Episode 5 May 21, 2020

Protecting Margins in Volatile Times

In this episode, Lydia DiLiello of Capital Pricing Consultants joins host Lindsay Duran to untangle the curious times B2B companies currently face. 

  • How can you protect margins in the age of COVID-19? 
  • How do you avoid price wars and a race to the bottom? 
  • How do you react to a situation for which there is no roadmap? 

Lydia and Lindsay share advice for customers struggling with wild swings in costs and demand cycles (SPOILER ALERT: Don’t arbitrarily discount!), and why any financial change must be accompanied by a shift in your value proposition. Then they explore the ways in which companies that have invested in process, software and strategy are positioned to come out of the pandemic much stronger than their competition. 

Find the whitepaper mentioned in this episode here.

Lydia DiLiello

Lydia DiLiello

Right now I see far too many businesses taking the reactive knee-jerk response. 'Let's just discount and everything's going to go back to the way that it used to be. Business will come back, and all will be well.' I keep chanting at my clients, “Do not discount.” Of all of the things that could be done right now, I believe that is the worst possible scenario because it tells the market that your value isn't what it was prior to COVID. 
- Lydia DiLiello, Capital Pricing Consultants

Episode Transcript

Lindsay Duran: Welcome to B2B Reimagined. My name is Lindsay Duran, and I'll be your host for [00:01:00] this episode. I'd like to welcome Lydia DiLiello, the CEO and founder of Capital Pricing Consultants. Lydia, thanks so much for joining us today.

Lydia DiLiello: Lindsay, it's a pleasure to be with you today. Thanks for having me.

Lindsay Duran: So today we’re going to talk about how to protect margins in this very volatile economy. But before we dive into that, why don't you tell us a little bit about your background and the focus of your work at Capital Pricing?

Lydia DiLiello: Okay. Be happy to. Lindsay, I have kind of an unusual background and I think a lot of people in the pricing space, I've had an opportunity to talk to them over the years, but I spent the first 20 years of my career in corporate America. I worked in custom plastic manufacturing as well as in automotive manufacturing.

So, I spent The majority of my career in manufacturing and decided to go out and see how I could help other practitioners with their pricing, because I've been in the pricing space at this point more than [00:02:00] 25 years now. And so whether it's manufacturing, industrial food service, my clients now run the gamut of industries.

And, you know, the challenge is, well, the scale is different. The challenges are the same for all of us, right? Trying to figure out what's the best price that entices the customer and gets them to actually purchase at a price that's profitable for us and something that's sustainable is a challenge for every client that I work with and in an environment that's so unprecedented. We've never seen anything like this, certainly on a global scale.

So, it's interesting to see how different companies are choosing to address this. But for me, it's a real pleasure to be able to go in and take the experience that I have and work with them to help them to a positive outcome. So, that's a little bit about me and what I'm doing right now.

Lindsay Duran: I’m curious as you're talking with clients, how you've maybe seen a shift in how they look at [00:03:00] pricing or pricing strategy, or maybe the importance of pricing in their business now that we're in these uncertain times.

Lydia DiLiello: So, I think I've seen almost a duality taking place. I have seen clients who generally have been very strategic and very intentional in their pricing suddenly freeze up and say, “We're just not doing anything.” And that to me is a significant concern because paralysis, I think is certainly not an optimal response right now. It's certainly better than price-cutting. And we can talk about that a little more as we go along but doing nothing is not an optimal response. The other part of my client base that I've seen is those that have not been as attentive to pricing as they might have been - those who said, “You know, we really want to do the following three projects” and then it was always “We'll get to it next quarter” are now turning around and coming back and saying, [00:04:00] “You know, we really should've looked at that because had, we had a better understanding and a better grounding of where our pricing was to begin with, we could now understand what was really happening,” because I think for that group of clients, you can't interpret your financial results if you don't know where you started from a pricing perspective, right? You don't know if you gained or lost a few points if you don't know where you started from. And so, I really see, to answer your question, two directions; either they become completely focused on it, or they've decided not to focus at all because now the focus that they had, they no longer know what to do with. I don't know if that makes sense, but that's honestly what I'm saying.

