Barrett Thompson: And years past, I often hear pricing people say it's difficult for me to make the case internally that we should put this investment into pricing tools. It's one of the challenges; no better time than when everyone sees that a big part of profitability could be eroded by inflation and the current tools aren't up to snuff.
Yeah that creates pressure. It's a sort of a crisis moment, but that may be what you need to finally get folks in your stakeholders and your business to say you're right, It's time to invest in those pricing tools. It's time to get serious about this.
Barrett Thompson: Hello everyone. My name is Barrett Thompson. I'm the GM of Commercial Excellence at Zilliant. And I'll be your host for our podcast. I'm joined today by Dick Sobel, director of analytics for Price Point Partners. Dick welcome to B2B Reimagined
Dick Sobel: Happy to be here.
Barrett Thompson: Always enjoy speaking with you. You've got such a wealth of knowledge on pricing and best practices across many industries. And we're going to get into that in just a few minutes, but before we do, why don't you share something with us that we wouldn't necessarily know if we worked with you in a pricing capacity or just checked out [00:02:00] your LinkedIn profile? What's one surprising or interesting fact about yourself?
Dick Sobel: Well, the LinkedIn profile doesn't show everything. Couple of things in the past, I've played tournament chess and competed in tournaments and found that, in fact, they're doing the world chess championship right now. It's one thing to play casual chess. It's another thing when there's competition, the pressure is enormous. The other thing is I'm an avid reader of American history.
And on a personal note, I fairly enjoyed spending time with my family and my seven grandchildren, who keep me busy while I'm not doing pricing.
Barrett Thompson: Absolutely. And those are true riches, family. So it's a blessing. Thank you for sharing. And let's get into our, our topic then today. We've had the pleasure, you and I, Dick of working together on and off for over a decade.
And it's been my experience that your views on pricing strategy, they're fresh, they're insightful. And so I was really pleased when we could have you [00:03:00] on the show again today because. I believe there are some pressing issues that B2B companies of all sizes are facing. Some of these issues may be new or sort of newly accentuated and others might be familiar.
So I'm interested in getting perspective from your vantage point, when you, would you think about B2B pricers and the challenges they face today? What would you say is one of the number one thing they need to have in their back pocket during this time, but inflation, which is on everyone's mind? What are you seeing?
Dick Sobel: Yeah, I think the rise of inflation has bought many opportunities for B2B. Supplier costs have been rising very quickly. And staying ahead of the curve has been of the utmost concern. Now we have a client who deals with rare earth materials whose costs have in some cases quadrupled in 2021. And it makes a major piece of their cost. Fortunately, we had a [00:04:00] developed a pricing metric to ensure that these costs would be passed to their customers in a timely manner and kind of staying ahead of their price cost curve. They also renegotiated their contracts but the key to the renegotiation was demonstrating through the published, the commodity charts, where you publicly could see where these metals and materials were going and they were rising. And when they were negotiated, they had the material and the proof to make it a valid increase. It wasn't just, we have to raise up and they raised their prices to a point where they had to achieve 50 or 60% price realization just to keep up with the rising costs of the raw materials. And we had another one in that regard did a preemptive and I would say significant price increases actually got 8% realization this year due to this inflation issue. And essentially without any loss of volume and they have [00:05:00] taken the time again to demonstrate to their customers the key factors why these increases are coming and that it's industry wide.
And frankly, all the others in their industry were doing it, but they were preemptive. And by being preemptive, they didn't lose any business. So I really can't imagine any business, no matter how small, not having a high active level focus, I guess, on price, cost management and optimization, right. To address inflation from both a price and a cost basis.
And I think that's where data analytics plays a key role. By measuring the impact of price, cost, volume and mix from a high to a granular level of detail, along with a good price optimization price elasticity strategy. So kind of winded answer to your question. That's kind of where I think we're going today.
And I think frankly, inflation is going to continue well into next year. 'cause I remember back into the seventies when it [00:06:00] came, it stayed and it stayed for a long time.
