European Pricing Maturity Study

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Pricing power is one of the key ways that businesses can create value for themselves. Improving a company's approach to pricing leads to more opportunities to create and capture value for customers, …

Pricing power is one of the key ways that businesses can create value for themselves. Improving a company's approach to pricing leads to more opportunities to create and capture value for customers, which results in increased sales and healthier margins. Developing pricing maturity takes time and effort, but understanding how to capture what customers perceive as valuable provides greater opportunities for companies to perform better in their chosen markets.
The European Pricing Platform recently conducted the first, cross-industrial European Pricing Maturity Study of its kind. It investigates the perceived, actual and desired state of pricing maturity in 121 companies across Europe.

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  • This first European Pricing Maturity Report shows that EU organisations understand the bottom-line profit improvement opportunities if pricing maturity development is taking seriously. There is still al long way to go for most organisations, but it's clear that EU top management put more attention, invest and give CxO support to their pricing teams in order to improve sales and margin growth. More on www.pricingplatform.eu
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  • 1. European Pricing Maturity Study 2013 - Reflect, Reframe and Refocus
  • 2. EPP European Pricing Maturity Study – 2013 Results Content Authors 4 3. European Pricing Maturity: perception versus reality 5 4. European Pricing Maturity: reality versus ambitions Project Manager 3 2. Methodology Nicolene Barnard 1. Introduction and key findings 7 5. European Pricing Maturity: industry benchmark 9 6. Industry Benchmark: Ranking Pricing Maturity Q2 2013 10 7. Conclusion European Pricing Platform 12 Addendum: Industry benchmark Pol Vanaerde President EPP European Pricing Platform www.pricingplatform.eu Page 2 of 13
  • 3. EPP European Pricing Maturity Study – 2013 Results Introduction and Key Findings Pricing power is one of the key ways that businesses can create value for themselves. Improving a company’s approach to pricing leads to more opportunities to create and capture value for customers, which results in increased sales and healthier margins. Developing pricing maturity takes time and effort, but understanding how to capture what customers perceive as valuable provides greater opportunities for companies to perform better in their chosen markets. “This unique benchmarking study shows that most European companies have still a lot of work to do when it comes to pricing maturity” respondents found it difficult to convince management to invest in the powerful pricing systems and tools which they deem necessary for successfully executing their pricing strategy. This echoes the challenge described in our whitepaper, Crossing the Pricing Chasm1, which entails moving from seeing pricing as a project towards a situation where pricing becomes a structured process, firmly embedded in the commercial organisation. 4. The European Pricing Platform (EPP), recently conducted the first, cross-industrial European Pricing Maturity Study of its kind. It investigates the perceived, actual and desired state of pricing maturity in 121 companies across Europe. In total, 88% of the respondents indicated that they intend to invest in pricing software solutions over the next twelve months. Reasons given for this investment include improvements to price monitoring, reporting, price guidance and deal making. In this ground-breaking new benchmarking study we find that: The EPP developed the European Pricing Maturity Study, based on the Pricing Maturity Indicator (PMI) survey, to offer European pricing and profit optimisation management professionals a framework against which they can determine the capability gaps in their company and set the right priorities in their pricing journey. 1. The majority of European organisations (56%) overestimate their current overall pricing maturity level. This is especially the case for organisations with pricing managers who are relatively new in their jobs or where pricing is a new function in the company. 