1. Aiding and abetting: How companies allow
their sales force to throw money away
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J U N E 2 0 0 4
POINT OF VIEW 7

2. Content
4 Aiding and abetting: How companies allow their
sales forces to throw money away
1. Opportunities in Transactional Pricing
2. Identifying and Sizing the Opportunity
3. Root Causes of Price Leakages
4. Capturing the Transactional Pricing Opportunity
and Institutionalising the Changes
10 Contact
11 Imprint
P O I N T O F V I E W 0 6 / 2 0 0 4 3
BBDO Consulting is a management consultancy specialised in brand,
marketing and sales strategy and implementation. The focus of our
consulting services includes brand and customer equity management,
as well as the development of sales and pricing strategies. Over 110
consultants in seven locations Berlin, Düsseldorf, Munich, London,
Madrid, New York and Zurich, offer comprehensive knowledge from
consulting and industry backgrounds. We consult numerous blue chip
clients through the BBDO worldwide network, with over 345 offices in
76 countries.
2 P O I N T O F V I E W 0 6 / 2 0 0 4

3. The opportunity for improvement is startlingly widespread – price leakages occur in any
situation where negotiable pricing exists, and in particular in industries where products
are sold through distribution, or sold directly to a large number of diverse customers
through a sales force.
So how do companies capture these pricing improvements? A comprehensive effort to
improve transactional pricing relies on the decision as to what net price (after discounts
and allowances) should be charged to each customer. Exhibit 1 outlines this process of
capturing the pricing improvements.
2. Identifying and Sizing the Opportunity
Several diagnostic tools can be used to quickly assess whether there is a transactional
pricing improvement opportunity within a company. Interviews with management and
sales force workshops provide a reasonably accurate picture of the company’s perfor-
mance along these dimensions.
That being said, it is often the case that perceptions within an organisation are far
removed from reality. Exhibit 2 shows a powerful analysis used to identify net price (dis-
counting) variability.
P O I N T O F V I E W 0 6 / 2 0 0 4 5
Aiding and abetting: How
companies allow their sales
force to throw money away
Pricing is the single most important driver of a company’s profitability. Exploiting even
small pricing opportunities can lead to significant improvements in earnings. For example,
for the average Eurostoxx 50 company, a price increase of 1% will increase earnings by
5.5%. Therefore, it is worthwhile to explore all options for price increases to ensure the
maximisation of shareholder value. Our experience across a multitude of client pricing
projects indicates that price improvements of 2-5 percent are achievable.
One of the most common ways of capturing price improvements is by optimising tran-
sactional pricing, the list price net of all discounts and allowances.
1. Opportunities in Transactional Pricing
Management often views pricing in terms of list price setting, where the debate centres
around whether price setting is an art, (e.g. management’s “best guess”), or a mechani-
cal process (e.g. pricing around the level of competitors or cost-plus). The truth is that
optimal price setting is rarely achieved through either one of these routes. In fact there
is more to pricing than just list price setting – equally if not more important, pricing is
about “price getting”.
Capturing opportunities from transactional pricing delivers quick wins that can improve
financial performance within a short time frame. The key is to identify price “leakage”,
the difference between the list price the company has decided to charge, and the actual
unit price it ultimately receives.
It goes without saying that in many cases, some price variability is warranted, given
customers’ different demand elasticity (price sensitivity). More importantly, that variabi-
lity often has no good rationale, i.e. lower prices are not charged to higher elasticity custo-
mers, but rather are based on historic reasons or salesperson skills, and are therefore
somewhat random. More worryingly, many companies are not even aware of the extent
to which price leakages occur in their business. For example, in the packaged goods in-
dustry, lease agreements for end-of-aisle displays are a common source of in obscurity.
4 P O I N T O F V I E W 0 6 / 2 0 0 4
Identify and size the
opportunity
Capture the opportunity
Institutionalise the
changes
• Price variability analysis
across all accounts
• Identification of most critical
accounts based on variability
analysis
• Net price waterfall analysis
for most critical accounts
• Hypothesis generation on
root causes of leakage
• Extrapolation of opportunity
across all accounts
• Analysis to validate root cau-
ses of leakage
• Development of targeted
actions for each cluster
(e.g., new price lists, sales
force training)
• Pilot with two to three
accounts
• Adaptation of action plan
based on pilot findings
• Rollout of action plan across
all accounts
• Continuous impact monitoring
and strategy refinement
Three steps to optimising transactional pricing
Exhibit 1