Barrett Thompson: I'm seeing the same. I mean, I'll corroborate in, in different industries and different customers. Same phenomenon is that the number of cost changes and the degree of those cost changes that they're facing in a year is up manyfold. It;s kind of typical for some industries to reset their list prices once a year, when they go through and do a costing exercise at the beginning of the year, say in January, but I've heard them saying in many instances, man I've done four or five price increases in a year because I keep getting hit with the cost increases. I heard you call out and I think it makes a lot of sense to recognize when you have the air cover of a legitimate and validated cost increase and that's an industry phenomenon. It makes it easier to have that price conversation with customers, right? Because they don't suspect that you're just raising price to increase your profits at my expense. They realize that it's a market phenomenon. You're not doing this to them.[00:07:00]
Unfortunately, the products that they buy are truly going up in price and that's universal. So they shouldn't think about switching suppliers. That's not going to solve the issue for them. And the example you gave of how that second customer had no decrease in volume, even though they were taking their prices up significantly is sort of reflective of that.
If you manage it carefully and you manage it transparently and you share why the prices are going up and you share that it's not unique to you, but it's a market effect. We don't have to be as afraid that there'll be some big negative consequences for taking price up like tanking volumes. I want to pick up on the second part of your answer, then let's explore this because you mentioned sort of the analytics that we need.
So the data-driven insights that we need to have. And, at this day and age, it's really hard for me to imagine running a pricing organization without real time or near real time insights into all sorts of aspects of my business, all the way from production to demand generation, but certainly in the realm of [00:08:00] pricing, what do you think are the most crucial analytics that a pricing organization should be looking at and how do they apply them to make better decisions?
Dick Sobel: I think the first step is to have a deep understanding on how a company, financially accounts for their business and that, by the way, appeals to CFOs, who sometimes are concerned about a new development in the business or a new input that they are normally responsible for, but they really haven't had the tools to work on. So by talking about financially understanding your business, it kind of means that you're tying your pricing actions, your mix, whatever things you're doing to that P and L that is there's a clear pathway from what we're doing and to what they're reporting because they report sometimes not only monthly, weekly, quarterly, they're always having to report their performance.
[00:09:00] And so ensuring that pricing actions and results properly measured. And how they impact EBITDA and meeting a company’s financial goals to me is the first step. And part of success I think is good forecasting models and the ability to use what if analysis in those models to help financial people, as well as marketing people, meet those goals.
And then the analysis, the data analytics provides to me, the viable insight to look at performance against objective. So for me, we've talked about this in the past Barrett, measuring mix, for example, one of those things on many levels provides, I think the missing link to margin analysis, I mean, good pricing and cost reduction strategies can still result in lower gross margin percent outcomes.
However, measuring margin mix using different criteria can provide actionable opportunities I [00:10:00] believe to improve overall gross margin percent. Mix measurements can occur at the customer level at the market level, at the product family level and the SKU level. Each tells its own story. You may have a reasonable mix on a customer level, but you may have a lousy mix on a SKU level or a product level.
How you work that out. I think it's very critical. So to me, one actual opportunity when you're dealing with that sort of thing, like mix is to align the sales channel compensation package, right? To encourage sales of more profitable products where markets can support higher prices and perhaps less focused on low margin products and price sensitive markets.
So for, to me, Why we're doing the price and the cost, and we're doing mix looking at volume. We're looking at elasticity. We look at a lot of [00:11:00] different things, optimization, but mix is the one that someone says, Hey, you know, we did all these cost reductions. We had these price increases. We even increased our volume, but our margin percent dropped.
When I was at Emerson and we went to profit reviews. And we did price presentations and the chairman of the board and these guys, if you're off by a 10th of 1%, you had a lot of explaining to do. And the only way you're going to explain a 10th of a percent or two tenths of a percent on a multi-billion dollar company is to look at all the aspects of it, including mix.
And many times, mix is the culprit. Although it's the toughest to manage. It's something to really have to look at.
Barrett Thompson: Yeah, this is pernicious. So I want to call it out. I think the example you gave there at the end really happens. I have my costs have gone down, I've taken my prices up and my customers have accepted them.