2. A significant portion, 42%, of respondents still operate at the most elementary level of pricing maturity, while 48% operate on level 2, which means that they are selling the right products to the right customers at the right prices, but that they lack full integration in the commercial processes and alignment with marketing, sales and finance. A serious challenge to tackle. In doing so, we want to provide these pricing practitioners with a tool to start the much-needed discussion around pricing maturity in their organisations. It allows pricing leaders to reflect, reframe and refocus on what is most important and relevant for them in getting from their current level of pricing maturity to the next. 3. While European pricing practitioners have a solid view of where they should be heading in terms of their pricing strategy, this study shows that the biggest challenge lies in the implementation and execution of this strategy. Given the current economic conditions, For a detailed description of the ‘crossing the pricing chasm’ challenge, read our recent whitepaper: ‘Crossing the pricing chasm – a guide to Pricing Maturity Development’. 1 Page 3 of 13
  • 4. EPP European Pricing Maturity Study – 2013 Results Methodology 120+ European participants The 2013 European Pricing Maturity Study represents the opinions of 121 pricing executives from different companies and industries across Europe who were surveyed by means of an online questionnaire (the Pricing Maturity Indicator). The 43 questions of the Pricing Maturity Indicator are designed to objectively determine the level of pricing maturity of an organisation, by evaluating their performance across the different elements of the EPP Pricing Framework. Price strategy Price policy & Price setting Discount Policy Price execution Monitoring Organisation & Governance Tools & Systems For each question, respondents receive a score which is then aggregated to attain an overall pricing maturity score, as well as an average score per element of the pricing framework. The EPP Pricing Maturity Model Level 1 - Price List Maintenance - This includes basic pricing management, often typified by selling any goods or services to any customer at any price. Level 2 - Transactional Control - This involves selling the right goods to the right customers at the right prices, achieved by means of a number of successful margin optimisation projects. Level 3 - Full Value Capture - This involves greater segmentation of the customer base and selling overall solutions at value-based prices. The pricing process is fully integrated in the commercial organisation. Level 4 - Profit Optimisation - This involves rethinking the solutions and revenue model in order to capture more value for the customer and increase profitability for the company. Page 4 of 13
  • 5. EPP European Pricing Maturity Study – 2013 Results European Pricing Maturity: Perception vs. Reality Wake up call: 56% overestimate pricing maturity level In this new EPP European Pricing Maturity study, we find that 56% of respondents overestimate their current overall level of pricing maturity while 2% underestimate it. The study shows that organisations especially overestimate their performance when it comes to whether or not they have reached level 3. At level 3, pricing is expected to be embedded in commercial department processes, working on a solid transactional control basis with close alignment between marketing, sales and finance, resulting in value based price setting where possible and optimal value communication and value selling. Where 44% of respondents perceive themselves to be operating at level 3, the vast majority of respondents still operate on level 1 or level 2 according to their actual pricing maturity results as measured in by the Pricing Maturity Indicator. Interestingly, the highest perceived maturity is from respondents who have only been in a pricing function for 1-2 years. The most realistic in their estimation of their pricing maturity are respondents with between 5 and 10 years of pricing know-how. 16% preparing to cross the pricing chasm 64% have ambition to cross the pricing chasm in the next 12 months If there was any doubt that crossing the pricing chasm is a big challenge and that it is critical for the pricing function to become embedded in European pricing organisations, that is swept away by the results of this study. This European Pricing Maturity Study shows that 90% of participating organisations are still working on level 1 or 2 – and only 16% of these organisations have advanced to a stage where level 3 is in sight (with a Pricing Maturity Indicator score > 2,75). Asked for their maturity ambition within the next 12 months, 64% of the respondents say to strive to reach level 3 (Full Value Capture). But only 16% of them seem to be ready and able to take on the challenge of ‘crossing the pricing chasm’ to get there. Should pricing management have more realistic ambitions in their priority settings? Figure 1: distribution of respondents