4. In order to estimate the size of the transactional pricing opportunity, a “net price water-
fall” analysis such as the one shown in exhibit 3, can be employed. Exhibit 3 displays in
graph form, all on-- and off-invoice deductions in revenue that may accompany a tran-
saction. Depending on data quality and availability, the “net price waterfall” analysis
can either be conducted for all company transactions, or for a representative sample.
This analysis reveals:
• A clear measure of the maximum opportunity that can be achieved by eliminating
price leakages, and
• the nature of leakages.
Once problem areas have been isolated, an action plan can be put against the highest
priority opportunities.
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In numerous client situations, we found that the discount spread (the variability among
the discount levels for a specific product) turned out to be several times larger than
senior management had anticipated. The large discount spread in exhibit 2 not only
suggests that a significant opportunity in addressing pricing exists, but also that several
accounts have low or even negative, profitability. Reducing discounts in those accounts
does not expose the company to significant earnings risk. Although some of these
accounts might be considered to be “loss-leaders”, more often than not there is no clear
strategic rationale to justify these unprofitable accounts.
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Variability in pricing performance
Exhibit 2
Discount in contract price from list (percent)
Deal size (Currency in thousand)
0
10
20
30
40
50
60
70
80
90
100
50
Senior management usually
believe that price variance is
below 10%
~35% discount spread
10 15 20 25
Illustrative
Example net price waterfall analysis
Exhibit 3
List price Invoice price Net price
163,3%
„On-invoice
discounts“
„Off-invoice
discounts“
39,9%
14,3%
8,0% 100,0%
1,5%2,1%
7,5%3,0%
1,0%
3,2%1,7%
Dealer
discount
Competi-
tive dis-
count Volume
discount
Cash dis-
count
Co-op
adver-
tising
Promo-
tional
give-
aways
Prompt
payment
discount
End
user
rebate
Carrying
cost Freight
20% off
invoice
leakage
80,0%
Types of leakage