Lindsay Duran: It certainly does. We are finding in conversations with our customers, that companies that have invested in pricing strategy and their pricing processes and in pricing software are much better positioned to make more surgical and strategic [00:05:00] price moves in response to what the market is doing, and just have a better understanding overall of how this is really impacting their margins and that the markets that we serve overall.

Lydia DiLiello: So, you know, Lindsey, that's an interesting point you bring up because the customers that have access to the data that had been vested, as you said, in process in technology and strategy really are in a position now, I believe, to come out of COVID far ahead of their competition because A. they already did the investment previously and now they're armed with information.

To me that next step is “So what are they going to do with that information?” How are they going to respond to the marketplace? And one of the things that I see that's so critical is, right now I see far too many businesses wanting to just discount, because that seems to be the reactive knee-jerk response.

“Let's just discount. [00:06:00] And everything's going to go back to the way that it used to be. Business will come back, and all will be well.” And I keep chanting at my clients, “do not discount.” Of all of the things that could be done right now, I believe that is the worst possible scenario because it tells the market that your value isn't what it was prior to COVID.

And that's not a message we want to send, right? Because the value of the businesses hasn't changed any. The circumstances we're working in have, but the value of the products or the services that were being provided previous to COVID, aren't less valuable. So, the whole idea of needs are discounting. I continue to try to educate clients on every opportunity I get; remind them. This is not a good idea. Don't discount. If you need to provide a different financial opportunity for a customer, then change your value equation, change the value proposition, change the way you're going to [00:07:00] the market. So, in other words, instead of if your price point used to be $50, now either add a service to it and then make it, you know, $48.99.

So, if your end goal is to entice them, drop the price a little bit and add a service to it, for example, but don't just leave that base price as it existed. Because that's where I think that companies really can destroy their value and come out of this really badly.

Lindsay Duran: Absolutely. It can be really difficult to reset the expectation of what the market price if you and all of your competitors have been on a race to the bottom, if you will, and starting some sort of price war. Now, in some instances, I think that it may be worthwhile to lower price where you can pick up volume and we've been helping our customers with that by helping them understand the price elasticity in [00:08:00] different micro markets of their business so they can see where lowering price will actually result in increased wins and increased volumes, as opposed to instances where that's not the case. And it makes more sense to hold the line on price so that you can preserve profits both in the short term, but also in the medium and long-term once we finally get into a recovery period.

Lydia DiLiello: And I really liked that approach, Lindsay. Because there's an opportunity with that kind of precision of data and understanding of customer behavior on an individual customer level, then there's an opportunity to go in and say, okay, for a contract. So, you get the customer to commit by a contract for that volume so that they are " on the hook” rather than it's just a verbal promise.

But you set up a contractual relationship that puts those price gates in, and you can reduce the price. Because now, as you said, [00:09:00] you're picking up significant volume and a guarantee of that volume because within that contract, I would also suggest that as part of that volume commitment, that there are also statements in there about “if the volume isn't achieved price reverts back to the previously negotiated value” so that customers can't just jump in and out of this, if you will. But I think that's a fantastic approach because it gives the company security of a volume coming in and it gives your customer security of they know what their spend is for X amount of time period. And they're still getting the same products and services that they.

Lindsay Duran: So you've touched on the customer-specific prices and some of those agreement or contract prices, which we know sales reps are extremely protective of, and those are always hard to gain a price increase. So, certainly protecting those out of the gates can be a way to preserve margin. How would you advise [00:10:00] companies to look at their matrix prices in the face of the current economic environment? And what would you suggest that they focus on there?

Lydia DiLiello: So, the first thing I would say, Lindsay, to protect profit is ‘this is not the time to just suddenly change all your matrices pricing or all of your different list prices. When I see significant volatility really coming from all directions. So, it is at the business itself? Is that the customer? Is that the manufacturers? Is it in our logistics in distribution? It's coming from everywhere. To me, the single most important thing to do is stay the course. So, that's the first thing. I would not make any radical. I would continue on with what you have in place, because what you strategically thought about initially, and the way that you set up those matrices are those list prices.

