Simon-Kucher & Partners and PROS
Philip Daus from Simon-Kucher & Partners talks with Valerie Howard, Lead Product Marketing Manager at PROS about the partnership between SKP and PROS.
Valerie Howard: We're excited to be here at Outperform, where we just finished a panel and presentation session in the pricing track featuring Craig Zawada, our chief visionary officer at PROS, Philip Daus from Simon-Kucher & Partners, and Jit Singhs. There we had a fantastic discussion on what's going on in the pricing industry, how B2B organizations are facing the pressure of buyers changing to digital channels, and how that's changing expectations of the buyer. It's really putting pressure on B2B organizations to shift how they're thinking about pricing.
Valerie Howard: Philip, would you mind telling us a little bit about yourself and your role at Simon-Kucher?
Philip Daus: My name is Philip Daus. I'm a partner at Simon-Kucher & Partners based out of Houston, Texas. As you can hear from my accent, not originally from Texas, but I moved to Houston as fast as I could for strategic reasons. My wife is from Texas.
Philip Daus: I've been with Simon-Kucher for 15 years. We were a 200-people organization when I started with the firm. We're now about 1,400 pricing professionals in 39 offices.
Philip Daus: I focus mainly on B2B verticals. So being in Houston, that means oil and gas, industrials, chemicals, manufacturing. Throughout my career, I've worked both in B2B as well as B2C industries as well.
Valerie Howard: Great. Thank you for that introduction, Philip. So, we know that Simon-Kucher does a lot of fantastic research in the pricing industry. You publish these studies called the Global Pricing Surveys [sic], and we wanted to know from your perspective, what's driving intensified pricing pressure that these B2B organizations are facing?
Philip Daus: The Global Pricing Study is a study that we've been conducting for about the last 10 years or so. Typically, we have about 2,000 companies across the globe that answer our survey. Essentially, the question we try to understand is, what creates pricing excellence? So, what are, really, the benchmarks in pricing because companies that exceed at pricing, the companies that are excellent at pricing, on average have a EBITDA that's 25% higher than the rest. So there's a lot of money in pricing.
Philip Daus: What we've seen over the years is there are essentially four factors that have stayed permanent or that have stayed the same in explaining pricing success. Then there are three that are essentially new and that are driven by changes in the marketplace, mainly driven by digitalization.
Philip Daus: The four factors that have stayed the same, number one is pricing organization. Excellent companies invest in a professional pricing organization. Essentially, they give enough importance to pricing per se, but also it's reporting to the right people. Number two is they invest in the right tools and software to make decisions. The important piece there is that the software is customized. So it's not an off-the-shelf solution, but it's rather either a standard software that gets customized so it's something that's developed according to the company's DNA.
Philip Daus: Then we see capabilities of the pricing team. As you all know, in the last 10 years, we've seen lots of changes: MBA courses picking up pricing as a subject matter, lots of activity at the PPS, and so on and so forth, lots of conferences-
Valerie Howard: And by PPS, it's the Professional Pricing Society-
Philip Daus: Professional Pricing Society, exactly.
Valerie Howard: ... conferences.
Philip Daus: The association of pricing nerds, if you will... Your conferences of course and the ones of Simon-Kucher and other specialized firms.
Philip Daus: Last but not least, the other constant that we've seen in the global pricing study was monetizing innovations, so the ability of companies to actually make money with innovations that they bring to market, be it products, be it services. The key number there is 75%. Seventy-five percent of all innovations flop because companies fail to monetize.
Philip Daus: That's a segue also to digitalization because, if you move to a more digitalized world, being able to monetize on these innovations becomes key.
Valerie Howard: One of the key takeaways I had from that book was thinking about your product innovation, where you want to innovate on your products from a perspective of what buyers are willing to pay for first. It was just incredible perspective from thinking about where you want to go with product innovation.
Philip Daus: Typically, we see that the monetization talk comes in very late in the game. Typically, you bring in the engineers and the R&D people, and they figure out the next best product, but they don't necessarily focus on the customer and they don't focus on what creates value and how does it translate into willingness to pay. Our recommendations have that willingness to pay talk very, very early in the game.
Philip Daus: The same is true when we talk about digital and digitalization. So, digitalization essentially means that we transfer processes into a digital format or products into a digital format. Ultimately, the goal should be to either have new revenue streams or to create new value-driving opportunities, so it's not a self serving-
Valerie Howard: Absolutely. It's about increasing the value you're delivering to your customers, right? They say that in the best way by paying you for certain perspectives.
