Restructuring Sales Through a New Pricing Strategy
In order to understand the redesign of the pricing strategy and the restructuring of the sales process, it is important to first clearly understand the initial situation.
A key stakeholder expressed dissatisfaction with the existing pricing structure, which had been implemented by the previous General Manager, and called for a modern solution that aligns with international standards.
To fully grasp the redesign of the pricing strategy and the restructuring of the sales process, it is crucial to clearly understand the initial situation.
Pricing practices in Japan differ significantly from the common approaches in Western European countries, particularly in terms of transparency and price formation. While catalogs in many countries provide reliable guidance on expected costs, this is not as easily achievable in Japan.
In Japan, it remains a common practice for manufacturers to list so-called "moon prices" in their catalogs. These prices often far exceed actual sales prices and serve more as non-binding, often unrealistic benchmarks. This practice has its roots in a highly competitive market driven by discounts. To competitively position their products in the retail or contractor markets, manufacturers offered substantial discounts, necessitating inflated catalog prices. Instead of promoting a realistic net price, the focus was placed on offering steep discounts. The actual purchase price for retailers was often determined by a myriad of subjective factors, such as the personal relationship with the supplier's salesperson or the length of the business relationship, making the pricing process highly opaque. Retailers, in turn, extended discounts to their end customers, emphasizing the seemingly favorable pricing compared to the inflated catalog prices.
This practice remains widespread today, as customers in Japan typically do not purchase directly from manufacturers. Instead, products are usually acquired through retailers or contractors as part of complex transactions. This makes it extremely challenging for end customers to obtain reliable price information from catalogs at the early stages of their decision-making process.
Why is this practice problematic? There is a risk that potential alternatives may be prematurely ruled out due to extremely high catalog prices, which could lead to entire projects or investments not being pursued. This issue is particularly relevant for products targeted at private consumers rather than large enterprises with experienced procurement departments.
What solutions were considered? The challenges needed to be addressed on multiple levels: in external communications with retailers and end customers, as well as in internal communications with employees, particularly within the sales department. The sales organization was highly accustomed to the existing discount practices, as was the retail sector.
The goal was to communicate a realistic, non-binding price externally, providing end customers with a clear price recommendation during the decision-making phase.
Initially, the sales organization strongly resisted changes to the existing practices, fearing that a new pricing policy might lead to significant revenue losses. Many salespeople had built a high level of trust with their customers through long-standing personal relationships, which they did not want to jeopardize with new structures and pricing policies. Furthermore, the existing pricing policy was considered industry standard, leaving little perceived room to deviate from this approach.
How was the problem ultimately resolved? A clearly defined, transparent, and easily understandable pricing system was developed for all involved parties, incorporating discounts based on the newly communicated non-binding price recommendations in the catalogs. The purchase price for retailers was now determined based on both qualitative and quantitative criteria. These criteria included, among other things, requirements for display space, the appearance of the storefront, and the method of product presentation. Purchasing volumes and services provided by the retailer, such as technical support or training, were also taken into account. By fulfilling the conditions outlined in the pricing system, retailers could even achieve better purchase prices. These measures allowed the manufacturer to enhance the quality of product presentation in retail, improve the customer experience, and ultimately increase sales and revenue.
Retailers initially felt significantly constrained in their pricing flexibility by the introduction of a non-binding price recommendation. There was concern that the new price recommendation might limit their ability to set prices for end customers, particularly private consumers. However, these concerns proved to be unfounded. After the new system was implemented, it became clear that the non-binding price recommendation actually simplified pricing for retailers. Essentially, products were now sold at the recommended prices, with slight deviations only on special occasions like in-store events, where special discounts were offered to increase customer traffic. This practice proved to be both legitimate and beneficial. Overall, the retail sector largely moved away from offering significant discounts.
The transition from decision-making to full implementation took nearly three years. Approximately six months were devoted to the development and approval of the new system, followed by another six months focused on communication and training within the organization and with retailers. Various product groups were then gradually transitioned to the new system over a period of two years. This phased introduction allowed for continuous observation, evaluation, and necessary adjustments to ensure ongoing improvement.
Parallel to the implementation of the new pricing system, the rapid development of the Internet enabled customers and clients to compare offers directly from different regions or other retailers. The implemented non-binding price recommendation thus became a significant competitive advantage for the retail network. More and more retailers expressed that the non-binding price recommendation significantly simplified their work.
An interesting side effect: Throughout the entire communication phase, the non-binding price recommendation was consistently referred to as "UVP" (RRP), a term that has since become widely recognized in the industry.
With the transition to the new discount system, several key outcomes were achieved: The quality of retail operations in terms of visibility, product presentation, and services such as technical support improved significantly. This led to higher sales on the retail floor due to an enhanced customer experience. Additionally, clear guidelines for pricing were established within the sales organization, eliminating the opaque pricing practices of the past.
In conclusion, despite the increasing price transparency brought about by the Internet, "moon prices" remain prevalent in Japan. This practice harms both manufacturers and retailers, as it hinders optimal sales performance by failing to effectively communicate the actual price points to the target audience. Therefore, it is crucial to move away from traditional practices that are no longer effective. The mindset of "That's how it's always been done" does not offer a sustainable path forward and must be reconsidered.
Image Source: Mario Spitzer (Author, generated with AI)
