Building Better Margins: Mastering the Blueprint for Success in Building Materials

Recently, we shared an article from McKinsey discussing challenges within the building-materials sector and how agile margin management can assist companies in the industry protect profitability. In this article we will share how companies can use the PROS platform to address the “five elements of agile margin management” discussed in the McKinsey article:

1. Create full margin transparency.
   McKinsey article: “Today, many building materials manufacturers don’t have a clear view into the drivers of profitability and potential margin leaks. This is partly because the sales function is often disconnected from other functions”
   
   So how do you ensure that the sales function is not disconnected from other functions? In my experience, sales reps are not actively trying to be disconnected, but they do not want to spend too much time on ‘being inwards connected’, i.e. trying to locate and find the right information.
   Imagine if the Sales Reps have the following at their fingertips:
   • The ability to understand the full impact of discounts, rebates, and cost to serve.
   • The ability to create different scenarios and be able to compare the expected results.
   • The ability to understand when an offering needs approval and when it is OK to proceed.
   • The ability to use forecasted costs instead of historical costs, in order to have a better view on what the profitability actually is going to be at different price points
   PROS Smart CPQ provides all these capabilities, and more.
    
2. Use agile price setting to adjust to cost changes
   McKinsey article: “More generally, outperformers adopt agile price-setting practices to be able to react quickly and adjust their prices when the market situation changes.”
   
   The McKinsey article mentions an example where a company used “systematic data collection and analysis” to detect and counteract cost-induced margin leakage. I don’t doubt that this is a good enough approach for many companies. However, for companies with extensive product lines, implementing new prices across the entire range can still present challenges.
   
   If you only look at cost you might not have the right competitive positioning, not the right value perceived by the market, or the price change might be too steep and will irritate customers. Excel is a great tool, but sometimes it is not enough, and you need a dedicated pricing solution.
   
   PROS provides a solution which enables companies to execute price updates quickly and accurately. You can read more about PROS Smart Price & Optimization Management solution here, or why not look at a video showcasing how you can use PROS to update prices based on market indices.
    
3. Introduced value-based pricing for added services
   McKinsey article: “Effectively, building materials manufacturers must make a deliberate decision about which services to offer for a surcharge, for free, or at all.”
   
   It can be very hard for a company to start charging for a service which have been provided free-of-charge in the past, especially if the products are standard and the competition is not charging for the same services.
   
   If you do decide to start charging for services, it will be important that the sales function is properly trained and will have access to available services when quoting or negotiating with customers. The answer is not to have a document on Sharepoint, but to have them at the sales reps’ fingertips when they are needed, especially if there are different service catalogs available for different types of customers.
   
   PROS Smart CPQ solution guides your sales reps to quote the right services at the right price levels. If you decide not to charge for your services, it is still a good idea to understand what these services are costing you and which customers are benefitting the most. Even if you do not charge for services, you can use this information in negotiations with customers, and ensure that customers that do get unproportionally many free-of-charge services should not also get unproportionate discounts and/or rebates.
    
4. Establish a coherent scheme
   McKinsey article: “One of the most powerful tools to ensure agile margin management is the microsegmentation of customers to determine the value created for each customer.”
   
   Microsegmentation used to be a powerful tool for agile margin management, but not anymore. It was better than “nothing at all”, but there has always been known constraints such as difficulties in handling sparse data and static segments that did not work well for all cases. However, now there are new approaches available which generates better recommendations, leading to better prices and higher margins.
   
   To learn more, I highly recommend this webinar held by my colleague Dominic O’Reagan on this topic.
    
5. Invest in state-of-the-art tools and capabilities
   McKinsey article: “To enable agile margin management, building materials players should invest in capability building and the right tools for the job:
   • Margin management tools to identify margin volatility and derive customer value with a mix of central steering and local autonomy, including support for e-commerce, to help building materials players react fast without extensive regular analysis effort.
   • Quoting tools, so sales teams can make fast decisions in the field by having the right quoting options and respective margins at their fingertips.
   • Performance management tools to monitor margin execution over time, to assess mitigation needs, and to identify priorities.”

While I may disagree with the McKinsey article on point 4, I wholeheartedly agree with them on this topic.

State-of-the-art tools and capabilities ….it is music to my ears. Can you also hear it? If you remain unconvinced, consider a study by Forrester, revealing that organizations faced challenges with slow, manual pricing processes and lacked essential data and analytical capabilities. However, after adopting PROS solutions, customers witnessed remarkable boosts in profit and revenue.

If you're interested in exploring how PROS can elevate your company's performance, don't hesitate to reach out for a discussion!