Analysing Customer Revenue and Net Margins

Below you can see a very typical set of data.

This happens if you've got customer revenue. You can see the net margin all over the map. So the question is, is this good or not? Well, we can't tell. It's suspicious when you've got a big spread of margins with low, small customers and that's often what you see. You see this sort of funnel shape. But you can't tell, so it really depends on what is the company trying to optimize. Is it profits, target price, market share, volume, cost, retention, plant utilization, customer satisfaction. If you can sell, you'd rather sell high margin products than low margin products. The key is comprehending why selling at a higher margin is not the norm, and how to ensure it becomes a habit in your business.

Factors Influencing Pricing Decisions

Businesses also want to manage costs. We talked about that you can break that into raw material production costs, the cost of selling stuff, R&D spend, overhead spend, things like retention or sort of buried into volume over time. These can be grouped down into market factors, sales, cost of sales, overhead which go into revenue cost which gets you to profit. So at the end of the day, the real money is in getting the right price and sometimes getting the price right.

Optimizing Pricing Strategies

Assuming what we have discussed so far, you sell more and you have a better sales mix. And that's where the 10% increase comes from. So the impact you can get out of pricing is 2 to 5 points of revenue. That is impressive. There's nothing else going to get you that without starting a new product line or something like that. In pricing software and large companies which have complex problems, this is necessary.

They don't even know the value of pricing because when you don't get a price difference, you don't know it. For instance, say you wanted to buy a shirt and the price is 29 dollars; then you get to the counter and it's 19 dollars cause it's on sale. You were going to buy it at 29. That's 10 dollars of money that's lost. You are the only person who knows that. So that's one of the challenges we have is that when you do not get the pricing you expect, people do not know it.

What are people trying to do with pricing? What affects how, what's the context that companies are operating in when they're doing pricing. There's a set of internal drivers worth considering like there's what are they trying to do strategically. What are their goals? And what do they sell? If you're a software company, it's clear that you don't sell pastries. So what are they selling? And then there's the market drivers telling what the market looks like and what are segments you are selling into or what's the competition doing. All these things affect then the pricing practices.

On the cost side, managing costs is crucial. This includes overseeing raw material costs, production expenses, selling costs, R&D spending, overhead costs, and factors like retention embedded in volume over time. These elements can be categorized into market factors, sales costs, overheads feeding into revenue costs, ultimately affecting the bottom line.

Implementing Subscription-Based Models

Pricing strategies can also be influenced by factors such as competition, technological advancements, customer preferences, and regulatory changes. You need to continuously monitor market trends, competitor pricing strategies, and customer feedback to adapt your pricing models effectively.

Moreover, implementing dynamic pricing strategies, utilizing data analytics for pricing optimization, and incorporating value-based pricing approaches can further enhance pricing effectiveness. It's also crucial to regularly review and adjust pricing strategies based on changing market conditions and customer demands to stay competitive and maximize profitability.

Another important aspect related to pricing strategies is the concept of value-based pricing. Value-based pricing involves setting prices based on the perceived value of the product or service to the customer. By understanding the unique value proposition of your offer and aligning pricing with the value delivered to customers, you can capture value more effectively and differentiate yourself in the market.

Furthermore, subscription-based pricing models, freemium strategies, and tiered pricing structures are common approaches used to cater to different customer segments and enhance customer acquisition and retention. These pricing models allow companies to offer flexibility to customers while maximizing revenue streams and maintaining a competitive edge in the software market. Another crucial aspect related to pricing strategies is the implementation of pricing experiments. By conducting pricing experiments, you can gather valuable data on customer behavior, price sensitivity, and willingness to pay. Testing allows you to compare different pricing strategies in real-world scenarios to determine the most effective pricing approach for maximizing revenue and profitability.

Adapting Pricing Strategies to Market Trends

Additionally, understanding the concept of price elasticity of demand is essential when setting prices. Price elasticity of demand measures how sensitive customers are to changes in price. If you analyze price elasticity, you can adjust your pricing strategies to optimize revenue and market share while considering the impact of price changes on customer demand.

Lastly, staying informed about industry trends, emerging technologies, and evolving customer preferences is vital if you want to adapt your pricing strategies accordingly. Keeping a pulse on market dynamics and continuously refining pricing strategies based on customer feedback and market insights can maintain a competitive edge and drive sustainable growth. Pricing software provides valuable tools and capabilities to design and implement pricing experiments effectively. Pricing software enables companies to simulate various pricing scenarios, monitor outcomes, and refine their pricing strategies based on real-time data and insights gathered from these experiments.

Understanding Business Framework

It serves well to have a structured framework for analyzing market drivers, pricing practices, value and price targets, customer incentives, execution strategies, company drivers, and offer design. Moreover, taking into account key considerations such as targeting market segments, understanding competition, gaining insights for decision-making, delivering value to customers, capturing value created, aligning partner actions, ensuring pricing message consistency during execution, defining the company's business model, strategy, and long-term goals, and designing product and service packages is crucial for growth and success. Such a framework helps in comprehensive planning and strategic decision-making in various aspects of business operations and growth.

