Making Target Prices Work for You
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This document discusses target pricing and how establishing appropriate target prices can help businesses manage revenue and margins. It explains that target prices serve as anchors in human decision making due to the psychological trait of anchoring. Target prices provide salespeople with pricing goals or benchmarks to aim for in negotiations with customers. The document then discusses how businesses can establish price guidance, including target prices, based on factors like historical price averages, percentile analysis of past deals, and segmentation of customers. It emphasizes setting realistic and data-driven guidelines to improve pricing performance and reduce need for manual price approvals.
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Making Target Prices Work for You
- 1. Making Target Pricing Work for You A Vendavo Profit Clinic
- 2. To begin, let’s play a game…
- 3. Item 1 Two Hands - Shiraz Barossa Valley Bella’s Garden 2010 95 points Barossa Valley, Australia
- 4. Item 2 Achával-Ferrer Malbec Mendoza Finca Bella Vista 2010 96 points Mendoza, Argentina
- 5. Item 3 • Logitech Wireless Combo MK260 with Keyboard and Mouse
- 6. Item 4 • Logitech M570 Wireless Trackball
- 7. Source Source: Dan Ariely, Harper, 2010
- 8. Source Products 00-19 20-39 40-59 60-79 80-99 Correlations Cordless trackball $8.64 $11.82 $13.45 $21.18 $26.18 0.42 Cordless keyboard $16.09 $26.82 $29.27 $34.55 $55.64 0.52 Design book $12.82 $16.18 $15.82 $19.27 $30.00 0.32 Neuhaus $9.55 $10.64 $12.45 $13.27 $20.64 0.42 Chocolate 1998 Cotes du $8.64 $14.45 $12.55 $15.45 $27.91 0.33 Rhone 1996 Hermitage $11.73 $22.45 $18.09 $24.55 $37.55 0.33 Correlation is a statistical measure of how much the movement of two variables is related. A correlation of 0 indicates that the change in value of one variable has no bearing on the change in value of the other variable. Source: Dan Ariely, Harper, 2010
- 9. The Point The exercise brings to light a concept the author calls “arbitrary coherence” which while insignificant in itself illustrates how we, as humans, form or accept “anchors” in our decision-making. For our purposes, as pricers, initial prices serve as anchors. Getting the right price to the sales rep in the field is an important first step in managing the revenue and margin outcomes for your business. Gartner - “Innovation Insight: Price Optimization Leverages CRM, Big Data and In-Memory Computing to Increase Profits and Innovation in the Customer Experience” – 26 April 2012
- 10. What is a target price? Price administrators use the concept of a target price to provide a goal or benchmark for sellers to achieve on sales.
- 11. Why is target pricing effective? Target prices are often effective because of a human trait called ‘anchoring.’
- 12. More Economists…. Daniel Kahneman Amos Tversky
- 13. Everyday Example… Reference price serves as an anchor.
- 14. B2B Example Target Price
- 15. B2B Example Price Floor Target Price
- 16. B2B Example Price Price Target Target Floor Floor Price Price B A B A
- 17. Foundation for Segmented Pricing Segment B Segment A Price Floor Target Price Price Floor Target Price B B A A
- 18. Approval Levels Approval 2 Approval 1
- 19. Where do Target Prices come from? Target Prices are one form of Price Guidance
- 20. What is Price Guidance? Price guidance are the guidelines that provide direction to sales people and to price approvers. Discounting Margin floors Payment terms Freight and Packaging
- 21. How do I establish guide lines? Guidance can be calculated based on: Historic price average Price band percentile Regression analysis
- 22. Matrix-Based Guidelines Motors Pumps Castings Belts Judgment Consistent with most organizations’ current approval Sales Mgr 22% 27% 30% 15% processes VP Sales 20% 22% 28% 12% Improve performance with additional granularity Automation of guidelines drives compliance EVP Ops 15% 20% 26% 10% Percentile-Based Guidelines Define price and approvals at the same percentile across segments Northeast # of Transactions Centrifugal Pumps >$10K Intelligent Guidelines Increase value capture via precise segmentation and 95th analysis of historical business patterns in each percentile segment Use data and analytic algorithms guideline levels Margin % Science Floor Approval Optimal Update dynamically to reflect market conditions Power & Risk TM Guidelines Power & Risk combines analysis of historic sales and # of Transactions managerial judgment Risk Power adjustment adjustment Optimal price percentile varies by segment to capture additional opportunities via Power & Risk scores Approval levels are optimally allocated to avoid losing important sales opportunities Margin % Floor Approval Optimal
- 23. Best Practices in Establishing Guidelines Best Practice Tracking Set guidelines that improve price and Track value of approval chain using margin performance Price In/Price Out Set realistic guidelines Use Target Price Yield to monitor guideline effectiveness Reduce manual reviews by establishing Track use of Negotiated Discount by Sales ‘intelligent’ guidelines Display adherence to guidelines in simple Deal Score provides guidance without fashion at time of Negotiation disclosing underlying data
- 24. THANK YOU
Editor's Notes
- What is a target price?Price administrators use the concept of a target price to provide a goal or benchmark for sellers to achieve on salesIn this way, the price target acts a positive influence, much like a magnet, on the price of each deal. This positive influence provides guidance to sales managers which can drive consistency with the pricing strategy.
