Profit Opportunities
Improving the price and revenue of customer contracts is the most powerful profit lever for B2B service providers. A 1% improvement in price results in a 20% profit increase in the average company. However, reaping these rewards requires capabilities and tools for managing :
- Complex cost models and rate plans
- Discounting in the sales field
- Risks due to uncertain customer order profiles
Industry leaders have identified that PRM is a strategic enterprise process, not only an activity of the sales department. Companies lagging behind in this area leave every year hard money on the table.
Up to 10% revenue leakage
The prices charged by companies to their customers cannot always be explained by tangible factors. The following graph shows, in the case of a transportation operator, how customer prices in a particular segment are related to their monthly order volume (each customer corresponding to a point).
There is no clear relation between price and volume and many customers with low volumes pay a price below the fair price envelop.
A simulation model permits to estimate the impact of bringing the price of these customers in line with the fair price. This model can be used to define price increase targets customer by customer. It typically shows that 3% to 7% of additional revenue (and sometimes up to 10%) is at stake.
Eradicating pricing errors
Price disparities are evidence of pricing errors that cost companies several points in net margin every year. These errors are due to deficient processes or lack of decision support and control systems. Usual sources of errors:
- Account Managers do not know which price is right
- They do not receive incentives to sell at higher prices
- No tool is available to simulate the forward profitability of the deals at negotiation time
- Customer activity is not systematically monitored versus commitment/forecast
- Management and pricing analysts do not have the right information to control and improve the pricing policy
Taking out the risk with systematic contract monitoring
Comparing the actual execution of the contract with the negotiated conditions is straightforward management practice. However experience reveals that this is most often not done properly in many companies. Insufficient contract monitoring thus results in:
- Lower levels of activity/orders than defined in the contract without any price adjustment
- Changes in product mix or operational conditions resulting in costs higher than expected
- Superior level of service provided for free to customers
Most often poor contract monitoring is the result of a lack of information systems permitting to systematically review contract execution and compare achieved results with contract forecast/customer commitment. The results are increased costs and untapped opportunities to re-rate customers and charge for superior levels of service.
The Pricing & Revenue Management system dedicated to B2B service contracts
OP for Business Contracts helps companies looking for higher performance to:
- Eradicate pricing errors
- Bring discounting under control
- Ensure systematic contract monitoring
- Use information strategically to improve pricing policy