In our recent study commissioned by Hanover Research, we found that maintaining competitive market pricing is one of the top challenges that manufacturers face today.
A huge component in figuring out competitive pricing is understanding market conditions. For example, in the manufacturing industry, it’s difficult to keep up with the fluctuating prices of raw materials and anticipate future market conditions.
That’s because — as manufacturers know all too well — the commodities they use to produce their products (such as metal, cables, wires, resin, etc.) constantly fluctuate due to changes in supply and demand in the market. Therefore, it’s key for manufacturers to understand and stay ahead of these constantly changing costs to ensure they’re able to compete in the marketplace and to achieve profit and margin goals.
The Pricing Problem
For decades, manufacturers have relied on cost plus pricing as their method of determining prices for the products they produce. This method involves the calculation of production costs, coupled with the desired profit margin you hope to receive for your product. Using this method as your pricing strategy requires very little market research and doesn’t account for changing consumer demands or the end user’s willingness to pay.
Furthermore, manufacturers must consider other factors, such as commodity pricing when determining their MSRP. This means they take the steel, aluminum, or resin index, for example, and incorporate these prices into their bill of materials (BOM). In other words, they set their price based on what commodities are needed to build the final product.
However, due to the degree of volatility in the commodities market and because they are so tied to these indices, it’s extremely difficult for manufacturers to set their prices. What does that mean? They need price list management in order to keep up with the indices and change their pricing in a quicker and more efficient manner.
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. They found that a 1% improvement in:
- Price yields an 8.7% increase in operating profits
- Variable costs yield a 5.9% increase in operating profit
- Volume yields a 2.8% increase in operating profit
- Fixed costs yield a 1.8% improvement in operating profit
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.
Secret 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 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.
Secret 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.
This isn’t even to mention that dynamic pricing allows you to respond quicker to the market during times of volatility, allowing you to update price lists quickly and be proactive instead of reactive.
Secret 3: Pricing Must Be Profitable
Don’t be so quick to drop prices below those of your competitor’s. Firstly, because of the tremendous leverage pricing has on profitability, it is very rare that lowering prices by itself can generate enough extra demand to achieve incremental profits from such a move. A company with 10% profitability must get better than a 10% increase in volume to offset just a 1% decrease in price. Imagine how much volume must be recovered to offset a 5% decrease in price. In short, lowering prices is typically not a recipe for improved profitability. Secondly, as stated above, customers don’t only buy on price. Aside from the speed of the quote, quality, service, selection, availability, ease of doing business, reputation, trust, and support typically rise to the top when customers make their decisions on with whom they will do business.
It's time to move away from cost plus pricing and manual, error-prone processes such as Excel and ERPs that leak revenue. Now’s the time to turn to technology like price optimization and management (PO&M) software that can help you drive profitable growth.
An AI-backed profit optimization platform can allow your organization to efficiently manage and optimize the price of its goods and services. Not only does it offer sales intelligence advice such as best-next-action recommendations and customer churn warnings, but it also incorporates the latest market information, delivering informed, dynamic, and personalized pricing decisions to buyers across both traditional and digital channels. Ultimately, it can accelerate pricing processes while increasing margins and protecting price attainment.
Achieve Competitive Pricing with PROS
Thankfully, PROS can help manufacturers solve the pricing problem through our PROS Smart Price Optimization and Management. We provide your organization with insights and analytics so that you can act proactively to fluctuating market conditions, quickly respond to competitive pressure, and have visibility into pricing and profitability at all times.
With PROS, you can deliver instant, personalized prices tailored for every unique buying and selling interaction and coordinated with all your go-to-market channels. This market-based pricing system is responsive to multiple changes, including those pertaining to:
- Supply and demand
- Customer tier
- BU strategy
- Customer behavior
- And other attributes
Essentially, PROS can incorporate external data feeds into pricing formulas to help predict the changes of supply and demand, giving you an accurate price every time. This helps keep your pricing competitive no matter what the market conditions are. In fact, the PROS solution identified $5-6 million in pricing improvements for one customer in the first 28 days of implementation.
Ready to learn more about how PROS can help your business develop impactful pricing strategies with cutting-edge AI?
- More about PROS Smart Price Optimization & Management
- How PROS Solves Your Manufacturing Challenges
- 4 Lessons Learned from 30 Years in the Pricing Industry | PROS
If you want to talk more about pricing strategy, reach out to us here!
Keep an eye out for the next post in our Digital Imperative in Manufacturing series in which we’ll discuss how to set a new standard for your selling strategy.