After a year of cutbacks, organizations can no longer shrink their way to profitability. So the question remains how can a manufacturer put itself ahead of the competition? One way is by focusing on three key areas of pricing. Profitability improvements from pricing depend on investing in strategies and tools to examine, rationalize and enforce pricing policies and best practices. The companies that focus on these three key pricing areas will be well rewarded with improved revenue, margin and market share.

1. Find and Correct Low-Margin Outliers.

Trying to gain visibility into corporate profitability can be like looking for a needle in the IT haystack. Multiple systems contain a surfeit of data, which is required to truly see all the elements that take you from list price to pocket margin. And even when you track down all of this data, quickly and easily finding areas for operational improvement is no trivial task. This step is often called picking the "low-hanging fruit." Yet, without a systematic approach, this ordinarily easily achievable success can seem unreachable for most companies.

For one global office products company, the implementation of a pricing system revealed a $10,000-per-month loss from a single customer that was inadvertently receiving pricing rebates in direct contradiction to company policy. This particular profit leak had already cost the company $90,000, but catching it with 27 months to go on the contract avoided a further $270,000 profit loss. This simple example shows how powerful apples-to-apples profitability comparisons can be to uncover profit leaks caused by contracts, deals, regions and even sales reps. A lack of visibility into the levers that impact profitability makes it impossible to find and correct profit leaks that can easily cost tens of millions of dollars each year. Software that focuses on profitability management and optimization can take the guesswork out of this first step and set the stage for future successes.

2. Identify, Rank and Attack Opportunities.

It's hard to know where to start. The companies that most benefit from formalized pricing strategies are those that have tens of thousands of SKUs, millions of transactions and large data volumes. Pricing in that kind of environment can feel like playing cards in Las Vegas. You might win a hand every now and again, but the odds are stacked against you. Starting a pricing-based profitability improvement program is critical to shift the odds entirely in your favor.

By knowing the application of a part, companies can identify a customer's "willingness to pay" and make pricing decisions accordingly. -- Doug Fuehne, vice president of professional services, PROS

In the case of a major global automotive parts manufacturer, effectively integrating competitive data was the first step in its plan to "beat the house." With this data available in a pricing context, this parts company analyzed its prices relative to the competition and saw a ranked view of margin improvement opportunities by part number. Identifying targets for margin opportunity allowed the manufacturer's pricing team to quickly adjust individual parts prices to bring them in line with both margin-optimized and competitive prices, increasing revenue by more than $5 million in a matter of weeks.

Consider the difference between classic car parts versus late-model service parts. By knowing a part's application and its potential customer's willingness to pay, a different pricing decision might be made. While the exhaust for a late-model family car and a classic hot rod could both be segmented into the same pricing strategy, this would be a gross miscalculation. When taking a closer look at the customer segments, the classic car enthusiast has a greater incentive to purchase the part regardless of price, whereas the owner of the late-model vehicle may be more interested in an inexpensive fix with an aftermarket brand. By knowing the application of a part, companies can identify a customer's "willingness to pay" and make pricing decisions accordingly.

View article on one page