Steinbeis experts develop pricing software for B2B sales
Anyone who has ever worked in sales is familiar with two problems. The first is that of passing on rising costs to customers. The second is about having to deal with customers who require intensive support, but don’t compensate for time investments with high prices. The experts at the Sales and Marketing Institute (VMI), a Steinbeis Consulting Center, have explored these issues with their own customers, resulting in the development of software that can be used to automate pricing decisions.
Even before the recent phase of price inflation, sales managers were experiencing difficulty finding suitable ways to pass on cost increases. But now, with almost meteoric rises in costs, previous failings when it came to systematically analyzing pricing or implementing price rises are surfacing. Other factors are becoming important, over and beyond rising costs: Are customers paying what they should be, especially compared to other customers? How many customers actually fuel costs, but fail to compensate for this in pricing terms? And then of course there are those customers who, to use sales jargon, pay “historical” prices – i.e. at the beginning of the customer relationship they promised big order volumes or a large project, but somehow never managed to deliver on those promises.
It’s quite common for such customers, who can be particularly demanding, to take up more time and effort than large, existing customers. Dealing with the latter is often so well aligned that this effort is relatively manageable.
How much effort is involved in managing customers?
On the one hand, and depending on how many office processes have been digitalized, dealing with a large number of small orders requires a disproportionately high degree of effort in processing. Add to this special requests regarding production, transportation, storage, returns, complaints, or payment terms, and things becomes even more expensive, especially if those are things customers are not billed for. If customers are no longer rewarding – due to low or only sporadic sales, coupled with high expenditures – at some point it may no longer be worthwhile investing time in managing them personally. It might then make sense to hand them on to an online store or wholesaler. Alternatively, customers might just have to pay for any special favors you do them in the future. But is the sales department even in a position to keep adapting – in terms of pricing, or time invested in helping clients?
To answer this question, the Sales and Marketing Institute (VMI), the Steinbeis Consulting Center headed by Steinbeis entrepreneur Professor Dr. Rainer Elste, has been working with one of its own clients on the development of a systematic process, culminating in a software solution.
The starting point: a lack of systematic structures
The customer of the Steinbeis Consulting Center operates across three continents, offering services in the field of plastic processing and distribution. In the fall of 2020, two key factors motivated management to start actively addressing the issue of automating pricing decisions. The first factor was rising costs, which even at that point had already risen beyond the normal volatile levels experienced in the raw material market. The second was to do with customers, who were receiving highly individual support from the sales department, but processes were not well organized, with no discernible or measurable degree of segmentation. Similarly, there was nothing in the way of a structured approach to price differentiation.
From data analysis to customer segmentation
The first step for the experts at the VMI Steinbeis Consulting Center was to analyze every single invoiced price, by customer and product, based on transaction data for an entire fiscal year (pprox.. 250,000 records). This involved almost two weeks of work inside the system cleaning up inaccurate or missing data. One finding after data analysis was that a significant proportion of small customers were paying prices that were too low. The team was also able to ascertain that transportation costs itemized in product prices did not even cover outlays in some areas in Europe.
The next step was to systematically define customer segments with the support of the sales department and management accounting. These categories were used to define criteria to be met by customers to fall into each segment.
This involved looking at both the volume of sales by customer and their profitability. At the same time, consideration was given to the fact that new customers often say they will grow and as a result, there is a transitional phase when they are treated like leading customers.
Finally, it was determined what level of service should be offered if a customer is assigned to a certain segment. In keeping with this, the support model was realigned and rules relating to goodwill or payment terms were laid down for each segment.
The outcome: a systematic, tool-based solution
The company decided that it was important during deployment of the new system to make no additional profit from handing on cost increases to customers – but it should definitely also not lose out.
Even during the first round of price increases, the company succeeded in achieving significant improvements, particularly with its small, less profitable customers. Despite double-digit price increases, customers neither went elsewhere nor reduced their already low order volumes. There was also a shift in understanding in the sales department. Although there had been a number of reservations at first, these gave way to the desire for a systematic solution with the support of a tool. It was recognized that this offered greater transparency and made it easier to manage customer pricing.
For the second stage of the project, the Steinbeis experts developed software that can be accessed from anywhere via the internet. The system is automatically fed with data from the company’s ERP system, which can be fed back into the system again. For security reasons, data is “stored” in-house at the company.
The clearest indication that the project was a success came from the CEO: “The software developed by the Steinbeis Consulting Center allowed us to become the only company in the industry to hand on cost increases in full.”
Mutual benefits for business and research
To implement the project, Rainer Elste built on the findings of a so-called Marketing & Sales Digitalization Index and insights offered by the index during his research at Esslingen University of Applied Sciences. One finding was that companies in B2B markets are comparatively reluctant to use digital systems for pricing and price control purposes. A market analysis of other providers of pricing software also revealed that matching customer segments to price controls is often a manual process only carried out on an ad-hoc basis by business consultants.
Based on these insights, the experts at the Sales and Marketing Institute (VMI) have developed a pricing tool called Price-Hive. Similar to a perfectly organized beehive, data held by the tool is systematically structured and evaluated, offering clear targets for pricing purposes. Based on the right premises, the software can even take into account possible downward price pressures. Sales staff are supported by corresponding algorithms, which, among other things, help with customer segmentation and cost adjustment considerations. Coming the other way, implemented changes can also be fed back into the tool. This automates a variety of steps, making processes more cost-efficient and, above all, repeatable. This is of particular benefit to SMEs that have to deal with a large number of customers.
Vice versa, the project has also made it possible to feed important insights back into research, because automating pricing decisions – with the support of systems that learn as they go along – is still a broad field of research.
Prof. Dr. Rainer Elste (author)
Steinbeis Consulting Center Sales and Marketing Institute (VMI) (Göppingen)
Elste, R., Digi Index Marketing Vertrieb. Concept and findings for an index-based measurement of digitalization in marketing & sales [German]. March 2021. DOI: 10.26273/he-opus-1309, Esslingen, ISBN 978-3-00-068367-1
Elste, R., Pricing: Hand on Cost-Drivers Properly [German], Professional, 30.04.2021