epp 2nd global pricing maturity study 2016

www.pricingplatform.eu

2nd Global Pricing Maturity Study 2016

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Content

page

• Introduction and key findings ……………………………………… 3

• Methodology …………………………………………………………….. 6

• Perception and Reality ………………………………………………… 7

• Pricing Maturity

– Strategy ………………………………………………………………. 10

– Policy ………………………………………………………………….. 11

– Implementation ………………………………………………….. 12

– Reporting ……………………………………………………………. 13

– Organization ……………………………………………………….. 14

– Systems ………………………………………………………………. 15

• Conclusion ……………………………………………………………....... 16

• Appendix: Firmographics

Authors

Pol VanaerdePresident - EPP

Michael Immenschuh

VP Strategic Consulting EMEA – PROS

Contact us for more information

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Different studies show that a strong, top level supported, profit culture makes the difference between low and high performers in any industry1. And it is clear that top management involvement in advocating a profit orientation culture is crucial.

But it’s also clear that pricing managers are (or should be) important change agents to lead the organization towards a value and profit orientation culture. This role goes beyond the ‘classic’ pricing task of taking care of the obvious margin/price leakages, the essential price reporting and (list) price setting optimization ; tasks very often seen as the most important reasons to exist of pricing organizations.

The first (European, and now global) Pricing Maturity Survey in 2013 showed that many organizations made good process in having the ‘basics’ all right. But most pricing teams said ‘they were struggling to get the new insights implemented in the sales organizations’. Execution was said to be one of the challenges. In the previous study many pricing leaders said they needed all their efforts to get the ideas implemented – and many are said ‘to be far away’ from a true value strategy and culture. The 2013 survey also clearly showed how important it is to do the right things at the right moment towards pricing excellence. Good priority setting and a clear roadmap are important to succeed.

At the same time, the ambitions in the previous survey where high, the stated ambition level in the pricing maturity was above 3.0, meaning that the ambition was to reach a value (based price) strategy deployment within the next 24 months.

We were very eager to learn what has been realized and if the challenges differ from 2 years ago. Here are the key findings of this year’s EPP Pricing Maturity Study 20162.

1 Different studies show that organizations with a strong top management involvement in advocating a profit orientation culture realize up to 25% higher return on sales.- SKP Global Pricing Study 2012.

2 in this survey, we took an industry focus on manufacturing only. We will conduct a separate survey for Lifesciences and Services Industry.

“Pricing managers are (should be) important change agents to lead the organization towards a value and profit orientation culture”

Introduction and Key Findings


1. The overall pricing maturity scored is 1.98. This is about the same score (slightly lower) than the 2013 survey (2.08).What happened? Are so many of the organizations struggling with their pricing excellence roadmap? Have we made only small steps in the last two years? Or have pricing managers been too critical of themselves? Is there indeed a lot of work to do (and thus also a lot of opportunities to catch)?

2. The highest score in this 2015 EPP Pricing Maturity Survey is given on ‘price list management’ (2.36). The second highest score was for ‘price governance’ (2.31). Both of course are typical level 2 projects, showing where pricing teams had a priority focus. The focus has been very much on typical level 2 tasks in pricing (see maturity levels)

3. More surprisingly in that context is the relatively low score for ‘price reporting’ (with a score of only1.84). Better reporting was the area with the largest delta between current and target maturity. The underlying reason seems to be that most companies are tracking margin performance at the product level but have limited/no visibility of pricing waterfalls and profitability on the customer level.

4. Interestingly, companies are indicating that ‘target price guidance’ is one of their stronger areas (2.20). Only 29% of companies are still giving local sales organizations full freedom to determine their local market prices. The majority of companies indicated that their pricing and sales teams are working together to determine target price guidance. That’s good news.

“What happened?

Are so many of the organizations

struggling with their pricing excellence

roadmap?”

Introduction and Key Findings

“The survey clearly shows that doing the right things at the right moment is crucial to succeed”


Introduction and Key Findings (cont.)

5. But… there is an important lack of discount discipline in the sales teams. The score for optimal discount structure is only 2.09, with 65% of the companies still allowing many unconditional discounts. Also the fact that only 13% of companies indicated they have a well integrated CPQ, CRM and ERP platform for a fully integrated lead-to-cash system needs improvement.