We hope it had thought behind it [00:11:00] initially. And that kind of brings us full circle back to that conversation about those companies that did make the investment in pricing and strategy and those that didn't. But, assuming that they did, and you want to stay the course. So that's the first thing.

The second thing is it's certainly an opportunity to assess, once you've taken care of your high-volume customers, then certainly go take a look at your high-volume product. And I think sometimes we are led into a false sense of security - believing that five volume customers automatically translate into high volume products.

But I found cases where there are high-volume products that are kind of nuggets, if you will, of profitability lurking out there where there are a great many customers buying a particular product, but not necessarily at those high volume. And so, I would say pay specific attention to your matrix pricing on those kinds of products so that you're not tripping [00:12:00] over or accidentally giving away margin on something that is a very high mover and make sure also that, this is going to sound counterintuitive, but in a time period where everyone wants to drop prices, make sure you're still getting your value for what you're delivering. So, for example, if a customer comes in and they want freight included, well, if you've charged our freight in the past, you need to keep doing that because the quickest way to bleed on margin is to suddenly add services into those matrix prices or into your list prices and not take price for them. And that's another, I think, common knee-jerk reaction, which is, “oh, thank heavens. I’ve got business.” So, “whatever the customer asks for I’ll do,” and I don't think that's beneficial. And that is something also that you want to guard against.

Lindsay Duran: I think that's really sound advice. I would imagine that right now, sales [00:13:00] reps are feeling increased pressure to perhaps over-discount more than they normally would. Right? When they may have thought that something was typically a 30% margin or 35% margin, found, now they may view it as a 20% or 25% margin sale.

How did you advise companies to think about discount thresholds and grants of authority processes, in order to combat some of that knee-jerk reaction to overdiscount?

Lydia DiLiello: So, I would say it, and I think you hit on a key point Lindsay, right now is a very difficult time obviously, to be in sales, because it feels like, I think at this point, like a no-win. But in actuality, I think that this is an opportunity to really forge relationships with customers.

So, the first thing I would say is, to a sales rep, “What kind of relationship did you have with that [00:14:00] customer previous to COVID?” “Was this a brand-new customer?” “Is this somebody that you've worked with for five years?” “What have their sales traditionally been historically in your relationship with them?” “Have they always delivered on what they told you?”

“Is this a point in time where they need help for a quarter, but they're going to bring the volume back to the rest of the year, for example?’ So again, tying it back to behavior of that customer. So before just essentially initiating a discount, as you said, what used to be 35% margin, now would seem like good business at 25%, really understanding what the dynamics are.

I think every rep has their list of here's my best customers. And here's my worst customers relative to behavior. Not necessarily relative to dollars spent. And I think this is a good time to be aware of that. From a company perspective, I would say I would keep all of the [00:15:00] governance and grants of authority in place, the workflows around who can authorize what price points. The quickest way to race to the bottom, and I think you brought that up earlier relative to ‘what happens when price wars start’ is for companies to loosen their grants of authority. Now, what that may mean is, that the people reviewing those authorizations are going to be inundated with requests. But I would say that is still more beneficial than loosening the gate and letting everyone discount up to what they're comfortable, because by the time the damage is accounted for it, it's way past too late to get that back.

So generally, what we see is profit impact is not seen in its fullest for at least six months. So, things look relatively even keel in the financials. You may see a few points dropped in terms of margin, but six months is generally when I see the biggest impact of [00:16:00] unconstrained discounting. And so, I am a big fan of don't let it start in the first place.

So, kind of circling back, Lindsay, when you said, so what would for companies, what could they do to handle all of this discounting right now? I think they have to be aware if they used to get, let's say three special price requests out of 10, right? And now all of a sudden, they're getting seven out of 10, then it times really go back and look at what are they offering in terms of the product?

And again, I'm suggesting change that value offering. What else can you get from that client if it's not just a commitment of volume? But what other opportunities are there to gain value from them? Is there some additional service that they're looking for? What additional needs do they have rather than we just go through and say, okay, the price was 50 and now it's 35 because we don't know what else to do that. That answer the question?