Philip Daus: That's the idea, but that's also where most of the companies actually fail in the execution. In our last Global Pricing Study, we asked companies, "Are you investing in digital initiatives?" Eighty-one percent said, "Yes, we do." So, most of the companies work in digital.
Philip Daus: We also asked, "What's the goal of your initiatives? Are you trying to reduce costs and improve efficiencies, or are you actually trying to drive top line growth?" Again, 75% of companies said, "No, we're actually doing this in order to drive top line growth."
Philip Daus: And then we asked, "Okay, are you succeeding at that? Do you have measurable success in driving top line through digital?" Then all of a sudden, the numbers dropped to less than a quarter. So, one out of four companies actually earns money through digital, and the rest fails at it.
Valerie Howard: Wow. What are the common pitfalls in that digital initiative transformation?
Philip Daus: There are a couple. The number one, I think, is that companies see a digital transformation rather as an IT project. It gets delegated to the IT folks, and it's not necessarily a change management exercise. So that's probably the most common thing, having the right people involved, making it a C-level, a CEO topic.
Philip Daus: The second flaw or mistake that we see very often is that companies invest in the wrong initiatives. The most frequent... We looked at what initiatives do companies invest in and what drives the top line in the end. The most frequent investment was in sales efficiency, so improving the sales process in one sort or another to drive efficiencies. Unfortunately, that's not the highest impact-bringing-
Valerie Howard: Oh, really. Okay.
Philip Daus: ... work stream.
Philip Daus: The most profitable ones are actually using big data to optimize pricing, so essentially, something that you guys are really, really good at.
Valerie Howard: Absolutely, yes.
Philip Daus: The other one is monetizing on new digital products and services.
Philip Daus: Both of these top revenue drivers ultimately are really at the lower end of what companies focus on. One out of 10 companies, actually... less than one out of 10 companies... invests in those digital initiatives. Those are probably the top two, and then there's an entire host of things of what companies do [crosstalk 00:07:51]
Valerie Howard: Absolutely. At PROS, we definitely see the transformative benefits of leveraging price optimization, so we're very much in line... our customers are very much in line with what the research shows from your Global Pricing Study.
Valerie Howard: I do have a question about that digital transformation initiative. Are there some industry sectors that really aren't seeing the pressure from digitalization and its impact on intensifying pricing pressure?
Philip Daus: That's a great question. Maybe also to go a step further, will there be industries that don't have to go through that cycle at all, right?
Valerie Howard: Yes.
Philip Daus: Ultimately, the question is, where can digitalization add value? That can be either on the seller side through, for example, reducing costs to serve or reducing barriers to entry. Or digitalization can help on the buyer side, improve efficiencies, increase transparency. Those are the drivers of digitalization.
Philip Daus: There are pockets where you have very, very customized products with long lead times, with lengthy interactions with human beings, and a lot of common sense, where, for example, AI doesn't really help that much yet. AI can help you analyze data, they can find pattern, but it's not necessarily there yet in order to drive insights.
Valerie Howard: So you're saying high touch, maybe services types of engagements, but aren't those services engagements in some ways leveraging automation to help up-level that service in some cases?
Philip Daus: I would actually say not just high touch services, but rather, really large accounts that want a more customized and personal treatment. Actually, we had that question in our last Pricing Study. Let me read that one to you because I think the results were super insightful.
Philip Daus: We asked companies, "How do you expect the role of the personal relationship of sales people to involve? Do you think that this role will increase with digital coming up? Do you think it will stay the same? Or do you think it will go down?"
Philip Daus: We could not find any patterns by industry. So, B2B service, the relationship will go up or down, or in manufacturing, or so on. But we could see a very significant difference by customer type. Companies said, for large customers, the importance of the relationship will increase in 72%. For small customers, it will decrease in almost 60%.
Valerie Howard: Oh, wow. Okay.
Philip Daus: So, that implies that digital will not replace the sales force. That's one of the fears that's hovering around. It's rather going to help make right decisions for the large accounts. It's essentially going to automate the processes for the smaller, less important accounts.
Valerie Howard: Absolutely. Our perspective on it is that, when you leverage AI or automation, often it helps to free up the sales person from some activities that might have been repetitive in some cases. They actually, in many cases, then have an opportunity to offer higher value-
Philip Daus: Absolutely.
Valerie Howard: ... spend more time educating their customers, perhaps on new product lines or complex products. We think, across all industries, we're seeing a lot of benefits.
