A 2011 Global Pricing Study revealed that Manufacturing ’power pricers’ capture on average 30 percent higher profits than weaker pricing competitors. Whilst this is a compelling reason to want to be a power pricer, the obvious question is, “how do we become one?” This transformation is a journey; the starting position and subsequent stages being as important as the final destination.
Pricing power as defined by Simon-Kucher & Partners – the Global Pricing Study conductor – is ‘the ability of companies to extract the prices they deserve for the value they deliver to customers’. Compared with many other sectors, Manufacturing has a relatively high degree of pricing power, ranking 4th out of 13 in the study, ahead of Energy/Utilities, Retail and Financial Services; Pharmaceuticals came first.
From a value creation perspective, Manufacturing is often innovative, and/or offers attributes not directly comparable or interchangeable with that of competitors. Furthermore, advantageous features such as portfolio breadth, technical advice and delivery reliability help create lock-in and combat commoditisation by low cost importers.
However, it’s important that a manufacturer applies an appropriate amount of effort to value extraction, which is focussed on the right measures at the right time. Compared to volume and cost, price is a Manufacturer’s strongest profit lever, but the flip side is that when poorly applied, it hurts profits more than the other factors.
In practice, this means if a company is in a ‘lower league’ of pricing, it should aim for measures that will take them into the ‘Championship’. Trying to jump straight into the ‘Premier or even the ‘Champions’ League will likely result in implementation failure. The organisation will lack the necessary transparency to spot opportunities, ability to apply sophisticated measures and/or the mindset change required to enforce them.
Consequently, Manufacturers should eschew a ‘one size fits all’ approach in favour of a tailored ‘playbook’ of measures based on their underlying pricing model (e.g. list price/discounts, project/tenders or transactional ‘spot’ pricing etc.). Evolution of a Manufacturer’s pricing competence should progress through four stages:
1. Create the pricing backbone
This stage concerns the pricing foundations of the company and includes measures such as gaining transparency on pricing and sales behaviours, and reducing margin leakage through stricter monitoring and controls. The focus should then be smarter price differentiation along product and customer dimensions.
2. Achieve a value mindset
It is important to ensure your entire commercial function appreciates the impact of price changes on profitability. Measures to create this mindset include providing value argumentation materials, training on negotiation techniques and profit related sales incentives.
3. Extend the price logic
With the foundations and profit culture in place, supplementary pricing measures can be considered, such as pricing maintenance contracts, value added services and spare parts.
4. Become a champion
Mastery of previous stages allows the Manufacturer to select sophisticated measures such as price signalling, bundling and innovative pricing models. This leadership sets the benchmark for the rest of the industry.
To select the appropriate starting point, an objective assessment of pricing competence should be performed. In our experience, few Manufacturers create a suitably robust pricing backbone to provide the foundation for more sophisticated measures. To achieve ‘power pricer’ status, Manufacturers should take a strategic, measured approach. Trying to change everything at once is detrimental to longer term success; focus on tailored measures that suit your company and sector. A company that is a pricing champion in its field can often capture higher profits than the market leader.