My unit volumes haven't changed [00:12:00] or my revenue volumes haven't changed. So you would think if all of those three measures are moving the right direction, of course, profitability will go up and yet. It very well, may not. It could stay flat or go down. And the culprit is mix, as you're saying Dick. And so I remember boy, maybe 20 years ago when I didn't see very many good ways to even measure the mix, hindsight. Let's just think about that for a moment. If I want to talk about where I've been. So I'm at the end of a month, end of a quarter, we've reported out the profitability results. Someone says, well, I can see this profit is less than what it was last quarter; gross margins are down a little bit, but why? Right there, it took a while to see how the technology and the methodology in the pricing space could even answer that question and attribute some part of the explanation to mix, but it can be done. We do this for our customers. We have the analytics that can call out the [00:13:00] mix effects and that's so insightful once they start looking at that, it's really an eye-opener. I think everyone understands what it means for an individual customer to cherry pick you, come in and take your low margin items, but not take your high margin items.
Imagine that an entire market does that, or imagine that you set yourself up for that. And I love that you mentioned this point. It's not that you're just faded to let the market deliver a mix to you that it chooses to deliver. You actually have influence over that by how you incentive sales to pursue certain channels or certain customer types by how you set the price into those channels and types, sort of counter-intuitive, but it might make sense to take a 30 basis point price decrease to a certain customer type. If that customer type natively gives you 200 extra basis points, all other things being equal on everything that they buy.
Dick Sobel: That’s a good point actually, I hadn’t thought of that.
Barrett Thompson: It's the same as saying, well, why don't I go get more of [00:14:00] my more profitable customers doing more business with me? Maybe I would rather take a small haircut on the profitability they bring, but in, so doing kind of swap out a really low profitability customer in my portfolio or offset their spend with me by bringing in this much higher profitability customer into the mix. That is important.
Dick Sobel: One other insight there is that when you compare customers within a given market and look at their mix calculations and customers that are same cohort, same industry, same market. And they're getting positive mix and other customers are getting negative mix. So that's an analysis to look at in terms of why can't you get, between customers, similar kind of results in terms of the products mix that you're selling. And it also occurs within markets. Why does certain products get more sold in [00:15:00] one market versus the next one? So there's a lot of further analysis that can be done other than just getting the number, I guess is my point.
Barrett Thompson: Yeah. There's the number and then there's the, what's behind that. What's the phenomenon? And let's take that then and look forward because I heard you mentioned this too, so I've say I'm able to get the number, what is the mix effect?
And then I'm able to identify some phenomenon that might be behind. What can I do to use that, to make a better decision going forward? How do I turn that and go do something differently in the marketplace? You were talking about scenario planning, What if analysis? Let's explore that a little bit.
Dick Sobel: Well, that's a good question. I guess first thing you got to know is what's going on. And then I think if we were looking for example, at customers within a given marketplace, some are providing a better mix of positive versus negative. Then it's really a sit down with your sales management and [00:16:00] trying to really understand what the details are.
What's really going on at the customer level. Sometimes you find out that who you think are similar customers in name are really not. They serve different markets. And so sometimes the answer lies there. Not in anything you're doing. But many times, and in the case of Emerson, as I recall, we had a product business and we had a system business where you put all these products together and make a nice, like an environmental system.
And the environmental system was high volume sales and the product sales were not as, there were many of them, but there were less unit volume in terms of dollars. And so the Salesforce said, Hey, we can make our objectives by selling three or four big systems, but we'd have to go sell, 500 products to get the same amount of sales, except that the system business profitability was about a fifth of the product profitability. At the beginning of [00:17:00] the year, you would make this nice forecast where we're going to go 5%, whatever. Right. And you would ignore the product mix. Later in the year, salespeople we're in trouble making the objective. They would put all their focus on the low margin business. So these are the kinds of things that, and it's not unique to Emerson.
It's unique to a lot of different businesses, but you get called out at Emerson when things like that happen and you need to make changes. And that means you have to be really sitting down, like I said, with sales management and trying to figure out are we offering the right products, the right systems? That's sort of thing.
Barrett Thompson: I appreciate that tie back to incentives. You get to the end of the year, you're trying to make a top line number. So you'd go after that large systems business, for example, but it happens to be the least profitable business in the business. So you end up, sacrificing that other key performance metric on the margin side.
I want to call out too a comment that you made. We found it so true that two customers at first glance, you [00:18:00] might consider them to be similar because they’re emographically the same, like they, their firmographics, right? They show up in your marketing database as being in the same vertical industry. But if you look at their purchase behavior, they could be quite different.