5. by whether the customer orders a part in an emergency or as part of routine maintenance.
Customers’ price elasticity also depends on, whether they consider the purchase a large
or small fraction of their overall customer budget, whether the replacement part is missi-
on critical, etc. For the spare parts industry alone, we have identified more than ten criteria
that affect customers’ willingness to pay and their responsiveness to price changes.
In general, determining customer (segment) price sensitivity involves systematically gathe-
ring and analysing sales data to uncover customer responses to price changes, as well as
any product substitution and cannibalisation effects. The more segment-specific the sen-
sitivity analysis is, the greater the customer insight and the higher the value-capture.
A final step is to understand what criteria drive price sensitivity for each product category.
These criteria, are then used to create sales support materials (e.g., scorecards) that are
used by the sales force as a guide to making pricing decisions. In effect, these criteria
help identify which customers fall into which price sensitivity categories, thereby allowing
the field sales force to maximise its selling price.
Avoiding classic pricing execution pitfalls
• Any re-pricing effort should be first performed on a pilot basis, and then rolled-out,
with the appropriate modifications, based on feedback from the pilot.
• Management should be actively involved throughout, especially in monitoring
the effort’s impact to (a) provide the necessary visibility to internal stakeholders (e.g.,
field force, regional sales managers) and (b) assess the effort’s business impact, espe-
cially in light of the potential impact on the bottom line.
• An interdisciplinary taskforce must take responsibility for the implementation of such
a project. The team should be comprised of representatives from the marketing,
finance and sales departments, with strong sponsorship at the executive board level.
Since best practice pricing is always an iterative process, with changes in consumer
behaviour closely monitored, the ‘pulse’ of the market is always evaluated through feed-
back from customers and the field, and the appropriate adjustments to strategy and exe-
cution are made.
In our experience, depending on data availability, running the above- mentioned pro-
cess to capture such opportunities typically take between 8-16 weeks.
It is surprising how many companies inadvertently and unknowingly “aid and abet“ sub-
optimal pricing actions on the part of the sales force. Isn’t it time to make sure you’re
not one of them?
P O I N T O F V I E W 0 6 / 2 0 0 4 9
3. Root Causes of Price Leakages
There are several potential root causes behind each type of price leakage. Consequently,
the step following the net price waterfall analysis is to identify what the underlying
cause of leakage is. The solution for transactional pricing problems must then be tailo-
red to the specific root causes of leakage for each customer. For example, if the root
cause of leakage is erratic sales force behaviour, setting firm pricing guidelines and
developing processes to monitor ongoing field pricing practices is the first step. In such
cases, appropriate training is required to generate awareness of the guidelines to enable
sales people to make correct decisions when negotiating price points. Equally important
is to diagnose whether the compensation structure supports perverse field incentives.
For instance, a vast majority of companies suffer from sub-optimal sales force incentive
schemes which reward the sales team for volume-driven selling rather than value-driven
selling.
Volume over value. In one client situation involving a leading technology solutions com-
pany, the sales force was almost entirely compensated on sales volume, which resulted
in frequent escalations to upper management and to various off-invoice giveaways to
customers as incentives to buy. Through a combination of systematic account planning
and sales force compensation realignment, the client was able to maintain sales volu-
me whilst increasing profitability by 25 percent.
The quarterly push. In the case of a leading medical systems manufacturer, the field
was compensated on meeting quarterly sales goals, which resulted in deep discounting
at the end of each quarter. What is more, customers were “trained” to wait, and place
their orders at quarter’s end, to receive better deals. To overcome this, the incentive
scheme was revamped, and sales people were trained in ‘price-getting’ negotiation tac-
tics. Additionally, using targeted analyses, the client developed a scorecard system that
identified leverage points for each key account and provided guidelines on optimal dis-
counting practices. The outcome was increased profitability, and a smoother rate of
sales throughout the quarter, with the associated benefits for the supply chain of the
business.
4. Capturing the Transactional Pricing Opportunity and
Institutionalising the Changes
To capture transactional pricing opportunities, a key requisite is a decision on the right net
price to charge each customer or each customer segment. A price sensitivity analysis is
necessary to uncover the true purchase willingness of each customer (segment). With spare
parts sales, for example, the customer’s price sensitivity is determined, among other factors,
8 P O I N T O F V I E W 0 6 / 2 0 0 4

6. Contact
United Kingdom
Stephanie Wong
Managing Partner
BBDO Consulting UK
151 Marylebone Road
London NW1 5QE
United Kingdom
+44.7770333376
stephanie.wong@bbdo-consulting.com
Germany
BBDO Consulting GmbH
Dr. Olaf Göttgens
Chief Executive Officer
Königsallee 92
40212 Düsseldorf
Germany
T +49.211.1379-8304
F +49.211.1379-8742
olaf.goettgens@bbdo-consulting.com
SwitzerlandDr.
Dr. Sandro C. Principe
Managing Partner
BBDO Consulting Suisse AG
Uetlibergstrasse 132
8045 Zürich
Switzerland
T+41.1.45-5601
F+41.1.45-5650
sandro.principe@bbdo-consulting.com
Dr. Mario Simon
Principal
BBDO Consulting UK
151 Marylebone Road
London NW1 5QE
United Kingdom
+44.7900930835
mario.simon@bbdo-consulting.com
BBDO Consulting GmbH
Richard Bachem
Principal
Königsallee 92
40212 Düsseldorf
Germany
T +49.211.1379-87 81
F +49.211.1379-8742
richard.bachem@bbdo-consulting.com
10 P O I N T O F V I E W 0 6 / 2 0 0 4
Publisher
BBDO Consulting GmbH
Dr. Mark Esser
Adel Gelbert
Dr. Olaf Göttgens
Marcus Osegowitsch
Dr. Roman Rittweger
Königsallee 92
40212 Düsseldorf
Germany
T +49.211.1379-8539
F +49.211.1379-8742
ISSN 1614 – 0907
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