Lindsay Duran: [00:17:00] It absolutely does. It makes perfect sense. And I want to come back to part of our earlier conversation, you know, we've been. Talking about companies as if they have prepared with the right processes and technology and change management and so on to be equipped to deal with this radical shift in business. But for those companies that maybe didn't have the foresight to invest in these types of pricing and commercial processes is now the right time to start considering that? I know I have a viewpoint on this, but before I share that I'll let you respond in kind.

Lydia DiLiello: So, I would say absolutely. The best time to start is as soon as you realize you've got that need.

So, when a company's had the awakening that they should have invested in long ago. That their prices are a mess. their data streams are not clean. And I don't think anybody’s are. [00:18:00] Is the best opportunity to go in and get outside help and say have the experts help you understand what you're looking at.

Simply having clean analytics to look at, could significantly change the direction of your business decisions right now. So, I would say don't waste time and now is much better than later.

Lindsay Duran: It also strikes me that now that everyone is traveling significantly less and not on the road and spending time in airports that companies might have more resource bandwidth to actually take on a project to improve their pricing, whether that's just focusing on the processes or looking at technology that may be able to help them, that there might be a bit more resource availability than there otherwise would have been in that now is an opportune [00:19:00] time to make those investments to try to come out ahead of the game. I was looking at some research from Deloitte yesterday and they were modeling out the revenue and profit recovery for companies that are just focused on cutting costs and trying to lower price to stay afloat, versus those who are actively trying to maintain commercial excellence during this particular period of time and really focused on pricing.

And so, I think that's a sound way to look at it is: “How do I make sure I make it through in the short term and do right by my customers and price with empathy, but also make sure that I am preparing for the medium and long-term recovery?

Lydia DiLiello: I 100% percent agree with that. And I think that statement is really critical - that maintaining commercial excellence is [00:20:00] what our clients and customers are going to remember about us.

And expect that businesses, we're all going to make mistakes as we transition out of this COVID. But I think what's critically important is that we still hold ourselves to the standards that we always have in our businesses. And those that always claimed quality as their primary goal and service is primary goals for the customer.

That's still gotta be the number one guiding principle because, however they choose to respond to coming out of COVID, if they keep that guiding principle in front of them, and that kind of going back to where we started our conversation in terms of whatever company has done in my mind, Lindsay, relative to strategic guiding principle, now is the time to cling to those even more staunchly than before.

Because if you stick to your core, that no matter what other decisions you make, you're not [00:21:00] going to be far off.

Lindsay Duran: Absolutely. I think that's great advice. You know, we talked about embarking on new initiatives and new projects. And one thing that always strikes me is that companies often underestimate the change management needs and requirement in order to actually embark on a pricing project or implement technology or improve their processes. What are some of the pitfalls that companies should avoid when they think about change management and rollout of net new processes or improved processes, and what are some of the best practices that you've seen work well? Perhaps you've been drawing on your time as a practitioner yourself.

Lydia DiLiello: That's an interesting question.

Pitfalls relative to change management. I think the single most difficult one for executive management often to [00:22:00] comprehend is that this is going to take longer than they think. And it just going to be more difficult than they think. So, in pragmatic terms, what does that mean? That means that if they have their headcount allocated to doing their day-to-day job, they can’t allocate them yet a second time to be involved in change management at the same time as settled thing of something's got to give couldn't be any truer than in change management. And I continue to see companies struggle at the risk of their project and at the risk of their good employee contribution because employees are being asked to essentially do two jobs at once, which is to handle everything day to day manage all of the change management as well. And so, I would say that time has to be carved out in a standard day for employees to participate in that change management. So, bringing on temporary staff [00:23:00] to cover some of the functions, I think, needs to be built into projects. So that would be the first thing.

The other pitfall I would say is poor communication. And that takes on just a myriad of tactical issues, whether that is a project manager that doesn't communicate in full or often enough. I have found personally, even if news is not the best we'll say, people can manage that if they understand what's going on. So, if they're taught to expect a weekly communication, good, bad, or indifferent, they feel like they know, and then the rumor mill doesn't jump in because, let's face it, the rumor mill is always so much more interesting than factual information. So, my perspective is, even if what you have to say isn't great news, you know, we're off by X weeks. This data set didn't work the way we thought.