And if you try to take the purchase behavior of two very different customers and get one to look like the other, you're pushing a rock up a hill. So there needs to be some analytically driven way to say when are two customers actually similar, when are they peers and why do I think they’re peers? And we've done some work with doing that.
Data-driven algorithmic ways to find where our two customers behaviorally similar in what they purchase and how they purchase, and then use that to have a very refined notion. Then when you go ask the mix question, so it's a product mix. When you say. Hey, I think these 15 customers are all similar and they should have a similar product mix and here's cases where one guy's not getting a product category at all [00:19:00] from me that I expect he's getting from someone else when you follow up on those and their data informed, they’re usually pretty accurate. You go and you talk to them and you find out, yeah, I do purchase that product category. I'm just not purchasing it from you. And then now you're off and running as a sales professional. Will. Why not? What could I do to get a piece of this business? Would you be willing to give me a try?
We've seen that sort of process give sales a way to rebalance that product mix inside of an individual customer, an active way, an actionable way to go balance the product mix instead of just the platitude. Hey, go get more of the more profitable stuff, but actually tell them what and who.
Dick Sobel: One last comment would be that that discussion also then ties into wallet share, once there's an issue, then you can start looking at these different customers and the salespeople and say, Hey, in your territory, customer A is like customer B, but you're selling three products to him, but five to the [00:20:00] other.
And the ones, the three that you're selling are the least profitable. And the next guy or gal she's selling five products, two of which are very profitable. And that's why they're getting good mix.
Barrett Thompson: This is all sounding great. Dick. We were chatting earlier and you mentioned the concept of closing the pricing loop. And I was really intrigued by that because I think that's not a mindset that many companies necessarily have when they embark on their pricing transformation.
But I wanted to ask you to share with us, what do you mean by closing the pricing loop, for the listeners?
Dick Sobel: Sure. I think that this was a term I used a while back and it kind of encompasses some of the things we've been talking about that is you start off by benchmarking the business where the clients is, where is your business now using some of the same tools we've already discussed.
And then with your pricing plan in place, assuming you have one, [00:21:00] you take those necessary pricing actions to achieve your goals and then measure and monitor your performance. And the key here is making midterm corrections as required as necessary. And the loop then closes when you clearly tie your performance to the profit and loss statement to the P and L. To different people that could mean different things, but it's the idea that as you're making midcourse corrections and making adjustments, taking actions, the loop kind of goes around and you're back to looking at how does that compare to your pricing plan, what your original forecast were and so forth. So to me, that's kind of where I see it.
So the big one as we've just discussed. It was matching that sales team’s incentives to your mix and pricing strategy. And we talk about what happened at an Emerson and, the disconnect is what reps are spending too much time chasing low margin deals and that sort of thing. Also once improvements do [00:22:00] start being realized after say a data driven analytics, each department tries to grab the improvement and profitability and claim it for their victory. What I mean by that is that you go, you do all this great work. Well, you put a system in place. And then the guys who are doing cost reduction say, well, yeah, the reason the profits are up is because we had all cost reductions and operations says well the reason your profitability is up, is it because of this and that? So the only way within the pricing loop concept to claim the victory is to have a direct correlation between your pricing actions and the other actions you've taken. One guideline I usually look at is that at least if your price realization is exceeding your cost increases on a regular basis.
Now it's not a one to [00:23:00] one, but it's not good if your price realization is lagging, your cost increases. On a monthly basis, quarterly or whatever, right. And that's when you got to start taking action. So to me, all these components kind of come in here and few companies are able to measure each component and the key is at a granular level, right, to really understand what's going on. They make a lot of broad assumptions. And they get lost in the complexity of the business. And so the pricing loop to me closing the pricing a loop is to ensure that all these actions you're taking and all the resources you've put to this subject actually get realized, measured, and you do claim credit for that because frankly, as we all know the leverage, you get out of pricing far exceeds all the other components to improve profitability,
Barrett Thompson: As you pointed out. Success has many fathers and failure is an orphan. So when you start showing some positive [00:24:00] profitability improvement, everyone's going to want to claim a part of that or the majority of that.
