Over the last 10 years or so the importance of pricing as a strategic function and a contributor to the bottom line has become part of the strategic direction of many companies.
Pricing is becoming more complicated for most organizations. While 15, or even 10 years ago, the purpose and value of pricing functions was still being understood and companies that placed a bet on the importance to drive bottom line improvements through pricing had some key commercial advantages. The reality today is most organizations are fighting to control the areas of opportunity they can capture related to the value they bring to the table and stay on top of the competition.
Typical strategies are still being used and the challenge today is to systematize and scale the operations of teams managing pricing catalogs and price lists into the market across a wide range of channels.
Everyone has heard and experienced how simple strategies, such as cost-plus or index-based pricing, can become hard to execute at scale when critical pieces within the process are disconnected (both systems and people) and collaboration is limited.
And yet many of the organizations out there still rely on these approaches to pricing.
In 2024, and moving forward, there will be two types of organizations when it comes to pricing:
- Those that keep using the same strategies and face the same challenges with only incremental changes to their operation.
- Those that learn and implement ways to refine the data, improve reliability, forecasting and the impact of their pricing decisions.
Here, I will share the top 5 most common strategies for manufacturing companies and ways that these can be refined to improve outcomes.
1. Cost-Plus
In my experience, this is one of the simplest ways to leverage collaboration in an organization and get some easy wins. In most cases a lack of visibility into cost projections can spell doom to the pricing organization. It is one of the most common challenges I've encountered in the field.
Some of the ways that this strategy can be improved include:
Refining costing techniques
- Invest in better understanding, spend in raw material and establish connections with teams managing promotions and incentives from vendors. I've seen companies really drive margin gains without having to cut costs but simply applying and motivating vendors to create rebate programs that incentivize better inventory on both sides.
Dynamic markup strategies
- After talking with many organizations that operate under a cost-plus approach and talking about the concept of price differentiation they immediately realize the value of setting up markups that better reflect the willingness to pay of varying market segments. There is no need to have or want to have a one-size-fits-all approach.
2. Competitive Indexing
The easiest way to implement this strategy still requires a significant amount of work to collect information that would support this approach. In reality, the most common failure mode is ensuring the correct competitive data is identified and can be obtained
Some recommendations to improve the effectiveness of this strategy include:
Market Intelligence
- The term sounds daunting and thinking about spending money on tools and services can quickly discourage this approach. But it doesn't have to be that way, I've talked with companies that have everything they need to improve their understanding of the competition; in many cases the same sales force in the field will have access to what their customers are buying and paying the competition. It is in their best interest to motivate companies to present valuable offers to the market.
Segmentation
- Know thy market I say; the worst thing a company can do with their products is to offer the same value across all segments. Clearly understanding the willingness to pay and the value offered for specific market segments will help in price setting and margin realization but also in avoiding creating offerings (products) with higher value and a lower price than needed.
3. Dynamic Pricing
In boxing there's the concept of whoever hits first will hit twice, same here, we want to be aware of the conditions in the market that could dictate a need to adjust prices. If we are the first, there's a better chance to hit back at the competition. One of the risks with this approach though, is a potential perception in the market of price unfairness or inconsistency. Additionally it is an approach that puts some strain in B2B operations as customers can't fully rely on cost projections.
To improve dynamic pricing approaches, companies should consider:
Advanced Data Analytics
- I am not talking about fancier excel charts, this is about setting up tools that provide real-time visibility into the market to facilitate a more predictive approach to pricing.
CRM Data Utilization
- It is truly sad how many organizations do not leverage the massive amount of data they have at their fingertips. Incorporating customer relationship data to refine pricing strategies and analyzing purchase history and preferences helps tailor prices to customer segments, improving satisfaction while maximizing revenue. This approach ensures dynamic pricing is both responsive and personalized.
4. Attribute Based Pricing
For this strategy the prices of products are based on key attributes that allow for differentiation within the same product line. These attributes typically represent options of value to the end customer. The most common challenge is identifying the right attributes and how much they are worth for different customer segments.
Ways to improve this strategy can include:
Attribute Value Analysis
- Conducting market research to help identify which attributes are most representative of the value proposition for different customer segments.
Dynamic Attribute Pricing
- This is a bit of a combination with Dynamic Pricing in the sense that it not only adjusts the way attributes affect price but also the selection of the attributes affecting price (i.e. seasonality).
5. Value Based Pricing
One of the most challenging strategies is to set prices based on the overall perceived value to the customer rather than the cost of production. The ability to assess and quantify value can be difficult and to be able to do it at scale can prove an important challenge.
Methods to improve the effectiveness of this strategy would include:
Customer Feedback Analysis
- Engaging directly with customers to collect their feedback as well as market research to better understand the value customers place on different product features and benefits.
Competitor Value Analysis
- Value is always relative to the next best alternative in the market, therefore it is important to have that level of insight to be able to better assess the differential value driven to the customer compared to the alternatives they have access to
Jose Paez is the director of solution strategy at Pricefx.Pricefx
Companies should consider implementing systems and tools that support efficiency but also reap benefits from automation and better visibility.
