Toxic Pricing and Global Price Consistency

As I was looking up flights for my vacation later this year, I navigated to my favorite airline’s website to search for tickets. I remembered a friend telling me to check international websites [...]

iStock_000057022470_XXXLargeAs I was looking up flights for my vacation later this year, I navigated to my favorite airline’s website to search for tickets. I remembered a friend telling me to check international websites of airlines, sometimes offering better prices for the same flight. Lo and behold, this pricing inconsistency saved me $400 per ticket to Europe.

This kind of inconsistent pricing is not isolated to airline tickets or consumer purchases. In my last blog post, I spoke about the billions of dollars that semiconductor companies leave on the table every year due to ineffective opportunity-to-contract processes that erode average selling prices.

Inconsistent global pricing and poor price concession controls are two big culprits of this price erosion. Customer product pricing should be dictated by the specifics of the price agreement, quote or contract with the customer.  Whatever the price that was set, there’s absolutely no reason that the price should change as it goes around the world.

Global price consistency means you have a price for a customer and that is their price.  It doesn’t change when they go to Europe, it doesn’t change when they go to Asia or the US.  Companies who don’t have the tools and processes in place must rely on the discipline and best intentions of regional sales personnel in the organization.  However, with people in many different locations, it’s very hard to achieve that consistency.  If you add up these inconsistencies, they usually equal quite a lot of money.

Toxic pricing is another practice that should be eliminated by every semiconductor manufacturer and, in doing so, can result in recouping millions of dollars.  Toxic pricing occurs when someone gives discounts they shouldn’t.  An example would be giving preferential discounted pricing to poor performing customers.  Every manufacturer has different discounting thresholds.  Generally, the more proprietary the product, the tighter this threshold is.  Regardless if it’s a proprietary or commodity product, there’s usually a discounting bottom line that should not be crossed.  Deals that go beyond this bottom line are the outliers that should be scrutinized on a case-by-case basis.

Eradicating price erosion begins with a few basic steps. Consider these starting points::

Align resources – sales, sales operations, channels, marketing and pricing organizations need to function as a single team and work towards the same goal.  Success should be measured by a common list of attributes that is being tracked.

Measure and eliminate toxic pricing – Improving visibility and control into the discounting process will help you address these issues.  This involves the analysis of order and POS data and correlates it to the original contract for the end customer.  Going forward, controls will need to be in place so that unnecessary discounting cannot take place without proper approvals.

Business process and tools mapping – A robust price rule management tool can streamline business processes and enforce pricing consistency throughout all regions, speeding quote turnaround time and eliminate any price inconsistencies.

By using the right tools and processes, semiconductor manufacturers can eliminate toxic pricing and enforce global price management.  Interested in learning how you can quantify how much you are leaving on the table?  Sign up for a free  two-day value discovery workshop.

Stay tuned for my next installment in this series where I’ll discuss the other issues causing revenue leakage.  Have a question about global price consistency or toxic pricing?  Join the discussion in the comments section.

Semiconductors – Get Your Billions Back

Congratulations to the semiconductor industry for a record sales year! The Semiconductor Industry Association recently announced that worldwide semiconductor sales for 2013 reached $305.6 [...]

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Congratulations to the semiconductor industry for a record sales year! The Semiconductor Industry Association recently announced that worldwide semiconductor sales for 2013 reached $305.6 billion, the industry’s highest-ever annual total.

 

Before we relish the success of last year, semiconductor companies must ask themselves two questions:  How can we continue to improve sales (revenue)? And how can we keep more of what we’ve sold (margin)?

Studies show that for every $1B in sales, semiconductor and component companies lose as much as $50M annually to lost opportunities, poor volume and price compliance, channel over payments and other forms of price erosion. That means that these companies are potentially leaving up to $15 billion on the table each year.

McKinsey stated that the use of transactional pricing along with value based pricing can help drive revenue increases 2% to 7% for semiconductor companies. They describe transactional pricing as focusing on minimizing the leakage of revenue. This revenue leakage is caused by ineffective processes that are eroding average selling prices in the opportunity to contract process.

If you’ve read our recent #RevNews, you already know that price erosion is costing chip makers an average of 2.3% in gross margin. But there are other significant impacts to the bottom line as well:

•  9% loss because of unmet volume commitments

•  10% lower win rates due to lengthy deal cycles

•  10% overpayment due to errors in reconciling channel incentives

The issues causing this leakage are primarily inconsistent global pricing, poor price concession controls, channel incentives overpayment and unmet contractual volume commitments which are the result of inefficient and silo processes that do not provide visibility and control.

We live in a world where every penny counts. Companies spend enormous amounts of time and money trying to control manufacturing costs and increase their bottom line, only to negate that effort by unnecessary leakage like improperly discounting prices or overpaying channels.

In the next part of this blog, I will continue our discussion on revenue leakage and elaborate on the issues that are causing it. If there’s a particular area of revenue leakage that you would like to hear more about, please let me know in the comments.

You can also learn more about revenue leakage in our upcoming webinar. You’ll hear how semiconductor companies like Microchip and On Semiconductor have reduced revenue leakage in their sales cycles. Register here.