according to perceived vs. actual measured pricing maturity Perception Level 1: Price list Reality Ambition 22,31% 42,16% 2.48% 32,23% 48,04% 31,40% 43,80% 9,80% 64,46% 1,65% 0,00% 1,65% maintenance Level 2: Transactional control Level 3: Full Value Capture Level 4: Full profit optimisation Source : EPP European Pricing Maturity Study – 2013 A leading HR service provider found themselves in a precarious situation after the departure of their commercial director, who was also the owner of pricing processes in the organisation. The lack of focus, monitoring and steering of pricing processes sorely affected the pricing maturity of the organisation. After conducting a pricing maturity audit, the insight they gained, helped them prioritise and tackle challenges in the right sequence. In order to re-install value capturing, they set up transactional price monitoring as a basis for selected margin improvement projects and much attention was paid to integrating pricing into the commercial organisation. Two years later, they were back on track, ready to set value-based prices on a highly segmented level and anchoring margin optimisation as a key strategic objective at the top levels of the organisation. A step-wise, basics first approach to pricing maturity, and full management support in embedding the pricing function as a partner in business, is essential in your quest to crossing the pricing chasm. Page 5 of 13
  • 6. EPP European Pricing Maturity Study – 2013 Results European Pricing Maturity: Perception vs. Reality 31% have ambition to take operational control in the next 12 months 31% of the respondents in the EPP European Pricing Maturity Study, who are now working in organisations where the pricing responsibility is scattered throughout the organisation, understand that their goal is to function optimally at level 2 - they need to take control of transactional data and use the insights gained from this to set up the first pricing and margin improvement projects within the organisation. Typically the first successes will come rather quickly and can be used to demonstrate the advantages of an increased and aligned focus on pricing. Figure 2: The EPP Pricing Maturity Model perception reality 64% ambition 44% 2% 0% 2% 10% 48% 32% 42% Level 2: Gain transactional control and optimise 22% 2% “You have to walk, before you can run, before you can fly” Level 1: Price List Maintenance Level 3: Full Value Capturing 31% You sell the right products to the right cutomers at the right prices C H A S M Level 4: Profit Optimisation You develop end-user solutions with different revenue models You sell segmented solutions at value based prices You try to sell anything to anyone at all prices Source : EPP European Pricing Maturity Study – 2013 Page 6 of 13
  • 7. EPP European Pricing Maturity Study – 2013 Results European Pricing Maturity: Reality vs. Ambitions The problem is in the “execution” Poor performers The results of this study indicate that European pricing practitioners have a solid view of where they should be heading in terms of their pricing strategy. The biggest challenge for them, lies in the implementation and execution of their pricing strategy, and in convincing management that investment in powerful pricing systems and tools will result in a significant enough improvement to justify this investment. Concepts which call for attention for organisations who currently operate on pricing maturity levels below level 2 are: Knowing your price elasticity (59% of respondents) – How much is the concept of price elasticity known and used in your core commercial team? i.e. knowledge about the responsiveness of consumers to fluctuations in price. Figure 3: Gap analysis across the components of the pricing framework Actual PMI score Gap with Ambition Tendering 0.86 Governance & Org System & Tools 0.97 1.28 Monitoring Price Execution 1.15 1.16 Discount Strategy Price Policy Setting Price Strategy 1.18 1.17 1.02 0.00 1.00 2.00 3.00 4.00 Measuring promotional effectiveness (51% of respondents) - To what degree do you monitor the effectiveness of price promotions? Source : EPP European Pricing Maturity Study – 2013 Economic value calculation (50% of respondents) – To what extent are you able to calculate how much the value attributes of your products are worth to your customer? Figure 4: PMI scores: distribution across the components of the pricing framework Reality Ambition Price Strategy 2,34 3,36 Price Policy & Setting 2,01 3,18 Discounting strategy 2,11 3,29 Price Execution 2,00 3,17 Sales team incentives support pricing initiatives (45% of respondents) Are sales team members rewarded on meeting price goals for goods or solutions, as well as for