Price Plots Can Hide Big Price Leakages

You and your pricing team have been diligent in using your pricing software to monitor price realization and eliminate outliers, reduce unwarranted discounting, and tighten up your price band. Beware—you may be victim to the Price Complacency Trap—that wonderful space where you are confident that you have instilled price integrity for your core products. In reality, you may be trading single-digit improvements by raising transactions to the regression line for double-digit declines in the entire regression line over time.

Today’s procurement professionals are counting on this mindset. They are wearing huge Cheshire Cat grins as they systematically depress prices for your entire industry. Procurement calls this “category management,” meaning driving double-digit (typically 20%) savings across the products that you and your competitors offer.

How do they perform this sleight of hand?

• Embed a commodity mindset. Procurement aims to convince you that your products are commodities and that all suppliers’ offerings are interchangeable.
• Create false competition. Next, procurement pits suppliers against each other and intimidates the incumbent by introducing non-qualified vendors—we call these suppliers “Rabbits”—to drive down the incumbent’s price. A complete waste of time for both the incumbent and unfortunate Rabbit.

In most mature businesses, low-price variance may just mean all procurement folk are singing from the same hymnal, putting suppliers into category buckets, and systematically driving prices down.

What’s the workaround?

• Understand your base price. That’s the price everyone gets. Think of it as the commodity or “Me Too” price. Don’t buy into Procurement’s fiction that you need to continually drop this price to stay in the game. Unite with your competitors and don’t just hold that line, but raise it. Remember, a rising tide raises all boats!
• Defend your differentiation. Know how your offerings improve your customers’ business results and communicate that value to the stakeholders who benefit. Customers will pay a premium when you build a compelling financial business case with their data.

In my next blog, I will explain pricing tactics for setting your base and differential price and procurement plays for reducing both pricing components.