Those kinds of clear and open communication are extremely [00:24:00] helpful. And I always work from the perspective of, remember that just because you know, you being the project manager, you being the consultants on the project, you being whatever position you're in, it doesn't mean that everybody else have all of that contextual information around that.

So, giving your listeners or your staff or the people on the project, that context so that information makes sense. They can't espouse or take on changes and alter behavior if they don't understand the context around it. So, those are the three things I would say around pitfalls and then best practices.

So, celebrate. That's a big one. I have seen companies do crazy things like, one company had an ice cream social to kick off a very large project. The CEO stopped by and just wandered around and told everybody how happy he was at the project was [00:25:00] finally getting started and how important it was to him personally. I think for the investment of an hour and for executive management's time, it smoothed the way and sent a very clear directional signal to everyone that was there, that this was top priority, and this project was going to go well and to go well and had to go well. So, that kind of celebrating and setting a tone is really important from best practices. Constant and open communication is the second piece. And that, both at a overall project level, and also down to the tactical level of - here's the next five things we're going to do and how we're going to go about them and how much time we expect them to take.

So those are, I think, the two things that I would say.

Lindsay Duran: Yeah, I think those are consistent with what we see with projects with our customers. And one thing that I always like to reinforce with [00:26:00] customers is - you can't view change management as a point in time activity. It's an ongoing process until the change becomes the new normal. So that's how, you know, when you're finished is when the change feels like the new normal and everyone is up and running and using that new process successfully. But even then, you still have to reinforce it and constantly measure and make sure that those frontline managers, particularly the frontline sales managers in a pricing project, are really engaged and paying attention to pricing performance. Because, if it's important to them, it will be important to the reps out in the field, making pricing decisions. And that's one of the big learnings that we often see in projects with our customers.

Lydia DiLiello: I think that's a great point, Lindsay, because so often projects are treated as though change management is just another check box to be filled in. Right? It's very much point in time. [00:27:00] So I think that makes a great point and I love the “it needs to be the new normal.”

Lindsay Duran: Absolutely. Speaking of our new normal and what we're all living with today. What other advice might you give companies to take into consideration over the course of the next few months so that they can really make the most of their business performance in this rather challenging time?

Lydia DiLiello: You know, I would say “be flexible.” Be open to things that in the past you would have said “Absolutely not. I don't even have the time to consider it.” You've made a great point when you said, you know, with all of us not traveling, people have more time now. And so, time for project, time to think through things that otherwise would have just been written off as “I can't even be bothered to think through that. I just don't have time.”

So, what I would say is, especially around how we serve our customers and clients. [00:28:00] If you have customers or clients that are asking for something specific, and I think this has happened to all of us, where someone asks, then you think “it's going to take too much time. It's going to take too much effort.

I don't want to deal with the logistics,” et cetera. We talk ourselves out of it immediately. So, I would challenge all of us to say, “be a little more, open-minded. Be willing to investigate with your customer what it is they need and prove to yourself before you say no, that it can't be done because you may come upon the next, really big thing for you or for your customer by doing this.”

And so right now, what I think our customers are looking for is some sensitivity, some help in some cases, some compassion in addition to the business, or at least that's what I'm finding. And so, trying to default to, yeah, I guess is the best way to put it, and find what yes means for each one of them can be a little different. [00:29:00]

Lindsay Duran: I think that's a very salient point for us to close out the conversation on today. So, Lydia, I want to thank you for joining us today. I very much enjoyed the discussion. If people want to learn more about your practice, how can they find you?

Lydia DiLiello: They can find me at capitalpricingconsultants.com or they can certainly reach out to me on my mobile, if they prefer, at (330) 283-5273.

Lindsay Duran: Perfect. Well, thank you so much. We will be posting a COVID-19 pricing strategies white paper in the show notes for this podcast. So, I'd encourage you to check that out. It has a lot of the strategies that we talked about today.

Thank you for joining us. And I hope that you will join us again for the next episode of B2B Reimagined. [00:30:00]

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