Right. But I'm imagining too, for many of the folks that are listening to us now, they would say, if that sounds very idealized, if you will, that are benchmarking where I am having a plan and a goal, and then tying out how my direct actions have contributed to that goal. Because I talked to so many Dick who say I am just overwhelmed because I've had six price increases this year. GPIs I'm busy running a deal desk, trying to staunch the flow of over discounting from sales reps. They're so up to their ears and just dealing with the daily stuff to keep the business going that they would admit quietly perhaps, actually I have not benchmarked, actually I don't have a plan. No, one's asked me to commit to one. They've just said keep the wheels turning. Right. And maybe at a high, low. Don't get behind the cost increases. Make sure price realization is keeping up somehow some way, but they're not able to be as strategic [00:25:00] as this vision is sort of implying.
So I'm sure you've run into many businesses like that. I'm just curious to know if you have tips or first steps that you might recommend to someone who says, I want to be that strategic. I want to create a plan with a set of defined actions. I want to tie off, but man, I'm just getting slammed, trying to get things out the door by the end of day, for all of the tactical stuff, I'm spending 20 hours a week down in Excel messing around with prices. I'm pushing price lists out to people. I'm trying to get the costs updated and current, just to know what the accurate cost is, is often a big challenge that I have to solve. Well, before I could do something strategic, like get the price updated in sync with that cost. Just sort of out of that reality, Dick, I just wonder if you have any tips for someone who says, I just feel overwhelmed with all the stuff I'm doing today, and I don't know how I would be as strategic as you're describing.
Do you have a first step for them or a set of principles that [00:26:00] might help them transition from the tactical to the strategic?
Dick Sobel: Well, I guess our approach generally is really data-driven. That is to say, forget the spreadsheets and trying to do it the old fashioned way. And frankly, you need some good tools.
You need an organization to come in and help you with those tools. And to do that benchmarking for you. And to begin to eliminate that complexity, you don't need to have a large group of people working on this right now. You need a little help. And these tools will allow you very quickly to identify where the low hanging fruit is.
And frankly, that's where you want to start. Get that low hanging fruit. And then begin from there a progression to spend more and more time as we go forward. And with inflation in place, you really can't afford not to do that, frankly, if you're not careful inflation this year will wipe [00:27:00] away all your profits.
Not everybody makes 10, 15, 20% operating profits. There are a lot of companies out there that are in that break, even to five, six, seven percent operating profit. And the key is you can't make a lot of mistakes there. So if you miss, if you missed the pricing curve, for example, the cost of living increase for seniors this year is 6%. Inflation is running at 6% and if you're not capturing and you're making 5% operating profit. I'm not saying it's one to one. That's going to go away very quickly. And so get the right tools, get some help. And by the way, a lot of clients, when you talk about the data to your point, they say, well, our data isn't any good.
We don't trust our data. Of course, I tongue in cheek say, well, then I don't know how you do your P and L if you don't trust the data.
Dick Sobel: [00:28:00] One of the things will happen is if you work with a set of tools that helps you clean up your data prior to getting your information, right, your data is going to get better.
People are going to pay more attention, and you're going to have a much better control of your business. We like to say, to get control of your profitability and to get control of your profitability you needs some tools to do it. If you don't have those tools. Cause by the way, enterprise systems, general enterprise systems don't have a good pricing module management application within them. They really don't. And so tools like that, that we can provide do not interfere with those systems. They supplement and complement them and allows you to get from under that, all those things you're trying to do that you mentioned earlier and start improving your profitability.
Barrett Thompson: That makes such sense. And In a way that's ironic. [00:29:00] The stress that's felt because of the inflationary period may be just the thing that pricing director, VP of pricing and others need to finally get the attention and get the investments support for the tools to solve this problem. And years past, I often hear pricing people say it's difficult for me to make the case internally that we should put this investment into pricing tools. It's one of the challenges no better time than when everyone sees that big part of profitability could be eroded by inflation. And the current tools aren’t up to snuff. Yeah, that creates pressure. It's a sort of a crisis moment, but that may be what you need to finally get folks in your stakeholders in your business to say you're right. It's time to invest in those pricing tools. It's time to get serious about this and step up to the next level. Get out of Excel. Get out of these manual processes.
