Sales at the expense of profit, or profit at the expense of sales? One of the conundrums that business leaders ponder when considering investment tradeoffs. Yet Net Revenue Management (NRM), a holistic professional approach that aims to deliver both more sales and more profit, is often not fully deployed. Sometimes, this is because there is limited awareness of its impressive value proposition, or it seems all too complex, or it falls somewhere between the traditional responsibilities of functions, who with fewer resources, may be struggling to meet their own standard requirements.
This article examines some of the obstacles to seizing the benefits of Net Revenue Management (NRM) and possible solutions to overcoming them.
Visibility And Opportunity Awareness
The presence of an intermediary between the seller and the eventual consumer (or patient) gives rise to a company’s investment and expenditure on the ‘Gross to Net’ line, which is deducted from Revenue (or Sales). Examples are promotional offers, free goods, discounts, early payment incentives, commissions, returns and all other spend on customers. NRM is about how to make this investment work better for you and generate a higher net return that flows through to the bottom line.
One issue at the outset is lack of visibility – companies generally only report Net Revenue in internal management reporting, hence management do not have visibility of the significant deductions that have gone before that.
Research has shown that a professional approach to Net Revenue Management delivers operating profit increase by 2% to 5% of sales. For companies having good profits of 50%, this means an opportunity to deliver double-digit growth on bottom line. Is that not enough incentive on its own to start such a journey? While beginners can target higher than average benefits, even companies that consider themselves experts can do more through a targeted approach and deliver better returns.
The FMCG industry is generally quite versatile in this area, driven by the need to manage numerous types of trade promotions in a complex wholesale and retail environment. But in Pharma and to a large extent Consumer Healthcare, the high product profitability and historical role of the customer being mainly the healthcare professional rather than a buyer, there has been less of a need to really delve into an area often considered as a standard cost of doing business.
Few Approaches Combine Both Art And Science
Over the last few years, more sophisticated and important buyer groups have risen like consolidated wholesalers and pharmacy chains, as well as health insurance companies. Secondly, there has been a lot of regulatory pressure on pricing. Both these factors have led companies to really get to the bottom of Gross to Net and better manage their distribution channels and customers.
However, approaches vary in the extreme. At one end of the spectrum are businesses that have set up specialist centralized revenue management functions, using Big Data analytics on sales transactions to model an endless list of ‘what if’ scenarios seeking the ultimate winning algorithm. This is then supported by implementation of rigorous internal processes and monitoring of many KPIs. On the other end, you have companies that simply rely upon the experience of senior leadership to negotiate changes to historical customer relationships, aligned with latest strategies and profitability needs. The former is mostly science, the latter is mostly art, but rarely do businesses reach the fine balance needed to effectively optimize relationships and really come closer to the overused state of a ‘win-win’ customer deal.
Collaborative Approach Necessary
Organisations that have open-minded leaders and use a task force approach can set off a chain of actions that not only delivers value benefit but leads to a new commercial culture that with enhanced capabilities can be sustained and self-managed. However, a high degree of alignment and representation on the core team is required from Sales / Key Account Management, Marketing, Distribution, Supply Chain, Finance, Legal and IT – all vital given the diversity of trade spend components.
Launch Phase Critical
NRM initiatives when first introduced are usually perceived with a degree of skepticism, particularly if Head Offices have provided a preset financial goal, undermining the analytics and creative work that would need to go on before such an objective could be developed and quantified. Secondly, it is best to start with independent experts who can help formulate the programme, do the initial legwork of definitions and analytics, and then facilitate an open and participative discussion about opportunities. Such an approach using a combination of data driven insights, best practices and in-house strategies, leads to fast adoption, a less stressful environment and greater consideration of game changing ideas.
Power Of Data Insights
The number crunching departments in an organisation have always looked at primary sales data for providing various decision-making advice. However, companies do not fully utilise the vast secondary or tertiary sales data they possess, or could access. Successful NRM projects get as close as possible to the end customer to understand the market dynamics, in order to provide management the insights required to evaluate past performance and model the future for selected strategies. Benchmarking is also important and does not always mean commissioning a third party to do an expensive primary research project. Often, the really important data is either common market knowledge, or easily available.
Tools, Capabilities And The Role Of The Specialist
There is specialist support available on the market to assist companies with commercial tools and capabilities, particularly for the developed US / Europe markets. However, the challenge is that markets that are prone to high levels of Gross to Net deductions, hence a larger NRM opportunity, require bespoke local approaches provided by experts, rather than a generic plug and play strategy adoption.
Introducing progressively comprehensive tools and techniques, along with building the capabilities of local management team is the way to go for NRM. Once effectively deployed through a more adept salesforce, such methodologies act as a catalyst for culture change in the organisation, as well as long term sustainability.
The overall aim is to ensure there is greater transparency, control, strategic input and targeting in all the customer / trade expenditure the commercial team makes.
Supply Chain Involvement
Involvement of the Supply Chain function as partners in NRM is very important. The overall cost to serve elements are frequently significant contributors to Gross to Net and some root cause analysis of historical issues, along with optimization of parameters for the future, can lead to a good value opportunity, along with minimization of waste.
Governance Needs To Be ‘Right Sized’
Imagine you are a manager in a multinational Pharma, or Consumer, company. Think of all the justifications you need to provide to different people and build consensus to allow an increase in your team’s headcount. Compare that to the controls and diligence around customer spend, much more significant spend, but significantly less control and oversight – even if it does exist, the expenditure authority is often in the wrong place. Building an effective governance structure around this spend is therefore quite important, as just the right level of internal challenge can lead to opportunity.
Execution And Monitoring
Delivery of NRM outcomes require detailed execution planning, coordination with the various stakeholders involved and monitoring of performance against desired KPI targets. As with the generation of opportunities, execution requires a significant amount of teamwork, the right mindset and a task force like approach to ensure success.
Given today’s market dynamics and pricing pressures, as well as greater availability of customer level data, the time is ripe to build your experience and capability in NRM. Apart from being a source of competitive advantage through delivery of higher sales and profit, you build greater control, compliance and unlock the combined value of your cross functional business team.