6. The low score for ‘sales incentives alignment to the price strategy’ (a score of only 1.76) is a symptom of the same problem. It shows how difficult it is today for most pricing teams to get sales aligned around the value and price strategy.

7. The low score on ‘Price Strategy’ items (2.0) confirms that pricing managers are aware of their struggle to ‘get the price policy implemented’. At the same time, pricing managers set a very high ‘to be’ target on price strategy execution (3.29 target), indicating they realize the gap in the current price policy execution. It is of course an open door, but strategy is never the most difficult part, it’s the execution. And that is no different for pricing strategies.

8. In this context it is no surprise which are the absolute lowest scores in this year’s EPP Pricing Maturity Survey. The lowest scores are on ‘understanding price elasticity’ (1.61) and ‘understanding willingness to pay’ (1.65). Both typical ‘level 3 maturity level’ challenges, needed to set a value based price within a value strategy, a level most organizations have not yet reached.

9. The ambition level (target) for the x+2 year pricing maturity scored an average 3.22. Pricing managers seem, again, to be very ambitious. They want pricing to be aligned across market strategy, marketing, finance and sales. Installing a true value (based pricing) strategy, integrate value communication and value selling are seen as the desired status within the next 2 years. Quite ambitious (too ambitious ?) to realize in the next 2 years.

10.Finally, the score for ‘do you have a pricing roadmap’ is a concern (2.04 is quite low). Should we invest more time in clearly defined yearly pricing targets, action plans and maturity roadmaps? 45% of the companies in this survey do not (yet) have a vision about how to develop the pricing skills and maturity in the organization. It is time for action!

“45% of the companies in this

survey do not (yet) have a vision about how to develop the

pricing skills and maturity in the

organization.

That’s a huge concern.”

Pol Vanaerde


European Pricing Maturity :

Perception vs RealityCompanies are demonstrating a split personality; the first group of organizations seems to be too ‘humble’, working on a higher maturity level than perceived – the second group is over-optimistic.

For the first, the ‘humble’ ones; 39% of the organizations perceived themselves as level 1 players - but after the assessment only 26% of the organizations found themselves on a level 1 maturity level.

For the second group; 34% of the organizations estimated to work on a level 3 (full value capturing), but in reality only 16% are really on level 3…

The result is that a lot of organizations have a wrong perception of their pricing maturity, some too humble, some too optimistic.

The difference between theself assessment and calculated maturity levels is meaningful as it may indicate many companies still don’t have a comprehensive under-standing of pricing practices and capabilities available to them.

“Very strange to see how many

companies still overestimate their

pricing maturity level

while other organizations really underestimate their

pricing capability level.”


European Pricing Maturity :

The Risk of Complacency

“There's no big apocalypse. Just an endless procession of little ones.”NEIL GAIMAN, Signal to Noise

And so it may be for European businesses as they continue to operate at a low level of pricing maturity demonstrating that as a group with 81% operating at level 1 or 2.

The results for the 2013 survey were 90% operating at this level demonstrating European companies have not realized the power of pricing. Research has shown very clearly that a 1% increase in price drives an 8.7% increase in operating profit improvement.

Pricing is by far the most powerful profit lever a company can take. Yet, European companies continue to be complacent about adoption of a capability that can deliver more money. The risk is not just suboptimal profitability, but maybe even extinction.

European companies are at risk of quickly falling behind in profitability in this challenging global environment.

It’s not all doom and gloom as European companies can accelerate their adoption of pricing maturity capabilities and quickly gain a competitive advantage in local and regional markets given that the vast majority of companies are not taking action.

Those advantages can deliver incremental profitability that fuel investment into further pricing maturity - driving additional capabilities, maturity and realization of revenue and profit potential.

The key is speed. Those companies that quickly grab the opportunity and execute can realize measurable and meaningful business results. Those that don’t take the risk of falling behind.

Wake up call:

81% of European companies are still operating at level 1

or 2 for pricing maturity.

This level is 9% lower than the 90% in the

2013 survey, but remains concerning

high!

European companies are at risk of quickly falling behind in this

challenging global environment.