The Business Model Canvas

The Business Model Canvas was originally designed for startups to help them define their business structure. It serves as a tool to visualize how different components of a business interconnect, enabling the identification of hypotheses, assumptions, and risks. By mapping out the business processes, it facilitates the identification of areas for value addition and cost reduction, as well as the ability to adapt to changes. While initially intended for startups, this tool has proven to be beneficial for companies of all sizes in analyzing their operations effectively.

A business canvas outlines key elements of a business model, including:

Value Propositions: Describes the value a company offers to its customers, such as convenience, vast selection, high-quality service, and fair pricing.

Customer Segments: Identifies the target audience, including consumers and vendors who sell products through the platform.

Customer Relationships: Details how customer interactions are managed, primarily through the website and automated services.

Channels: Outlines the various channels used to reach customers, including website interfaces and affiliates.

Revenue Streams: Enumerates the sources of revenue, such as direct product sales, commission from partner sales, subscriptions, and web hosting services.

Key Partners: Lists essential partners like sellers, logistics partners, content providers, and others crucial for business operations.

Key Activities: Highlights key activities required for business functioning, such as website management, customer support, fulfillment, and partner engagement.

Key Resources: Identifies critical resources like brand reputation, distribution networks, and data analytics necessary for business success.

Cost Structure: Outlines the costs associated with IT infrastructure, product/service development, convenience offerings, and more.

Example of the Amazon Business Canvas  

Taking Amazon as an example, let's explore their value proposition. Amazon's core value lies in convenience, offering low prices, free shipping, exceptional customer experience, fast delivery, a vast selection of products, and high-quality service at fair prices. Their customer base includes individual consumers, small businesses, and vendors who sell products through Amazon's platform. Amazon's customer relationships are predominantly managed through their website and automated services, constituting a significant portion of their interactions. Revenue streams for Amazon encompass direct product sales, commissions from partner sales, Prime subscriptions, music subscriptions, and web hosting services – showcasing a diverse and dynamic revenue mix.

Amazon's unique approach of being a price follower rather than a price leader, has allowed them to maintain market control and avoid perceptions of market manipulation. Their historical focus on low costs and utilizing investor money to acquire market share, leading to its current position as one of the most valuable companies globally emphasizes the significance of understanding business strategy and business model as a valuable tool in sales conversations and project assessments, suggesting the use of the business model canvas for gaining insights into a company's operations efficiently.

Introduction to Discounts and Rebates

In this section, we will look into discounts and rebates. The complexity surrounding discounts and rebates often leaves businesses confused about their purpose and utilization. Our aim here is to demystify these practices. When engaging in sales through channels, such as selling to distributors, a common practice, raises a fundamental question: Why do you engage distributors in the first place? Distributors play a vital role by adding value to your operations. They extend your reach, handle billing, and perform various tasks that contribute to the sales process. Consequently, offering incentives like discounts or rebates serves as a means to compensate them for the value they bring to the table.

Discounts and Rebates as Incentives

Understanding the roles and contributions of distribution partners is crucial in determining appropriate compensation through discounts or rebates. Ensuring the alignment of channel incentives with your objectives is paramount for success. 

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It is essential to examine the commercial terms of discounts and rebates and assess their alignment with your goals. It's surprising how often discrepancies exist in this regard, with past structures often lacking clarity in their rationale. Moreover, incentivizing performance through rebates becomes significant. Rebates come into play when rewarding individuals based on achieving desired outcomes, such as increased sales or purchases.

Moreover, distributing discounts and rebates effectively across different products poses another consideration in optimizing channel incentives. If you consider these aspects you can enhance the effectiveness of your strategies in driving performance and fostering beneficial partnerships within your distribution network.

When Should You Use Discounts and Rebates

Previously we talked about push and pull products and how they should have very different discount or rebate allocations. For push products, pull products you shouldn't have to discount. Poor products need to get discounted.

Here is an example of a situation when a good product and a confident producer may not use rebates nor discounts to incentivize purchases or further sales. A global pharmaceutical and medical equipment producer wanted to purchase iPads for their sales team. Initially, they approached Apple to buy 1000 iPads and were quoted the list price of $699 each. Despite requesting a bulk purchase, Apple reiterated the price per unit without offering any discount. This was possible because Apple had confidence in their product and its value proposition, which eliminated the need for discounts.

In the realm of product allocation, discounts, and rebates, it's essential to discern which customers should receive them. Core customers with significant business potential might be more likely to receive price flexibility compared to opportunistic customers with potential challenges in servicing. In cases where customers with baggage are involved, no discounts may be offered, and it's acceptable whether they make a purchase or not.

Complexities arise in managing rebates, making them more cumbersome unless they provide tangible value. In such instances, opting for simple discounts might be more practical. Evaluating the rationale behind discounts and rebates involves considering factors like customer segmentation, value proposition, and overall feasibility to determine if these strategies align with the business goals effectively.