Get out of taking 90 days to pass on monthly cost change, right? We can't do that. Let me shift gears a moment in the time [00:30:00] we have left and we talked a lot about cost and getting that passed through and having prices keep up that way. And of course, the power of mix and the power of analytics, one other topic I'd really love to get your view on is the importance of better discount management in B2B, because on top of these price increases, we need to take, they're still a big part of the energy goes into where and to whom and how much am I discounting. And I'd love to get your view on that.
Dick Sobel: Yeah. Two points on that. One is that a client or a customer or user will have a discount schedule and they use it. But what they don't realize is that it's not being implemented correctly. So that they have a discount schedule and certain break points for certain products. Right. But they're not attaining the margins they think they should. And then forward thinking and I'll have a comment. How do I set those break points and discount levels, right, to optimize my general [00:31:00] overall outcome in terms of volume and margin in the future? And so we have a tool and I'm sure you guys do as well, but we have a tool that looks at, kind of sets it up and says, okay, for your business, for your markets, for your products, different levels of detail, a tool where you can start looking at break points and discount levels through these various groups and then see what the outcome would be.
So, for example, when you start out, you might think that your current situation results in a average discount of 15%. When you do the analysis, you find out that you're actually discounting at 20% and that's giving you a million dollar loss of margin that you thought you would have at the beginning of the year when you forecast it, Hey, we have a discount schedule, everybody's using it, but there's always the exceptions. So what you want to find in this tool is [00:32:00] what is the impact of the exceptions on the existing discount schedules that you have, and then be able to say, okay, for these businesses and these markets with this is the optimal discount schedule and break point that gives you the maximum volume and maximum margin.
And then once you have that, then you can tie that in with the overall pricing plan and get the best of both worlds. We had one client a while back that had a shocking disparity. For example, between what they thought they were getting from the published discount schedules that everybody had and the actual result.
And one last comment, we're working on one prospective client that has one discount schedule for all, and that discount schedule is not very favorable for them. And so we're looking now to help them optimize their discounting and then tie it into their overall pricing plan.
Barrett Thompson: So, [00:33:00] this is such a great point. And what I think I hear you saying is the raw discount schedule. If that's what you're looking at to sort of judge the discounts that you think you'll be giving to the market, it errs on the side of being way too optimistic. It needs to be adjusted with the reality of, there will be additional discounts on top of that.
And when you look at what you've actually done on your orders, it's likely to be a deeper discount than you saw just by looking at the discount schedule. So it's certainly important to know what your realized discounts are at the end of the day, not your pro forma discounts on the schedule, because it will mislead you.
Dick Sobel: Yeah. And the data analytics will give you that feedback. The feed forward is this analysis and the what ifs and the planning, the data analytics will tell you what happened and how you can begin to improve.
Barrett Thompson: That's wonderful. Well, Dick, I really want to thank you again for taking the time to have a conversation with me today and sharing your perspective.
Are there any parting thoughts or predictions for [00:34:00] 2022 that you want to leave with our listeners?
Dick Sobel: Well, I think that as we've talked, inflation is going to be throughout 2022 and may even accelerate because they say, if you go to those who were around in the seventies, when mortgage rates were 18% and you could get 16% on a CD, not that I hope we're not going there, but don't be complacent.
Therefore it's an opportune time to get control of your profitability driven by data analytics. And to continue to dedicate, I think, resources in the pricing competency, utilize available tools to help reduce the complexity and improve your financial performance, but so exciting time to be in business and meet these challenges at a time.
Deflation is another challenge. I don't expect that next year, but we've been through that or close to it. And that's, I think, worse to deal with. That's kind of what I'm thinking,
Barrett Thompson: I really value that perspective [00:35:00] and you're right. The time is now it's a great time to act and the tools and technologies are available. Just before we go, Dick, can you tell our guests how they can connect with you and with price point partners on the web.
Dick Sobel: Sure price point partners can be found at price point partners. That's one word pricepointpartners.com and either myself or Ralph Zupancic. Who's been in this business for about 20 years, either one of us and our extended team can help you.
Barrett Thompson: Sounds great, Dick. Thank you once again. Thank you. I want to thank each of our podcast listeners for being here.
We are committed to your success. And if you need any assistance, please reach out to us at Zilliant. Would you also do us a favor and take a moment to rate and review the show as it helps us to continue to put out great free content. Until next time have a great day.
