Boost Profits in a Downturn: Use the Pricing Lever

 Email Article  

Tweet  

  

  

  

 delicious  

  

In a volatile economy, companies can no longer rely on cost reductions or increased sales to improve profit margins. Instead they must turn to the most influential and yet overlooked lever: price management. By undertaking a well-conceived price initiative, firms can realize value rapidly. Many organizations can see a profit improvement of up to 1% of sales ($10 million in profits for every $1 billion in sales) in four to six months.

Here are five pricing strategies to help you weather the economic storm.

• Improve Price Responsiveness

When faced with unstable conditions (fluctuating raw material and energy costs; frequent competitor price changes), companies must respond promptly by fine-tuning their pricing, for products and services, to align them with prevailing conditions. Equally important, companies must communicate with sales reps, partners, and distributors in a timely manner-arming them with the pricing information they need to compete effectively.

• Address Low-Margin Business

Transaction-level pricing analysis is more useful than that done in aggregate (e.g., divisional, regional, product or channel level) since they can help identify low-margin customers and deals (with their associated root cause(s)). These analyses enable organizations to determine whether certain deals make strategic sense, despite their low profitability, or whether corrective action is needed.

• Tighten Cost-to-Serve Recovery
  

Many firms fail to recoup cost-to-serve items from customers (e.g., freight surcharges for expedited shipping and product support), thereby eroding margins unnecessarily. Companies need to ensure appropriate cost-to-serve recovery from customers designated as "opportunistic," while continuing to serve effectively those identified as "strategic."

• Set Granular Pricing
  

Buyers across a company's customer base value products differently. Rather than cutting prices uniformly (and reducing profits by ignoring the varying "willingness to pay" of customers), firms should identify fine-grained segments based on relevant attributes. Optimal price and negotiation guidelines should be set which take into account each segment's Pricing Power (unrealized ability to change prices) and Pricing Risk (the measure of what is at stake for the business).

• Control "Maverick" Selling
  

Bad revenue results from low- or negative-margin business and often reflects "maverick" selling by sales reps and channel partners. Firms should tighten guidelines by establishing target prices, approval levels and floors to increase the consistency of negotiations. This will control maverick selling and improve margins and price realization by 9% in under a year. One industrial manufacturer was able to increase price realization by combining an effective pricing strategy with the right price management and price optimization software.

Companies that elevate pricing from a tactical lever to a strategic one will reap tremendous benefits, ultimately emerging stronger and more profitable than their competitors.