across its product portfolio.
A quick analysis revealed that a lack of pricing discipline was having serious repercussions in the business. With our help, CLIENT determined that in the first quarter alone, they had sold >60 products at an annualized loss of more than $6 million.
Such hidden losses were bad enough, but unless CLIENT made some major changes to get its pricing house in order, things would soon get much worse due to shifting conditions in the business landscape.
Within 18 months of taking steps to improve their pricing practices, the BU was on pace to add more than $100 million in profit to its bottom line. These results demonstrate the power of pricing as profit lever, supporting the principle that a 1% improvement in price has the potential to yield a 10% improvement in operating profit.
Product life cycles were shrinking, which meant companies had less time to recoup development costs. The emergence of Chinese and Indian competitors not only created margin pressures and led to overcapacity in certain markets, but also stimulated demand for certain key ingredients in ways that pushed price volatility among raw materials to unprecedented levels.
While GPOs pushed hard for price concessions hospitals and providers were also feeling the squeeze from falling revenues and shrinking payor reimbursements. For a company like CLIENT accustomed to combating pricing pressures by introducing new products, this change in priorities held particular peril. While the BU’s products were often good enough to deliver these cost savings through improved patient outcomes or material savings, the company had not armed its salespeople with what they needed to make the economic and clinical case to customers in the field. The BU was determined to seize back the reins of pricing policy and implement a logical, rigorous pricing strategy to stop leakages and capture the vast sums of money left on the table.
Our past surveys demonstrated that organizations with superior pricing skills earned higher operating margins than their peers. Those in the top pricing quartile earned operating margins 11 percent above average, while the very best pricing performers (the top 5 percent) earned operating profits 24 percent greater than the industry average.
Low performers priced reactively – to cover costs, in response to competitors or simply ad-hoc on a deal-by-deal basis. Low performers engaged in price wars that destroyed value.
High pricing performers in the analysis shared certain positive characteristics:
The C-Suite recognized the potential bottom-line rewards to be gained from building a new pricing strategy on a solid data foundation.
With their support, we embarked on a five-month analysis that included interviews with key customers, intensive data analytics and a review of historical sales data. The findings not only laid bare the shortcomings and leakages in existing pricing practices, but also provided the insights upon which to build the new pricing structure.
CLIENT’s BU had been operating under the assumption that it needed to offer discounts and negotiate with customers to capture market share and make sure every hospital carried CLIENT products. Our analysis revealed the BU should have been negotiating from a position of strength based on the fact that GPOs needed to buy CLIENT products if those products provided superior inherent value over the competition. CLIENT now realized that it did not need to give discounts to pay for the ‘privilege’ of getting a GPO contract.
Our analysis uncovered an opportunity to increase the frequency with which many hospitals used the products. Using dollars spent per bed as a standardized metric, the analysis revealed that product usage varied dramatically from one facility to the next. Some hospitals annually spent several thousand dollars per bed on medical delivery products, while other hospitals used as little as $100 worth of products per year on the same metric.
Customer insights allowed CLIENT to move away from a harmful discount dependent pricing system toward a more beneficial incentive-based strategy.
On the other hand, CLIENT could put incentives in place to encourage these low-volume customers to do more business with CLIENT. Hospitals that stocked their storerooms with CLIENT products could qualify for better pricing.
With good data on annual per bed spend by all its customers, CLIENT’s sales team could focus on driving additional sales in the large swath of hospitals where CLIENT was underrepresented.
We helped CLIENT to realize the necessity of developing different rules for different components of its product portfolio.
Previously, CLIENT had taken something of a one-size-fits-all approach of applying cost-plus pricing across its entire portfolio. This strategy led to distortions and unintended consequences up and down the product line. At the low end, CLIENT ended up overpricing commodity items and thereby depressing demand. At the high end of the value chain, customers could cherry-pick premium items for a relative bargain price.
To maximize and rationalize the value of its portfolio, CLIENT recognized that it would need to segment its product lines into three categories
The BU was able to win over its sales force by providing extensive training and marketing support that helped the sales team demonstrate product value to its clients and thereby successfully make the case for higher prices. In addition, CLIENT cushioned the blow for the sales force by giving them greater autonomy in certain situations.
The pricing rules acted as guardrails. Salespeople could offer customers certain tradeoffs and approve deals instantly (without asking for higher-level authorization) for customers willing to accept those tradeoffs.
At CLIENT, the Pricing Department developed a commodity index according to which the entire product portfolio was ranked and separated into the Core, Specialty and Premium categories. With assistance from the Marketing department and the C-Suite, the Pricing Group then established a price menu that laid out a series of price tiers and guidelines for discounting.
The Pricing Group also had the responsibility of serving as an intermediary among product marketing, sales and other key functions. For a pricing strategy to be successful, companies need not only a good IT infrastructure to manage and analyze data flow, but also a social infrastructure that enables people throughout the organization to speak a common language on pricing.
As a result of the new pricing program, customers better understood the value of certain products and the new pricing policies enabled them to make better purchasing decisions.
Patients benefitted as project wins contributed to new product breakthroughs, saving lives and improving their quality of life.
CLIENT’s results exceeded expectations. The sales team brought in an incremental $100 million losing very little market share. The sales team had new tools in its arsenal with better marketing materials that quantified the value a particular product added to a hospital. A deal management workbook for each negotiation gave the sales team information on key customer metrics as well as the latest price menu and guidelines for discounting and negotiation as established by a centralized Deal Management Team.
The price menu specified certain minimum profit requirements for each product category. Core products might be commodities, but the BU had no need or reason to price Premium items at parity with the competition. With a good incentive program in place, deals became less centered on price and gave the BU a chance to build stronger relationships with its hospitals and GPO customers.
Faced with margin pressures and commodity price volatility, CLIENT’s Business Unit chose to build a solid foundation for future growth by developing and applying a focused and disciplined pricing strategy based on a deep understanding of customer value. This strategy applied the centralized pricing function typically used by world-class pricing leaders and gave this Pricing Group the power to set guidelines for the sales force to follow in making deals and giving discounts.