Earlier this year, the U.S. price of oil fell below $27 a barrel for the first time since 2003. Overproduction and excessive supply reached such high levels that even Russia and Saudi Arabia put a freeze on production at record levels. At one point this year, the driving force behind the decisions of many oil producers was simple and easy to understand: fear.
Today, prices have been resuscitated, but only slightly. If you are expecting stability to reign supreme from now on, you need to look at the market a little closer. The fact of the matter is that volatility—in any industry—is the norm; stability is a thing of the past.
Market fluctuations lead to knee-jerk reactions, which is a dangerous proposition when trying to run a profitable business for the long term. These responses often are executed through traditional strategies, such as cost cutting or lay-offs, to save money, but tactics like these rarely result in profit improvement for longer than a momentary blip. By the time the next tectonic market shift occurs, you are back to square one.
Such complications manifest when companies focus too much on external factors—by way of overreacting to every data point without coordinating that information with strategy. The industry outside the confines of your business is undoubtedly crucial to the way you work, but that movement does not need to dictate your business strategies. In fact, it shouldn’t if you really have a strategy. There is a method to protecting against volatility while preserving profit—or even improving it—that is often ignored by organisations and it starts with the sales team.
The Hourglass of Understanding
Your raw material costs are changing; customers are more knowledgeable; and competitors are lowering their prices to protect themselves. What do you do?
If your pricing strategies are simplistic and undifferentiated, you panic and follow your competition. For a company to adequately protect itself from market changes, the entire pricing process must be checked and rechecked… and then checked and rechecked again. Are your pricing tactics having the planned impact when tested against your strategy?
Start by defining your market position. Look outward to understand how the raw material prices are affecting you. What has happened with your competitors following their price drops/increases? Do your products have a different impact that could become your advantage in the new market environment?
From there, move to more granular aspects within your own company, incorporating your market insights along the way. This process allows you to reevaluate your price at every step of the way.
Sales needs to be present and involved in this process to stay up to speed. As a member of the sales team, you are the front line for executing tactics that are aligned with your profit and pricing strategies. In order to better negotiate with customers and avoid over-discounting, it is crucial to have a deep understanding of each and every aspect of the price you are presenting. If there is change resulting from the raw material fluctuations, whether it is impacting your costs or your product’s market price, you will have the ability to defend it. An understanding of a product’s price at the base level, combined with market insights, alerts you to when a deal has the potential to be more profitable.
At this point, I must emphasise a point that seems obvious, but can be overlooked: Looking outward does not mean searching industry-wide to see general impacts. When researching the influence of volatility, you must first understand that every company is impacted differently, so customise your analysis to focus on your pain points and strengths.
Now, your finance and sales team understand your company’s place in the market. It’s time to move inward with your analysis.
Tackling Volatility, Segment by Segment
At this stage, your data—both internal and external—factors into the equation. You must utilise technological platforms that can handle massive amounts of data, make connections that result in business insights and simplify the flow of information from the finance team to sales.
Once that is in place, you begin segmenting.
As I mentioned above, collaboration is key, but here is where the sales team gets to shine. When looking inward at your transactions, a good place to start is by segmenting the data by product, customer, region or whatever combination of segments makes sense to your business.
By parsing out your data by product or customer or region, you notice patterns in the analyses that reveal powerful or risky profit opportunities. Maybe a certain product is performing well in one region, but not another. Perhaps a customer buys more of one product in one division, but not another.
When the data finds these patterns, sales combines this information with the experience they have collected in the field. For example, your biggest customer buys more of Product A in their division based out of the West region of the U.S. The sales rep on the account is also aware that raw material costs have decreased for you, but your product is particularly important to that West region because they operate differently from the East region.
In this example, the sales rep uses his/her knowledge of the customer’s business operations to complement the data in a way that puts your company in the power position. Now, the sales rep won’t have to feel pressured to pass on that price relief because your product is more valuable to this customer. They are willing to pay more—or ignore the raw material cost impact—to keep their business profitable.
Start by creating larger segments, such as product family or customer industry to test your high level assumptions, and move to more granular views as your pricing strategies become more defined.
If you are able to drill down to the level described above (or further), you will recognise when and where you can take advantage of opportunities and when and where you should be more cautious. At the granular level, it becomes all about value in the eyes of your customer, which should be the focus of everyone in the organisation, not just sales or finance. You will be able to identify the value of your customers and establish a strategy that lets you keep customers with the potential to defect and increase the profitability of others.
Nothing will Change; Everything will Change
The guarantee of volatility is actually the most stable expectation for the future.
When the market is in a state of perpetual fluctuation, everyone is worried. For sales, a strong collaboration with finance can help save your organisation’s profitability from dipping during stressful times.
Broad knowledge and granular data supported by personal experience makes a formidable sales team. You can remove the tendency to over-discount out of fear—just trust the data.
By Mitchell Lee, Vendavo, Business Consultant at Vendavo with 25+ years of experience in the technical, operational, marketing, and commercial arenas of the chemical industry. Prior to Vendavo, Mitch was with BASF and Orica in product marketing and business management, driving operational optimisation, pricing excellence, and margin improvement, as well as personal engagement in high value sales negotiations.