meeting overall sales targets? Monitoring 2,02 3,17 System & Tools 2,00 3,28 Effective value communication (43% of respondents) - To what degree do you understand the value components per segment? And are you able to communicate this effectively? Governance & Org. 2,29 3,26 Tendering 2,30 3,16 Reporting on competition intelligence (50% of respondents) - To what degree do you have a system in place for monitoring competition intelligence? Life time value calculation of tenders (49% of respondents who use tendering) - Do you compare the value of the tender to the total amount of sales revenue generated by the average tender? Use of pricing research for key product offerings (42% of respondents) To what degree do you employ pricing research for key product offerings? Source : EPP European Pricing Maturity Study – 2013 Page 7 of 13
  • 8. EPP European Pricing Maturity Study – 2013 Results European Pricing Maturity: Reality vs. Ambitions Highest level of pricing maturity at 5-10 years seniority It is reassuring to see though that generally there seems to be a positive correlation between number of years of experience in a pricing function and the maturity score of the different components of the pricing framework. The respondents in the EPP European Pricing Maturity Study are quite well distributed in terms of number of years of experience. There are quite a large portion of newcomers to pricing (30%), but but at the same time we see that 38% of respondents have been busy with pricing for more than 5 years, which is good for those who want to establish a career in pricing. The more people in pricing, the higher the pricing maturity With 43% of respondents indicating that there are 15 people or more working exclusively on pricing in their organisations globally, the study shows that the the attention for pricing as a value driver in Europe is also moving in the right direction. The number of people working on pricing relates positively with the pricing maturity within an organisation. Figure 5: Number of years in pricing function and its relation to overall pricing maturity Distribution of Pricing Pricing Pricing respondents Maturity: Maturity: Maturity: Perception Reality Ambition 9,09% 1,18 1,43 3,11 1 - 2 years 20,66% 2,48 2,06 3,26 3 - 5 years 32,23% 2,23 2,17 3,22 5 - 10 years 21,49% 2,38 2,37 3,24 > 10 years 16,53% 2,40 2,19 3,21 < 1 year Source : EPP European Pricing Maturity Study – 2013 Figure 6: Number of people working exclusively on pricing globally, in relation to overall pricing maturity Distribution of Pricing Pricing Pricing respondents Maturity: Maturity: Maturity: Perception Reality Ambition 1 - 3 people 14,05% 1,88 1,92 3,28 4 - 7 people 15,70% 2,37 2,02 2,94 8 - 15 people 15,70% 2,21 2,09 3,37 > 15 people 42,98% 2,44 2,30 3,30 No one works 11,57% 1,86 1,96 3,03 exclusively on pricing Source : EPP European Pricing Maturity Study – 2013 Page 8 of 13
  • 9. EPP European Pricing Maturity Study – 2013 Results European Pricing Maturity: Industry Benchmark In this study we examine the results of all industries with more than 4% representation amongst respondents. Figure 7: Best represented industries PMI - Q2 2013 Top industries Other* The pricing maturity score calculated per industry is the average score of all answers per respondent in that industry. The level of pricing maturity serves as an indication of how well respondents are capturing the full value that excellent pricing can bring to their organisations. Knowing where you are in terms of pricing maturity helps you determine how to prioritise your efforts to make complete profit optimisation a reality. Mach & Equipment Postal & Logistics Chemical FMCG / Retail Telecom This industry benchmark will allow respondents who have already completed the online Pricing Maturity Indicator to assess where they stand with their own unique situation in comparison to that of colleagues within the same and/or other industries. Automotive HighTech Life Sciences Source : EPP European Pricing Maturity Study – 2013 Figure 8: Top industries represented in PMI survey Top Industries represented in PMI survey Machinery & Equipment 28,10% Automotive 18,18% Life Sciences (incl MedTech) 12,40% HighTech (incl Semiconductors) 5,79% Telecommunications 4,13% FMCG/Retail 4,13% Chemical 4,13% Postal & Logistics 4,13% Other* 19,01% Source : EPP European Pricing Maturity Study – 2013 * Industries with less than 4% representation in the EPP European Pricing Maturity Study: Travel & Hospitality, Banking & Insurance, Consulting, Software, Consumer Goods (white, brown), Agriculture, Academic, Media, Professional Services, Apparel & Accessories Page 9 of 13
