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.
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.
By understanding brand perception, application, competitive pricing and a multitude of other factors, companies can identify, rank and take advantage of opportunities to make a major impact on product line profitability.
3. Drive Profitable Pricing Decisions with Harmonized Execution and Performance Management.
For B2B manufacturers, the best pricing strategy is worth nothing if it is not executed with discipline. Empowered, centralized corporate governance is key in controlling how products are priced and at what price products are ultimately sold.
Let's look at another example of a world-leading chemicals company and large SAP user with 150 subsidiaries and customers in 200 countries. Because inconsistent internal processes can cause your sales reps to work against pricing policy best practices, it is critical to utilize the same criteria, or pricing methods, to ensure that all products are priced uniformly. In this case, guiding the sales force to acceptable levels of contribution was critical, while a strict adherence to approval workflows removed any chance of sales reps making agreements outside parameters. Some of the most advanced companies are empowering their sales reps to complete deal approvals via BlackBerry to make adherence even easier. Without aligned field sales policies and a common set of deal evaluation criteria for all customers and contracts, non-compliant invoices are routinely approved.
Performance management is an additional way to look at governance. Once pricing methods and defined deal approvals are created, companies need to establish new key performance indicators and sales compensation plans. The old clich what gets measured gets managed" holds true in pricing. When profitability and market share maximization become the enterprise measure of success, companies will require automated deal scoring, deal management and other fundamental changes as the critical measurements of organizational success evolve. Sales reps are competitive, so play into their nature. Peer performance metrics have been proven to support adoption of best practices in pricing with incredible results.
Warren Buffett once remarked, "Only when the tide goes out do you discover who's been swimming naked." For those B2B manufacturing, distribution and services firms that are not investing in advanced price optimization capabilities, be warned -- the tide is out. In good times, everyone does well, but the tough times provide the greatest opportunity to expand your lead. Take these three bold steps this year and you'll be rewarded.
Doug Fuehne is vice president of professional services at PROS, a leading provider of pricing and margin optimization software products, specializing in price analytics, price execution and price optimization. PROS (NYSE: PRO) -- Pricing Management & Optimization Software -- www.prospricing.com.