Importance of an accurate product pricing strategy

A summary of the views and discussions raised during an exclusive pricing strategy roundtable event hosted by The Manufacturer and revenue & profit realisation company, PROS.

Earlier this year, a select group of non-competing senior decision -makers from across the UK food and consumables sector came together as part of The Manufacturer Director’s Forum to discuss the importance of adopting an accurate product pricing strategy.

An evening of lively debate got underway with Dr Peter Colman – senior director at Simon-Kucher & Partners Strategy and Marketing Consultants – offering an oversight from the firm’s latest Global Pricing Study.

The roundtable participants were not competitors, and though the importance of and challenges surrounding effective pricing strategies were discussed in a general sense, there was no reference to specific examples or individual products within the food and consumables sector.

Conducted every two years, with respondents from over 25 industries, this year’s study found more than 80% of those polled had experienced higher price pressure over the past two years. When asked why, the top three reasons cited included: stronger competition with low-price suppliers (60%), increasing negotiation power among customers (37%), and greater price transparency (34%).

Transparency was an interesting reason, according to Colman, as it’s arguably due to customer consolidation and the rise of price comparison through the internet, rather than the company in question choosing to become more transparent.

Rising prices

Encouragingly, almost two-thirds (61%) of those polled indicated that their company had improved margin percentages in the past year. However, that meant that more than a third (39%) hadn’t. The primary factors cited as to why that was the case included: variable cost inflation offset price increases (32%), no price increases (20%), and shift to a lower margin product mix (19%).

Colman continued by highlighting the clear differences between those companies which manage pricing professionally and/or proactively, and those who conduct it as an afterthought and/or reactively.

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There are clear differences between those companies which have implemented a proactive pricing strategy, and those who continue to act reactively.

When analysed across three metrics, the evidence is profound he noted, “the ‘Best achieved a 27% higher EBITDA margin, a 39% higher average achieved priced price increases, and 33% higher share of successful new product launches.” [The ‘Best’ classification comprised 13% of all companies participating in the study, all of which had made significant investments in improving price management]

The ‘Best in class tend to start a product pricing strategy very early in their product development cycle, Colman reinforced. He added, “TheBestcompanies place higher importance on having the right commercial organisation and support processes and methods in place to proactively steer pricing; however, there is always significant room for improvement.”

Electronic bidding

Following on from Colman, one attendee noted that if a competitor could potentially copy your product with relative ease, then where you initially pitched your product in terms of price was absolutely crucial.

If you started high, then your chances of making a good margin would increase; however too high could be unattractive to a large demographic of customers. This critical decision demonstrates the importance of knowing and understanding your market, both from a company-wide perspective and – arguably more importantly – from within procurement teams.

The emergence of the electronic bidding process was criticised as being unhelpful to companies already combating higher price pressures, with the process enabling bidders to see they are second, without letting them know how far off first they are.

Two issues were highlighted in particular. Firstly, that electronic bidding has only helped hasten the race to the bottom; and secondly, it promotes the idea that there is no differentiation in the market – particularly in relation to commodities.

In the face of such a process, how does one effectively differentiate? What can you offer end-users that no one else is – or can? Increasingly, organisations need to strengthen their value proposition to the market, with a strong emphasis on quality and sustainability – both of which are becoming more important as the concept of the ‘circular economy’ grows in popularity.

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A pricing strategy typically doesn’t come from mid-management, it usually comes from the top down, and its effectiveness relies on robust, clear leadership.

The phrase ‘a rising tide raises all ships’ is particularly relevant to a market segment mired in rock-bottom prices and though it would at first appear to be counter-intuitive, it is possible for the market leader to be price aggressive and to accidently instigate a price war.

Leading from the front

Colman proffered the observation that a pricing strategy typically never comes from mid-management, it usually comes from the top down, and its effectiveness relies on robust, clear leadership.

“Pricing has to be a board-level discussion,” he said. “You can put in a process relating to strategy, but ultimately it comes to down to clear leadership from executives.”

If you are the market leader, your competitors will be waiting for you to and make the first move, therefore, Colman stressed the importance of taking the initiative to increase prices (while adhering to legal guidelines).

“Certain products will never be more than commodities, the end-user of which is only interested in price, so how can you add value and/or differentiate?” one attendee asked. The consensus was that everyone has to do it together, without struggle there is no innovation; so work to make – or force – something to change.

The discussion concluded with some words of advice, namely – try not to judge yourself too harshly against competitors, even if they are leader in your market, as they often have other issues that you are unware of – it is very easy to accidently commoditise yourself.

Others may have the best or most expensive product, but is it consistently delivered on time? Is it supported by exceptional customer service? If not, these could potentially be differentiators your business could look to adopt.

Conclusions

Tim Shorter – VP, Global Sales, Food & Consumables, PROS

The current buying environment has changed significantly, with companies increasingly not receiving credit for the true value of their products and services. This situation is being compounded by many companies employing unreliable growth strategies which fail to deliver consistent results.

In PROS’ more than 30-years of experience, there are three root causes of an unreliable pricing strategy:

  1. Buyers are better informed about market prices and are conditioned to find your bottom price.
  2. Organisations exclusively rely on sellers’ ability to understand customer willingness-to-pay.
  3. Current pricing methods – cost, formulaic pricing, margin goal guardrails, reactive – don’t recognise the unique buying behaviour of individual customers.

Why should you care about pricing optimisation? Each market segment or group has its own behaviour, which willingness-to-pay pricing science attempts to understand.

By employing such science, customer proven results demonstrate gains of 2-3.5% revenue uplift and 10-15% margin growth.

What can companies do? Adopt the following mission statement to achieve defensible winning prices for every customer for every product:

Today: Tomorrow:
Customers have increased negotiation leverage with price transparency. Enable sales and contract teams with detail to defend pricing.
Price-focused customers will not pay for differentiated value. Use micro-segmentation to better fit customer offerings based on willingness-to-pay.
Current metrics reported averages overlooking key details. Pricing-focused metrics uncovered specific improvement opportunities.

For more information, please visit pros.com/industries/food-and-beverage