Failing to keep up with a rising interest in pricing strategy will leave manufacturers sidelined as commoditised suppliers with eroding margins says Niels Skov, managing director, Europe at revenue management solutions provider Model N.
In today’s manufacturing businesses, optimising supply chain and production processes are recognised as strategic issues which for some time have been firmly established on the boardroom agenda. By contrast, until recently, pricing and profit processes have been among the least automated across manufacturing industry, with little or no visibility at C-level.
Spread sheets, word documents and even pen and paper have remained dominant, with rudimentary management, oversight and execution of pricing plans and policies. As a result, it has not been unknown for sales staff in large multi-national businesses to casually offer discounts which have severely eroded margins.
This has not only pushed individual customer profitability unwittingly below target but in the worst cases has resulted in net losses – potentially catastrophic in highly-competitive industries such as fast moving consumer goods where standard operating margins are tight.
However, as the latest European Pricing Platform’s Pricing and Profit Optimisation Forum held recently in Cologne highlighted, the importance of optimising pricing and profitability strategies is undergoing a radical reappraisal. Attendances were up 60% on the previous year, including a higher proportion of director-level attendees with direct responsibility for pricing issues.
Much of the conference debate centred on how to get key departments to provide the necessary visibility for senior management to take control. This represents a fundamental shift for many businesses and demands board-level sponsorship. But for those successfully undertaking such transformational change, the rewards are proving immense.
This was emphasised by the findings of a survey of attendees, which showed that more than one quarter (27%) believed greater oversight at senior level – getting pricing on the CEO’s/CFO’s agenda – would ensure corporate performance was both more competent and effective.
This was reinforced by the further finding that almost one half (46%) of respondents believed such improvement also required a structured and co-ordinated pricing team, an initiative which can only be effective with board-level sponsorship.
There is another dimension here. Many of the manufacturing businesses attending the Forum operate an indirect sales model and much discussion took place around how to own and drive different aspects of pricing execution in a way which enables distribution partners to become true value-added resellers rather than simple box-shifting logistics companies. By enabling collaboration in demand generation through more effective management and incentivisation, this is providing the basis for mutually-profitable, long-term relationships.
The question is no longer one of “is it important?” but “how do we do it?”
In response, one of the key fundamentals is to work with good quality data. Across business departments, there is a tendency for isolated, self-optimised islands to appear in the absence of consistent processes or support tools.
This can result in momentum for change – but too often in the wrong direction. Centralising the process of setting and executing a pricing and profit strategy demands a re-design and re-engineering of their business processes.
For many businesses facing this challenge, a good place to start is to achieve the necessary degree of control. This means putting the right technology in place as part of a defined process to record all aspects of pricing transactions.
Not only will this guarantee full auditability, it will provide control and consistency over rebates, free goods, discounts and other aspects of pricing. By connecting this with customer and product master data, a company can ensure visibility and traceability for every pricing deal.
Typically, this will require a change of behaviour and mindset throughout key departments. A systematic approach is needed to help staff move away from instinctively thinking about discounts to how to ensure the delivery of value added services in creating mutually beneficial deals. This requires pricing teams to take a strategic view of how customers define value and how as providers they can deliver it in a way that makes commercial sense.
Enabling a pricing team to think in this way relies on building an in-depth understanding of how each customer is trying to secure competitive advantage and then providing one or more of the key components in achieving this goal. Ideally you should aim to make your products and services embedded and indispensible in realising competitive advantage as perceived by the customer. Become a strategic partner.
The increasingly stark alternative is to go down the road of discounts and rebates, eroding margin as a commoditised supplier, offering little or no real differentiation.
Revenue management sits at the heart of delivering a strategic approach to pricing and profit control. It is already firmly established in the airline and hotel management industries and is becoming a competitive ‘must have’ capability in high tech and life sciences.
Businesses are becoming aware of how lack of control can impact badly on profitability, market capitalisation and shareholder value.