Improving margins through smarter pricing

Originally posted here

For manufacturers, visibility of the elements needed to price products optimally has been relatively blurry, but emerging tools and specialists can change that.

The hospitality and travel sectors may be veteran users of sophisticated pricing tools and techniques, but for many manufacturers, price optimization is a relatively untested concept.

Pricing physical products is often complex, involving more than simply the cost of production – yet it remains a guessing game in many cases, says analyst Pierfrancesco Manenti at IDC Manufacturing Insights.

“For the average manufacturing enterprise, pricing is typically a very operational, internally focused task. The managers who do it tend to be relatively junior and they generally create prices associated with the cost of production.”

The imperatives for taking a more sophisticated approach to pricing are growing, however, thanks to keener competition and tougher economic times. According to Manenti, globalization and the rise of more informed end customers are heaping further pressure on companies to develop their pricing process.

“Manufacturers have become more internationalized, so finding the right price in different countries is extremely important. Consumers are also increasingly using social and mobility apps to get information about products before buying. This is impacting the whole supply chain. The market is moving faster, so companies need to take decisions, in respect to prices, faster.”

Niels Skov, Managing Director for Europe at Model N, which offers price optimization tools and insights to the high-tech and life sciences sectors, says larger firms face further challenges when it comes to getting prices right.

Different departments often take decisions relating to price on promotions and credit and discounts without talking to each other. “In many cases, businesses use a significant number of tools and work processes in their organization of sales, marketing and finance,” says Skov.

“But we often find these tools and processes do not collaborate well in terms of commercial strategy, they don’t share data and operate in silos. It may be that deal-making is not integrated with what’s happening in product marketing or with the finance side in terms of protecting margin.”

This might mean unwittingly charging less than cost for some products. Or some companies may price low in one market and end up jeopardizing margins with customers in others who expect to pay the same rates, says Skov.

In his view, part of the solution lies in aligning all functions relating to price in the way that enterprise resource planning systems help integrate the management of internal and external information in the back offices of large organizations. Skov continues, “Pricing by nature is difficult because of its cross-functional nature. You can’t fix it just using a customer relationship management (CRM) tool, a contract-management tool or a rebate tool. [It’s about aligning] those functions to have a single view of pricing from a single platform with a cross-function and cross-process view of net margin outcomes.”

Manenti believes that manufacturers need to take a more strategic approach to pricing and assign responsibility for it much higher up the organization. “It is still perceived as a non-strategic function, but there should be another function, headed by the CFO, that can take the lead in this respect for all products.”

The article was written by:

Andrew Stone

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