Philip Daus: We're totally aligned. We actually measured that as well. We asked for the top skills that, in the next five years, sales people will have to develop or that become more important. As you say, the number one skill is value communication. It's going from order taking into somebody that can actually explain the differential value of your product or of your service. That's the number one by far.
Philip Daus: The second one is building a personal relationship with a buyer. That one is a little bit tricky because you have differences between baby boomers, Generation X, and millennials. Millennials tend to be a bit more tech-savvy, and they don't necessarily like that relationship. But you have to look at it differentially-
Valerie Howard: I mean, it's just a-
Philip Daus: Depends on the industry.
Valerie Howard: ... different type of relationship possibly. To that point, it seems like we're ultimately enabling the salesperson, and even maybe the pricing professional, to get more satisfaction out of their work when we're able to up-level it to more strategic efforts and greater value delivery in those efforts. You see that as well?
Philip Daus: Yeah, totally. Totally see that.
Valerie Howard: Okay, great. So, Philip, you mentioned that we're enabling salespeople to focus on higher value efforts. What's the risk to an organization if they're not focusing on a digital selling strategy?
Philip Daus: That's a great question. It's a little bit like innovate or die. If you don't innovate, if you don't improve as a company, your competitors will, and the market will evolve. The purchasing patterns of your buyers will change.
Philip Daus: Essentially, if you keep your business model constant, in the next 10, 15 years you might just disappear from the market or even faster in the function of the industry where you're in.
Philip Daus: There are a couple of numbers that we typically get from our Global Pricing Study. One is pricing pressure: "Over the last two years, have you seen an increase in pricing pressure, yes or no?" Sixty-five percent of companies say yes. There's more pricing pressure, and you have to deal with it.
Philip Daus: We also asked, "Are you involved in a price war?" Fifty-seven percent of companies says, "Yes, we are." I mentioned before, Amazon, you see currently about 60,000 price wars every day. It's an amazing number.
Valerie Howard: Wow.
Philip Daus: That's not going to go away soon. The third-
Valerie Howard: Can you describe for us a little bit how you measure that 60,000? What's the 60,000... What is a price war and that definition?
Philip Daus: You essentially look at pricing behavior. You essentially [inaudible 00:13:57] products that are on the Amazon website, and see what happens to their price point in a given timeframe.
Valerie Howard: Got it.
Philip Daus: So, do they move up? Do they move down? You compare different products of different competitors, essentially, and see how they interact. The essential finding is that there are more price wars.
Philip Daus: They are shorter. Price war ends earlier than they used to because algorithms make a lot of the decisions, but they are also much deeper. They are essentially more costly from that perspective.
Philip Daus: In general terms, when we ask, "How are you going to solve this from a pricing perspective?", companies always answer with, "Well, we'll increase prices. We get better at our price increases." Almost 80% of companies say, "We will increase prices over time." Particularly in B2B with tariffs going up, and so on, it's probably a smart decision.
Philip Daus: The other key question we always ask is, "How good are you at that?" One KPI to measure that is price implementation rates or price realization, and they're super low. Let's say you plan to implement a 5% price increase. You communicate, "We increase prices by 6% or 7%," to the market. You want to get 5%. Defacto, you will get out of that increase only 1.4% from the market price.
Valerie Howard: Wow.
Philip Daus: So, it's dramatic.
Philip Daus: It's even worse because one out of 10 companies is able to achieve their price increase goals. You can translate it in nine out of 10 companies fail at price increases.
Valerie Howard: Yeah, and that's really a huge threat to your margins. If your costs are increasing and you can't effectively pass along price increases, your margin's continuously at risk.
Philip Daus: It is. It is. Then on top of that, you have the change to digital channels. Every time you move a customer from channel A to channel B, there's some risk involved. So, it's not going to get smaller. That risk is not going to get smaller.
Philip Daus: To your earlier question, what happens if you don't change as an organization, if you don't embrace digital? Ultimately, it will cost you likely your livelihood, so you have to do something.
Valerie Howard: To share some of the research that PROS conducted, we saw that 45% of procurement professionals are intending to purchase more than half their goods through digital channels within two years. If that many buyers are making that shift, and if you're an organization that's not effectively enabling those buyers to purchase digitally, in our perspective, that's a huge risk for you as a company to not have a channel to serve your customers in the way that they want to purchase.
Philip Daus: Absolutely. Many companies are awfully ill prepared to make the move. As you know already in the analog world, when you look at price consistency across customers, very often you see the shotgun blast of price versus volume. The problem with digital is every price inconsistency will be made transparent. Customers kind of game you into giving price concessions and having the lower price point. So you have to have some type of strategy in place to react to that.