Price Strategy - include six elements :1. Pricing Goals2. List Price Strategy3. Pricing Strategy Development4. Segmentation5. Product Lifecycle Strategy6. Value Chain Understanding

30% of the organizations in the survey indicate they have specific pricing goals and KPIs per segment or market with targeted price positioning versus competitors

Nevertheless the local sales organizations have extensive “freedom” to adapt price strategies to local market conditions

These organizations develop pricing strategy and price positioning using a small central pricing team that mainly includes product management and finance.

But still only 9% of them are using mature pricing strategy development practices that align cross-functional marketing, sales and finance.

For the other 70% of the organizations, pricing goals are mainly only general guidelines with key performance indicators (KPIs) mainly set on price erosion and discount capping.

Use of price segmentation is still rudimentary with 39% of companies having a basic product and customer segmentation in place. Basic segmentation is typically by region, industry or application. Another 36% of companies are using more detailed sub-segments based on analysis of historical transactional data. Only 7% of companies indicated they are using mature price segmentation practices where customer segmentation is dynamic, based on multiple and connected data sources and predicts customer behavior.

Product lifecycle management is not practiced with 81% of companies indicating they are not using it or only doing annual product portfolio pruning with very little alignment to price strategy.

Understanding of the value chain is the least mature topic for companies. Only 4% of companies indicated they have a mature value chain understanding with new go-to-market approaches and monetization models tested to gain or regain market power.

In depth findings per building block :

Price Strategy

Price Strategy - include six elements :

1. Pricing Goals2. List Price Strategy3. Pricing Strategy Development4. Segmentation5. Product Lifecycle Strategy6. Value Chain Understanding


Interestingly, companies are indicating price guidance as their strongest area in price policy. Only 29% of companies are letting local sales organizations have full freedom to determine their local market prices.

Almost 70% of companies indicated their pricing and sales teams are working together to determine target price guidance. That’s really good.

While the most mature area, there is a big opportunity as only 9% of companies indicated they are using in-depth data analytics and forecasting to determine price guidance.

Asked how well their product portfolio is aligned with their market segments, 50% of companies indicated their product and price differentiation is implemented (e.g. good, better, best tiered offering) for price and margin optimization.

Understanding price elasticity and willingness to pay are clearly two areas where companies need to improve and where they have the biggest potential. In 54% of companies, knowledge about price change responsiveness is only scattered in the sales team. And although a nice 59% of the organizations mention that understanding of willingness to pay is only based on in-house historical data analytics, only 3% of companies are using mature practices involving micro segmentation and cross-elasticities to model and forecast the impact of price changes on revenue and profits.

Interestingly, business leaders often complain about the lack of discount discipline in their sales teams. Yet, 65% of the companies are still allowing many unconditional discounts.

Finally, a small 28% of the companies say to use value base pricing methods based on understanding the value components, the price/value positioning and price elasticity.

Price Policy includes 8 topics:

1. Price Guidance

2. Price Portfolio Consistency

3. Price Portfolio Offering

4. Discount structure policy

5. Understanding price/value positioning

6. Understanding price elasticity

7. Understanding willingness to pay

8. Price setting methodology


Price Policy


Three areas of price implementation maturity stand out; the low current maturity of selling processes and sales incentives at one side - and the high target maturity of actionable KPIs.

Interestingly, 42% of companies indicated they are selling on product features, or product advantages or “on price”- but not on end user value.

Only 5% of companies believe their sales team is seen as a strategic partner that enables the customer to develop and implement the next generation of business model.

Regarding sales incentives, 80% of companies use volume and margin targets to drive sales incentives.

Only 6% of companies link sales quota retirement to price guidance realization

Companies are indicating a high level of maturity when dealing with price escalations. The largest group of companies (45%) are at stage 3 with different levels of approval predefined based on the size of the discount and the size of the deal.

The majority of companies, 73%, are struggling to monitor compliance to terms and conditions or struggling to set and manage clear consequences or both. Only 7% of companies believe they have systemic checks in place or have integration with client supply processes to ensure adherence to the contract terms and conditions.

On the other hand, 74% of companies defined vital pricing KPI reports, but only shared ad-hoc within a limited audience. Only 12% of companies indicated that they are including the KPI reports as part of the business planning process, using them in regular reviews and have them as part of a dashboard.