  • 10. EPP European Pricing Maturity Study – 2013 Results Industry Benchmark: Ranking Pricing Maturity Q2 2013 In figure 9, you see the difference between perceived and actual pricing maturity scores by industry. HighTech: highest actual pricing maturity! 43% actually work on level 3 Machinery: most realistic perception of pricing maturity FMCG/Retail: lowest pricing maturity, 100% work on level 1 HighTech respondents score significantly higher than any other industry on their pricing maturity with 43% of respondents already operating on level 3. The EPP Pricing Maturity Study reveals that 86% of respondents in the HighTech sector have more than 15 people working exclusively on pricing globally, with the remaining 14% having between 8 and 15 people focussing solely on pricing. They perform particularly well on pricing strategy and pricing execution, and have advanced pricing tools and systems at their disposal for optimising monitoring, reporting and price guidance. Machinery and Equipment is the most represented industry in this study, comprising 28% of respondents. This is also the most realistic industry, in that their perceived and actual pricing maturity is almost a perfect match at 2,06 vs. 2,08. Interestingly, they are also the most ambitious, wanting to grow to a pricing maturity level of 3,24 within the next 12 months. The bulk of respondents, 53% operate on level 2, with 6% operating on level 3. The biggest difference between actual and desired pricing maturity for this industry is in the area of monitoring and reporting, with 26% of respondents still working in Excel sheets with pricing knowledge dispersed throughout the organisation. In addition to this, their biggest, most immediate challenge is to develop a system for their sales force to capture competitor intelligence effectively. The Fast Moving Consumer Goods and Retail sector is the only B2C industry represented as a separate sector in this study. Surprisingly, it shows the lowest pricing maturity in Europe according to the research results. All respondents from this industry are, in reality, still operating at the most elementary level of pricing maturity. Their two biggest challenges lie in gaining control over discount practices (including monitoring the effects of these discounts/promotions) and in making sense of, and efficiently using the large amount of data gathered during customer transactions. Figure 9: Perception vs. Reality per Industry Q2 2013 Perception Reality Chemical 2,80 HighTech 2,62 Postal & Log. 2,80 Chemical 2,33 Telecom 2,60 Postal & Log. 2,27 HighTech 2,57 Telecom 2,24 Automotive 2,41 Automotive 2,18 Life Sciences 2,27 Life Sciences 2,10 Mach. & Equipment 2,06 Mach. & Equipment 2,08 Other 1,94 Other 1,83 FMCG/Retail 1,40 FMCG/Retail 1,76 Source : EPP European Pricing Maturity Study – 2013 Page 10 of 13
  • 11. EPP European Pricing Maturity Study – 2013 Results Industry Benchmark: Ranking Pricing Maturity Q2 2013 In the addendum to this report, you will find a dedicated benchmark report for each industry with more than 4% of representation in the European Pricing Maturity Benchmark Study. On the right, you will find an overview of the pricing maturity per industry, per aspect of the pricing framework. The highlighted blocks indicate the aspect where the largest gap between actual performance and future ambitions are. For example, in figure 10, we see that the Chemical industry respondents have the same maturity score as the Telecom industry, for the Pricing Strategy component of the survey. However, the Chemicals industry respondents consider this an area in which they need to take urgent action during the next 12 months, whereas for the Telecom industry , the focus would be more on price setting and price execution. 53% of respondents in this study, indicated that they make use of tendering. The biggest difference between actual performance and desired performance are noted in the following areas: formal life time value calculation when evaluating tender accounts, including year-end rebates and bonusses of sales team; putting a tender pricing strategy in place, with particular emphasis on margin improvement plans; and how tender information is obtained, cross-checked and validated. Figure 10: Actual pricing maturity scores per industry, with key attention areas per industry highlighted Price Strategy Price Discount Setting strategy Price Execu- Monitor- Systems Gov. & ing & Tools Tenders Org. tion Chemical 2,45 2,27 2,80 2,27 2,15 2,10 2,68 2,05 Postal & 2,40 2,10 2,40 2,07 2,30 1,90 2,40 2,39 Telecom 2,45 1,93 1,80 1,93 2,55 1,90 2,56 2,21 HighTech 3,07 2,40 2,71 2,52 2,29 2,64 2,63 3,24 Automotive 2,18 2,45 2,03 2,00 1,97 2,23 2,09 2,35 Life Sciences 2,30 2,00 1,93 1,93 1,67 2,07 2,40 2,27 Manuf. & Mach. 2,23 1,98 2,12 1,99 2,06 1,91 2,14 2,24 FMCG/ Retail 1,90 1,73 1,40 1,73 1,75 1,30 1,96 2,00 Log. Source : EPP European Pricing Maturity Study – 2013 We invite you to consult the addendum to this report for more detailed industry specific results. Page 11 of 13
