Why Pricing Matters
Pricing is and will always be the number one lever to drive
profitability for any organization. A 1% improvement in price
far outweighs a 1% improvement in volume, variable cost, or
fixed cost. In fact, McKinsey was able to quantify the impact
of price improvements using the five-year trailing average of
Income Statements on the Global 1,200.
While the order of impact may change from industry to industry
and company to company, pricing will always be critical to
profit and growth. Here are a few secrets we've learned when
it comes to optimizing pricing in the manufacturing industry.
1: Pricing Must Be Data-Driven
One specific pricing problem many organizations are having
is the inability to incorporate external data into their pricing
strategies. Without data pricing, it's really just a guess. As
MIT's Sloan School of Management points out, "Incorporating
external, or third-party, data is an important part of data
analytics programs as companies look for strategic insight
from outside their firms."
For example, if you don't know a customer's willingness to
pay, then you don't know what price point they will accept.
Similarly, if you don't know the fluctuations in supply costs,
then you don't know how to adjust pricing accordingly. If you
don't have a handle on competitor's pricing, then you don't
know if you are priced way too high or low.
Why is external data so important to pricing? Because it can
be used to augment a company's decision-making, better
meet customer needs, more accurately account for supply
A well-structured plan for
using external data can provide
a competitive edge."
and demand, and improve margin and profit, among other
things. McKinsey echoes this sentiment, stating that "a
well-structured plan for using external data can provide a
competitive edge."
It's important to remember here that pricing—and therefore
the data used to determine pricing—is the number one lever
to drive profitability for any organization. Therefore, the kind
of data that goes into making decisions about pricing can
ultimately lead to profit and growth.
2: Pricing Must Be Dynamic
Having the ability to dynamically price in real time is
what can truly set manufacturers apart. After all, delivering
prices or quotes quickly is more important than the actual
price at the end of the day. In fact, providing instantaneous
pricing information has been shown to significantly improve
win rates.
Moreover, in a Hanover study of over 700 procurement
professionals, it was found that over half of those from
companies over $500M would be willing to pay up to 5%
higher prices for instantaneous pricing information.
+8.7%
in operating profits
+5.9%
in operating profit
+2.8%
in operating profit
Fixed costs yield
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Enterprise AI for Industrial Manufacturers
They found that a 1% improvement in:
+1.8%
in operating profit
Volume yields Variable costs yield Price yields
PRO TIP