Almost all companies are looking to make vital pricing KPI reports a part of the business dashboards.

Price implementation includes 7 topics:

1. Governance

2. Selling Process

3. List price maintenance

4. Margin/Profit improvement processes

5. Contract/agreement/deal condition

6. KPIs actionable

7. Sales Incentives


Price Implementation


Overall, reporting was the area with the largest delta between current and target maturity, which is surprising as actionable KPIs had been seen at a higher maturity level.

Although 63% indicated that gross margin details are available at the product line and customer level, only 6% have detailed price waterfalls for every key customer and use a calculated customer lifetime value for deal making purposes.

With 64% having visibility into segment, channel, customer and product profitability, only 9% are using an activity based costing model with the ability to run simulation reports identifying the profit improvement potential. This surprised us.

Win/loss reporting provides excellent visibility into the effectiveness of your sales process. Yet, 47% of companies do not have systemically reported win/loss analysis.

Tracking of competitive price information is at about the same level with 47% doing it on an ad-hoc basis. Only 7% of companies have tools and processes in place that make competitive prices readily accessible.

Overall, companies are highlighting visibility into price performance as a key area for increased investment. They are looking for improved visibility into price waterfalls, profitability, competitive pricing and win/loss analysis.

Price reporting includes 4 topics:

1. Waterfall

2. Profitability

3. Win/Loss

4. Competitive watch


Price Reporting


Overall, companies reported strong capabilities across the price organization topics.

32% of the organizations say sales is pretty much still in the lead. Pricing teams are not really installed, pricing is a part-time job.

32% embedding a pricing team into the finance department.

27% having a pricing team in place with a clear mission, defined KPIs and reporting structure into the CMO, with 9% of companies have a chief pricing officer as part of the leadership team.

Also worth mentioning.. 37% of companies have little or no specific training designed to improve pricing capabilities and front-line pricing skills. But also 15% have highly skilled and experienced teams in place that stay fresh by exchanging talent with external organizations.

45% of the companies do not have a vision about how to develop the pricing skills and maturity in the organization.

But the other 55% are working on at least some form of action plan for the next year, with 17% believing pricing maturity is a competitive advantage.Price organization has 3 topics:

1. Pricing Organization

2. Capabilities and Skills

3. Pricing Maturity vision


Price Organization


When talking with professional services and ERP system implementation experts, one of their key complaints is the poor state of client data. It is in multiple places, multiple formats, at varying degrees of completeness and accuracy. Interestingly, data quality came in as the highest current level of maturity in the price systems category and one of the top 5 in the entire survey. But it is also seen as one of the areas with the highest improvement potential.

Although relatively positive about their data quality, results were well distributed across the different levels of maturity with 33% indicating their data is in poor condition, 29% indicating their data is “mostly correct” but scattered across multiple systems, 21% indicating their data is “accurate enough for directional decisions” and 17% believing they have a single source of pricing truth.

Companies are less exuberant about the extent they are enabling sales with pricing tools during the sales process. Almost 80% of companies indicate they have little to no sales and partner enablement and rely heavily on back office processes to support special requests.

The other 20% are much further along the maturity curve with configure, price and quote (CPQ) tools integrated into their CRM systems and system generated pricing guidance supporting the P in CPQ.

Companies are still struggling to move from Excel spreadsheets to more dedicated pricing (analytic) tools with 75% of companies mainly using Excel for price list maintenance and ad hoc

reporting.

Only 13% of companies indicated they have a well integrated CRM, CPQ and ERP platform for a fully integrated lead-to-cash system.


Price Systems

Price Systems has 4 topics:

1. System Integration

2. Pricing systems

3. Sales enablement

4. Data quality


Conclusion

This expanded 2nd EPP Pricing Maturity Survey continues to highlight that there is

a clear correlation between overall organizational pricing maturity and an organization's ability to execute an effective value, and profit oriented, strategy.

Organizations building their organizational pricing maturity realize incremental revenue and profit from improved price and discount discipline, better price setting and sales support/alignment. A solid foundation is necessary to make progress.

Taking transactional control, with good visibility in reports concerning revenue and margin leakages, the capability to provide context specific and targeted price guidance to the front-line, and defining continuous margin improvement projects are important. it’s only a first step, but a necessary step for many organizations.