  • 12. EPP European Pricing Maturity Study – 2013 Results Conclusion “We still seem to underestimate the power of pricing as profit driver” - A FMCG CEO This unique benchmarking study reveals that the majority of European organisations overestimate their current overall pricing maturity level. Furthermore, 90% of the organisations have not yet reached the level where pricing is fully integrated into the commercial organisation. This includes increasing alignment with sales, marketing and finance department goals, and winning a seat for pricing at the general management table. There is a clear correlation between overall pricing maturity and an organisation’s ability to execute pricing strategy. Therefore it is crucial for companies to invest in developing awareness of pricing across their organisation. Whether they decide to develop a separate team dedicated to pricing, or choose to raise skills across the sales, finance and marketing team around pricing management, this awareness will provide better long term results and higher opportunities for profit. Alongside this, if organisations really want to move beyond the level of pure transactional control, they need to be prepared to make significant changes in the way the organisation operates. Besides changing the way that pricing decisions are made, it also requires a review of how your target customers are selected, how your product or service offerings are structured, how your value is communicated etc. The person or team leading this process should have the full support of all stakeholders throughout the organisation. Never walk alone when undertaking such a far-reaching initiative. If there was ever any doubt that ‘crossing the pricing chasm’ (moving from looking at pricing as a project and instead seeing pricing as an embedded function in the commercial organisation) was a big challenge for European organisations, this European Pricing Maturity Study shows clearly that it is probably the most important challenge to overcome for pricing and profit optimisation management. Companies need to invest more time and effort in change management, but before doing so, make sure the CxO levels are on board for the journey. It takes time and hard work to gain the commitment and momentum necessary to get to a higher pricing maturity level and achieve profit optimisation. Unfortunately there are no shortcuts, you have to walk before you can run, before you can fly… This study can help with that process. Companies can learn a lot by benchmarking themselves against colleagues within the same and/ or other industries. It is time to reflect, reframe and refocus on pricing and profit optimisation in European organisations. Use this study to start the discussion in your company and move pricing maturity to a higher level. Page 12 of 13
  • 13. Contact If you would like more information or to arrange an informal discussion on the issues raised in the EPP European Pricing Maturity Study and how they affect your organisation, please contact: Project Manager: Nicolene Barnard Nicolene.Barnard@pricingplatform.eu President & Founder of EPP: Pol Vanaerde pva@pricingplatform.eu For more information about the European Pricing Platform or our knowledge-sharing activities and events, please contact: Business Development: Britt Dejager Britt.Dejager@pricingplatform.eu Marketing & Events: Jessie Dhondt Jessie.Dhondt@pricingplatform.eu The European Pricing Platform is a not-for-profit knowledge sharing platform focused on supporting business management, pricing and profit optimisation professionals and CxO-level executives in Europe across a variety of industries. Our target is to keep the pricing and profit optimisation know-how of EPP participants up to date. Our mission is to be the number one on- and offline pricing resource for European decision makers. Interactive collecting, developing and sharing of pricing and profit optimisation knowledge are the key elements to the success of our platform. We support our EPP participants through a variety of on- and offline media, such as Industry Focused Forums, Chapter Workshops, Open trainings, In-company trainings, Certified Pricing Manager® training, Special Pricing Events, Digital library of articles, research and whitepapers. Click on the image to the right to read the ‘Crossing the pricing chasm’ whitepaper. Read more about us on our European Pricing Platform portal site.