Valerie Howard: We've shared a lot about how digitalization is intensifying pricing pressure, but there's also opportunity in that. Can you share with our audience what some of the key steps to shifting to a digital sales platform are?
Philip Daus: Absolutely. We would probably think of it in terms of four key elements that you need to think of in general when you shift customers from channel A to channel B, but even more so when you shift from the analog world into a digital world and make everything more transparent and comparable.
Philip Daus: Number one is, define what you actually want to get out of digital. There are many strategic objectives that a company could have. It could be as simple as, "We want to automate the sales process, and we want to cut costs." It could be, "We want to streamline the buying experience for the customer." It could be more like, "We want to tap into different markets. We want to install dynamic pricing. We want to customize our product offerings."
Philip Daus: There are different things that a move to digital could enable. You have to define what your goals are. You have to prioritize the goals. You also have to then track whether you, in the implementation process, are able to achieve those goals. That's number one, and that's why I said before, it's really a strategic initiative first of all-
Valerie Howard: Absolutely.
Philip Daus: ... versus an IT problem.
Philip Daus: Number two is really understanding the impact on customers. What I mean by that is, every time you shift customers around, you will have customers that are winners and customers that are losers. That can happen on a per customer per product level. So, really creating transparency around that, and even before you make that move, start to clean up a little bit the internal mess.
Philip Daus: We worked for clients who essentially didn't go through that exercise and just switched from day one to day two with the result of bleeding cash because they didn't understand that, what are the customers that trade down, what are the customers that just get a discount from today to tomorrow, or understanding the impact on neighboring countries. They implemented a digital strategy in the US, not realizing that the customers in Canada would look at the pricing and also request refunds.
Valerie Howard: It really is a global market now, isn't it?
Philip Daus: It is a global market, so you have to really understand what the impact is on your customers and work on that.
Philip Daus: The third one is, understand the impact on your sales force. If you move across channels, what happens to their commissions? What happens to their incentives? There might be internal resistance that you should keep in mind and include in your strategic planning.
Philip Daus: Thirdly [sic], you really have to prepare the organization. You have to go through simulation exercises. You have to have a detailed migration plan for the difficult accounts. So, customers that get huge pricing increases or huge price decreases, how are you going to handle that? Is it a one-time switch? Do you handle that over time? How do you prepare these customers? Who visits the customers? Who tells the story? How do you tell that story? Having marketing negotiations.
Philip Daus: That entire process of preparing the sales force and the internal support organization should not be underestimated. There's a lot of time that goes into that.
Valerie Howard: What we see works successfully is incremental change. From what I'm hearing you say, there's a lot of stakeholders that are involved in that process from your pricing teams, your sales teams, and your customers. You're trying to influence their changing behavior so that you can reach the outcomes you desire.
Valerie Howard: One of the case studies that we have is, we worked with a medical distributor who was working towards enabling buyers to purchase digitally. They were facing that challenge as well, where, "How do I incentivize sales on this structure? How should I think about it?" Actually, the salespeople loved that their customers could now purchase digitally because it freed them up from having to spend their time responding to simple quote requests. They could instead focus on that higher value sale. It was a positive impact across... in many ways.
Valerie Howard: There's a lot of opportunity in digital selling.
Philip Daus: There are different very interesting working models in how you can actually implement something like that in practice without hurting your top and your bottom lines.
Valerie Howard: Absolutely.
Philip Daus: So it's good to look at some of the benchmarks there.
Valerie Howard: Absolutely. As we close out this wonderful video and podcast here with you today... As we close out this video here today, Philip, I'd like to ask you what's the one thing that you've happily overpaid for, or you might be segmented as a customer with a high willingness to pay?
Philip Daus: That's a very difficult question. As I said before, I'm German, so it's not in my DNA to overpay. I always get fundamentally frustrated learning about that I could've got a better deal somewhere else.
Philip Daus: I think, ultimately, it's kind of like a trade-off exercise. Every time that a product or service helps me to spend more time with my family and less time traveling, that's probably where I'm willing to pay probably a little bit more over market price. Everything else would get me tremendously frustrated as a consumer. Overpaying is never good.
Valerie Howard: Okay. So nonstop service, perhaps, instead of the two plane route?
Philip Daus: That sounds like a good offering, yeah.
Valerie Howard: Awesome. Well, great. So nice to have you here with us at Outperform today, Philip.
Philip Daus: Thanks for having me. Thank you. It was a pleasure being here.