Achieving a sustainable pricing advantage is becoming progressively difficult, yet increasingly more important as global economic pressures, depleting resources and raw materials, energy price volatility, and regional anomalies cause major shifts in the value chain economics across all industries.
The problem is that mastering a sustainable pricing strategy to achieve competitive differentiation requires any organization to adopt a dynamic and integrated approach. However, the complexities of this concept force some two-thirds of all manufacturers to cling to a cost-plus strategy, despite its well-known shortcomings as a reactive posture that leaves money on the table and ignores market and customer dynamics.
Moving away from a cost-plus strategy to an integrated approach requires cultural change—an organization must be ready to let go of old, familiar practices and embrace more complex processes. Companies that have successfully transitioned away from a cost-plus pricing blueprint, have done so by executing the following three key steps:
- 1. Establish a robust database comprising data on market demand, capacity, price elasticity, product substitution, switching costs, customer and product profitability, as well as quantifiable insights on what your customers value. This solid baseline of validated market data will enable you to optimize the pricing of your product and/or service offering, based on internal and external demand drivers.
- 2. Clearly define pricing ownership, and expand beyond the top management team to include broader institutional input, and ensure that competitive value offerings and segment positioning are included as part of the pricing strategy.
- 3. Develop or procure a predictive model that enables you to leverage near-real-time known market data to adjust pricing, based on ever-changing critical factors. An effective statistical algorithm paired with an inherent knowledge of the market can give your organization a competitive advantage to stay ahead of the market with a proactive, intelligent pricing response.
Companies that have realized a sustainable, fully integrated, world-class pricing competency can accelerate improvement in many other important areas, including route-to-market channel optimization, key sales account planning, management and customer contract negotiations, Sales and Operations Business Planning, and product portfolio management. Although challenging, a number of companies have been successful with an integrated pricing strategy, including:
- BP, which takes integrated pricing competencies to its customers via risk management strategies, to better equip them to manage volatile energy pricing. For example, BP helps customers manage their portfolio mix to take advantage of a declining energy price market, or to set a cap in a rising market.
- Dell, which uses supply chain and customer demand visibility to frequently adjust prices on its high-end personal computers. Based on supply chain knowledge and information gleaned from visitors to its website, Dell can predict near-term sales and adjust pricing to maximize revenues, as well as temper demand to avoid over-extending its supply chain.
- Dow Chemical, which has adopted a proactive pricing and margin management approach. It’s pricing team first works with each business over a period of more than 12 to 16 weeks to conduct a pricing assessment, and thereafter, establish a system. Once the pricing management tools are in place, the most important part of the process occurs: the pricing team sits downs with the business to make sure that they understand what to look out for and how to respond effectively.
The ability to dynamically, aggressively, and proactively adjust pricing as a part of the corporate strategy will result in optimizing top-line performance, and can also provide the data needed to support fixing previously “unfixable” problems including:
- Low-contribution customers and products
- Profit leakage points and inconsistencies
- Dissonance in pricing and/or profitability against segmentation criteria, regional differences, account size, and volume differences
Ultimately, the most compelling reason to adopt an integrated pricing strategy is quite simple: it is proven to deliver at least a 2% to 3% year-over-year increase in operating margins—a huge pay off for any company.