- Anchoring, as studies by notable psychologists Daniel Kahneman and Amos Tversky have shown, is tendency to bias decision making based on information obtained first early in the process. That is to say, the information I learn first has greater weight in my reasoning than information gained later. And, the decisions I make will be shaded by that information. That early information acts like an anchor to effect the choice I make. Providing an analytically informed Target Price as an anchor is supportive of maximizing the opportunity of each deal.
- A simple example of price anchoring we might encounter on an ‘everyday’ basis is a price tag at a department store which shows a comparison price, in this example Compare at $700, and an actual price, your price, which is lower. In this example an amazing $279.99. The reference price of $700 serves provides an anchor for decision-making. A logical conclusion is that $279.00 is an excellent bargain on a designer label piece of woman’s wear. At a 58% discount it practically screams “buy me.”
- In a business to business setting, an example of effective anchoring is - a sale rep requesting pricing for a customer is provided a Target Price.Here the Target Price provides an benchmark for the seller and acts to influence their decision-making.There are a number of ways that Target Prices are derived. Examples span from those simply derived to others based on sophisticated modeling. A short list includes target prices based on discounts from a list price, a percentile based on historical price points, average selling price, or the outputs of price optimization engines. Regardless of how the target price is derived the intent is the same – provide a benchmark price as an anchor. Lets look at an example for a B2B company. Our chart depicts sales volume (depicted on the vertical axis as Quantity in units by the height of each bar) and the price per unit (depicted by moving left to right on the horizontal axis as prices ranging from low to high). In the chart we see prices ranging from $6.00 to $13.50. A target price provided to Sales of $10.50 creates a benchmark to influence higher prices. Is a target price 100% effective? Not in and of itself. The rationale for the target price is an important factor. In this example nearly 22% of sales volume is priced at or above the $10.50 target. And, greater than 44% of sales volume is within +/-$1 or 10% of the target. The message in the data is $10.50 is a very achievable price.
- Another important concept for the price administrators is the Price Floor. When used in conjunction with Target Prices the Price Floor establishes a corridor of appropriate pricing in which, as the name implies, the Price Floor establishes the lowest acceptable price. In the example on the screen the Price Floor is $7.50. Sales below the Price Floor are not accepted. In many cases, these sales produce un-acceptable Pocket Margins, are often unwarranted, and should not be approved”Often, a portion of this sales volume will migrate to higher prices. And, for the volume that does not, it will be passed over by the supplier in favor of sales that deliver acceptable returns.
- Using the Vendavo Price Manager solution - Targets and Floors can be set at different levels for different products, customer types, regions, channels, or any other business dimension. In the example on screen, our initial corridor has a Target Price of $10.50 and a Floor of $7.50. Which we’ll now call segment A. We will introduce a second Segment, called B, with a Target Price of $36 and a Floor of $32. The notion of establishing differentiated corridors is the essence of a differentiated pricing strategy, which is sometimes called “value pricing strategy.” Implementing Value Based Pricing with segment specific anchors in the form of target prices and floors can be highly beneficial in maximizing sales.”
- Another important concept for the price administrators is the Price Floor. When used in conjunction with Target Prices the Price Floor establishes a corridor of appropriate pricing in which, as the name implies, the Price Floor establishes the lowest acceptable price. In the example on the screen the Price Floor is $7.50. Sales below the Price Floor are not accepted. In many cases, these sales produce un-acceptable Pocket Margins, are often unwarranted, and should not be approved”Often, a portion of this sales volume will migrate to higher prices. And, for the volume that does not, it will be passed over by the supplier in favor of sales that deliver acceptable returns.
- What is price guidance?Price guidance are the guidelines that provide direction to sales people and to price approvers In a previous Pricing Minute we covered Target Pricing. Target pricing is a form of price guidance. It sets a benchmark for a seller, and a deal approver. It provides a positive influence on decision making and drives consistency with the pricing strategy.
- Guidelines for target price, approval levels, and floors can be calculated a number of ways. Effective methods can be based on historical price average, price band percentiles, or deviation from a regression line. Any of these methods is viable. More advanced methods leveraging pricing science are available. These methods produce higher levels of optimization in guidance using sophisticated algorithms. Regardless of the method employed, a key is to conduct the analysis for each peer group.