The Power of 1%
With intelligent & structured pricing approach B2B companies can control & reduce margin leakages
Numerous articles and studies have come to the same conclusion on pricing that "1% improvement in pricing can deliver upto 10-15% impact of profitability". If one ever gets to discuss this finding with the Chief Marketing or Sales, one is bound to hear the long list of constraints & market challenges they have faced in increasing prices and how they are stuck with commodity products for which the pricing is market determined and there is very little or nothing in control of the sales/marketing team.
While some of these constraints could be true, the fact remains that the 1% rule is not only about increasing pricing but about controlling the variation in pricing of products types, order quantities, SKU's, customer segments, payment terms etc.
Complexity of Pricing
Pricing is complex, not due to market factor but also due to internal complexity & product structure. Even for a medium sized B2B organisation the complexity will involve product types X routes X SKU X order quantities X customer segments X raw material types X raw material costs X route to market X discount structure payments terms etc.
These combination could run into thousands or even millions and to ensure that pricing rules are maintained across all combinations is quite a task and requires advanced IT systems. Despite these challenges, companies can adopt a few simple steps to control pricing leakages
Simple not simplistic approaches holds the key
Leonardo da Vinci had said; Simplicity is the ultimate sophistication and that holds true for Pricing structures & rules. To clarify, Simplicity is being simple after knowing and it assumes it knows without actually bothering to take the time to understand. On the contrary 'Simple solution' understands the deep issues of the problem and finds the simplest way out of it.
Given the fact that B2B customers expect pricing instantaneously even for a 'made to order' product, the pricing logic has to be simple and yet accurate & easy to use for the people who are front ending with the customer.
B2B companies trying to improve pricing can keep the following aspects in mind while implementing pricing models, rules & governance
a) Cost plus based pricing is often the most adopted and simple approach however its a costing led approach which ensures that all costs are covered along with the expected margin. While this approach ensures that there is no downside, it falls short to address the dynamics of capacity constraints, customer segments, order quantities, downgrades etc. It also falls short of providing options on how with better order conditions-like run lengths, item quantities the pricing can be made favourable and win-win for both parties.
b) Continuously evaluating the product portfolio to identify "value destroyers" will help in reducing the overall pricing leakage. B2B manufacturers also need to analyse the' bundle/basket orders' and intelligently price the products to make the overall 'deal' profitable instead of only focusing on the product/SKU margins. Needless to add, Sales & marketing efforts needs to be place to keep moving into newer & more profitable segments else only a pricing optimisation exercise may not yield much results
c) Having a dedicated "pricing desk" to ensure that larger deals are critically analysed for go/no-go decisions will help companies immensely. Too often one finds that the marketing/sales team or leadership positions taking pricing decisions which simply for lack of time might be leading to lack of adequate focus on the critical aspects of pricing.
d) While the focus is on pricing products in the right manner, the reporting and analytics of the outcomes are even more critical. Ideally the report should provide a balanced view of the 'gains' and 'losses' from the pricing actions and help the management identify issues at product & customer profitability level as well.
To summarise, given the gains Pricing can bring, companies needs to start adopting standardised methods, rules & governance and most importantly instead of pursuing the objective of increasing prices the effort needs to be on controlling the variations and taking control of "value destroyers" in a timely manner.