The average organizational maturity score between 2013 and 2015 did not to our surprise, significantly change. Have pricing leaders been too ambitious in 2013? Has it been harder to implement the change than we expected? Is our roadmap realistic and clear enough? It’s good to make such reflections at least once a year.

This 2nd EPP Pricing Maturity Survey clearly shows that pricing managers need an effective pricing maturity vision, a roadmap, with clear target settings for their pricing department. You can only fly once you know where to go.

What the development of the maturity score between the surveys 2013 and 2015 point at is that very few companies have been able to ‘cross the pricing chasm’. Most companies still seem to handle Pricing very much in a “traditional” way; where the main focus is on setting list prices, defining price and margin targets and installing price derogation processes – all important ‘level 2’ activities, but where handling price execution is still very often in a “monitor and control” manner.

We can observe that the seamless working together as well as holistic data exchange and usage between Product Management, Marketing and Finance/Controlling on the one side and Sales Operations remains an area of improvement to get to the next level of pricing maturity.

The move from the mastering the price setting, market positioning as well as staticprice guidance, which represents the level 2 on the pricing maturity scale, to the full, structured and scientific usage of the often massive data pools companies do have, isa competitive advantage.

Gartner states : ‘MarketScope for Price Optimization and Management Software for B2B: 2013’ report that “A successful PO&M implementation can increase margins by 50 basis points or more, and increase revenue by 2% to 4%.” And PROS reports : ´Experience with our customers as well as detailed science studies indicate that this revenue change is conservative. We see typically 1% – 2% top line increase which to a large extent drops to the bottom line and generates an 80-150 basis points margin increase.

The good news is that pricing managers are ambitious about the future state. There is a clear determination to become a true driver of change and to lead the organization towards a true value and profit driven organization.

“Creating a price/value strategy is often the easiest part, execution is always much more difficult.

Aligning pricing across marketing, finance AND sales is crucial.”


Conclusion

The survey on the other hand is also clear about the main challenge; effective execution and cross-functional alignment. Creating a price/value strategy is the easiest part, execution is always much more difficult. Aligning pricing across marketing, finance AND sales is crucial.

This all needs serious change management skills.

Pricing leaders have an important change leadership role to help steer their company towards a value and profit oriented culture.

Therefore they need to be fully embedded in the commercial process and be ‘in business’, not just be a ‘partner in business’.

Crossing the pricing chasm (read the whitepaper: Crossing the pricing chasm, EPP) means you will have to make the change from ‘pricing as a project’ towards ‘pricing as embedded in the value and profit strategy’. It’s THE challenge for most of us. It’s the pricing manager’s quest. How to make it really happen?

This survey can help to reflect and start the discussion in your organization how to bring your organizational pricing maturity at a higher level and realize higher revenues and profits.

We look forward to meeting, discussing and reflecting with all pricing and profit leaders worldwide to continue our road to excellence.

Kind regards,

Pol Vanaerde Founder European Pricing Platform

“Pricing leaders have an important change leadership role to help steer their company towards

a value and profit oriented culture.”

Pol VanaerdeFounder European Pricing Platform


PMI Survey Methodology

The 2015 EPP Global Pricing Maturity Survey represents the opinion of 200 pricing executives from the manufacturing industry, surveyed by means of the online Pricing Maturity Indicator survey (www.pricingmaturity.eu).

Survey duration: October 15th – Nov 30th 2015

The questionnaire of the Pricing Maturity Indicator is designed to objectively determine the organizational pricing maturity level, by evaluating the actual performance across the pricing framework building blocks :

• Price Strategy

• Price Policy

• Price Implementation

• Price Reporting

• Pricing Organization

• Pricing Tools & Systems

The EPP Pricing Maturity Levels

Level 1: Price List Maintenance – list prices are set by product management, but final price setting is owned by sales.

Level 2: Transactional Control – essential price analytics are in place and the 7 vital margin improvement projects are defined and implemented. Pricing is very much seen ‘as a project’, often reporting to finance.

Level 3: Full Value Capturing – pricing is fully embedded in the commercial processes, often reporting to the commercial organisation. A value strategy is deployed, with pricing aligned across marketing, sales and finance.

