Business is certainly no game, but there is room for creativity and experimentation in the pursuit of a winning bottom line.
Let’s face it, the business challenges within distribution are numerous and painful to manage. The increasing number of customers with widely varying buying behaviors make optimal price setting difficult; negotiations with your suppliers can often be tenuous; frequent product cost changes are common and low visibility into supplier incentive programs is enough to keep all of us up at night. And that’s just for starters.
In an attempt to drive growth, most companies rely on the same tried and true playbook – they pick apart cost. Even mildly successful organizations commonly try various tactics to reduce costs and boost efficiencies. And those efforts are an important component of growing the business, certainly. But there is another even more impactful profit lever – price. Unfortunately though, change in this area often comes hard, and for good reason.
Setting the right price is done on the other side of several complex issues. You’re typically dealing with thousands (or millions) of products from hundreds (or more) suppliers that may offer many variations of the same product, good-better-best options, and your own private label options. You’d also like to include service offerings and product bundles where applicable and you deal with a large number of customers that are both national and global in scope and represent multiple industries. There are more contracts than you can count, even more sales reps to manage and rebate programs to track with systems that are disconnected at best. If you’re lucky, you also have transaction volumes that continue to grow.
In addition, you’re also managing digital disruption with customers who expect a multi-channel experience, increased pricing visibility and more manufacturers and customers looking to work direct…and the list goes on. With these challenges and others, it’s no wonder you are tempted to remain satisfied with the little profit you have now rather than risk making a price change with no guaranteed result.
The Benefits of Intelligent Pricing
The benefits of knowing and setting optimal price shouldn’t be ignored. Of the three key profit levers (price, volume, cost) it’s price that can make the largest impact for any organization. In the revised 2010 version of The Pricing Advantage by experts at McKinsey & Company, which analyzed 1,200 large public companies, a 1 percent increase in price levels nets an average of 8.7 percent improvement in profit. Likewise, researchers found a 1 percent reduction in variable costs produces just a 5.9 percent profit improvement.
Additionally, Deloitte researchers looked at 100 different pricing projects in 2012 and found companies employing pricing strategies were able to increase margin benefits equal to an average of 3.2 percent in revenue, and for some industries the percentage was much larger.
Smart price setting may be complex, but it’s a necessity for customer retention & business growth. But how do you set the optimal product price? How can you gain control of your margins and how will you quickly gain price and margin visibility to identify bad deals? Consider these 4 best practices:
Organize for pricing success: First, establish a pricing function by setting up a ‘pricing council’ made up of senior company representatives from cross-functional areas. Set quarterly meetings to ensure pricing strategies align with corporate goals and understand the type of organization you require to support pricing. Typical organizations are below and the most common is the center-led organization.
- Centralized – All pricing analysis and authority goes through a single, central pricing organization.
- Decentralized – Each business, functional, product or geographic unit is responsible for its own pricing without much central coordination.
- Center-led organization – A combination of centralized and decentralized, by which a small central team enforces corporate policies, runs analysis, organizes meetings and supports business units or geographies that retain decision-making authority within predefined guidelines.
Build a Profitability Framework and Utilize a Price Waterfall: Gain a deeper understanding of where profitability gains can be found by institutionalizing the price waterfall concept. With this in place, you can see the profitability levers that make up all transactional adjustments between your starting price and ending point or margin. Your price waterfall should incorporate both your buy side and your sell side for maximum benefits.
Create pricing strategy maps: Pricing strategy maps, created at both the corporate and customer level, are a great visual representation of your pricing strategy that help managers articulate and execute their desired strategies.
Rely on process playbooks: You can ensure consistent, repeatable execution of the above-mentioned pricing strategies with process playbooks, which could cover such topics as account profitability, price increase effectiveness, service cost recovery, rebate evaluation and others. Key elements of a process playbook include:
- Define the pricing challenge;
- Identify and analyze the source of the problem
- Quantify available opportunity
- Execute corrective action
- Monitor and measure effectiveness