Level 4: Monetization – pricing is involved in the monetization model of the organisation and develops new revenue and business models.

On the EPP Pricing Maturity Model

EPP developed the Pricing Maturity Study (based on the PMI survey) to offer European pricing and profit optimization management a framework according to which they can determine the gaps and set the priorities in their pricing journey.

By providing a deeper understanding of actual and desired pricing capabilities and maturitylevel, as well as the main pricing challenges to bridge, pricing leaders can reflect, reframeand refocus on what is important and relevant for them in their pricing maturitydevelopment

The Certified Pricing Manager® program is developed on the skill cards for price management on each maturity level.

http://www.pricingmaturity.eu


The European Pricing Platform® (EPP) is the leading knowledge sharing platform, serving thousands of pricing and profit optimization managers. As a not-for-profit organization, the EPP is devoted to support and share pricing know-how development via a variety of media:

• Industry Focused Forums.

• Workshops.

• Seminars.

• Open and in-company Trainings.

• Access to a vast digital library of articles, research and whitepapers.

EPP is dedicated to:

• Help develop and share pricing knowledge, best practices and resources.

• Put pricing and profit optimization on the CxO's agenda.

• Connect pricing practitioners with leading pricing experts, researchers and academics.

• Offer a personal career and development program.

• Increase the employability and recognition for pricing professionals.

In addition, EPP also provides the exclusive Certified Pricing Manager® Program.

The EPP Certified Pricing Manager® programme is the only officially recognized pricing and profit optimization accreditation programme in the world, designed for experienced and highly accomplished pricing practitioners seeking personal career advancement and professional recognition.

No other programme is so comprehensive and practical. The Certified Pricing Manager® programme is specifically designed around the organizational and personal skill cards to perform on the different pricing maturity levels. Certification is based on real business project success.

About the European Pricing Platform

Contact

If you would like more information or to set-up an informal discussion on the topics discussed in this EPP Pricing Maturity Survey – and how

they impact your organisation,

please contact:

Pol Vanaerde

[email protected]

For more information about the European Pricing Platform or how

we can help you,

please contact:

Britt Dejager

[email protected]


Everyone wants results and inspiration. Contact us, we can help.

Call EPP Head Office:

Britt Dejager

+(32) 051 32 03 72


APPENDIX ACharts & Demographics


Charts


Demographics

Benelux10%

France8%

Germany13%

Spain & Andorra

7%

Nordics, Baltics11%

Switzerland & Austria

8%

Middle East, Africa16%

UK14%

Asia4%

Americas4%

Italy2%

Poland3%

Countries

Automotive, Aircraft, Aerospace

20%

Chemical & Biotech8%

Building & Infrastructure

3%

Manufacturing & Machinery

16%Medical tech & Pharma7%

Telecommunications6%

Other12%

Computer Hardware, Software, Electronics

& Components6%

Utilities, Postal, Logistics

3%

Consulting, Professional Services,

Academic10%

Ag, Consumer Goods5% Banking & Insurance

4%

Industry


< 1 year25%

>10 years22%

1-2 years15%

3-5 years16%

5-10 years22%

Pricing Function Experience

>15 people35%

1-3 people20%

4-7 people13%

8-15 people10%

None22%

Pricing Team Size

Demographics


SAP1%

Dynamics11%

Other (None)38%

Salesforce16%

SAP28%

Siebel6%

CRM

Demographics

Epicor1%

Infor1%

Other/ None39%

Peoplesoft2%

Sage4%

SAP53%

ERP


Model N1%

Other/ None82%

Periscope2%

PROS8%

Vendavo5%

Vistaar1%

Zilliant1%

Pricing System

Other/None83%

CloudSense1%

Configit1%

FPX1%

Navetti1%

Oracle5%

Apttus1%

PROS2%

Steelbrick1%

Tacton4%

CPQ

Demographics


Excel32%

IBM Cognos6%

Numeric1%Oracle BI Suite

6%

Other33%

Qlikview11%

SAS1%

Sofon1%

Sybase IQ1%

Tableau7%

Tibco1%

Business Intelligence

No59%

Yes - 1-2 years20%

Yes >4 years5%

Yes, < year8%

Yes, 2-4 years8%

Move to the cloud

Demographics