- May 2019
Design Your Pricing Process to Boost Your Bottom-Line Profit
Increased performance in pricing directly translates to bottom line growth.
Many companies have realized this and are searching for ways to grow their pricing capabilities. Today, frontrunners achieve more sustainable pricing actions which reduce customer complaints, require less time, and leave long-term growth opportunities unharmed.
1. Review & Plan – Learnings & Opportunities based on smart analytics
First, review the performance of past price increases. To be able to effectively review performance, certain analytics tools need to be consulted. Frequently used is the Price Increase Effectiveness, which provides insights on actually realized increases on net level, regardless of customer changes and product mix effects.
Next, identify pockets of opportunity. Price Spread Analysis within Peer Groups may help you identify customers which are paying below average for their goods or services, as may a Discount Terms Scatter Plot.
Then, combine your learnings based on the various analyses you have run into scenarios. Optimally you utilize a scenario planning tool running on in-memory database technology to do the scenario planning for you. Important: ensure that the tooling fully captures your existing pricing logic. Also, if including several years of past transactions as well as other customer characteristics, machine learning can further help you with supportive guidance to evaluate possible courses of action.
2. Do – Test Implementation and gain confidence
Most likely, recommended scenarios will significantly deviate from your current pricing habits. For instance, price adjustments may be tailored to customer characteristics, and in general a far greater degree of differentiation – both in timing as well as in percentage – may be recommended.
As pricing has severe impact on your business relationships, we recommend starting small to gain confidence with your sales and marketing teams. Run a test implementation and ensure that customer reactions are meticulously noted and benchmarked against typical levels of reaction.
3. Check – Measure Effectiveness
Once the test implementation has been performed, confirm that the results are in line with the desired outcome. Make sure to take a close look at whether the price increase counter-acts potential growth opportunities or harms prospecting activities. Should adjustments be required, then the differentiated price increase approach will allow for quick learning and adaption to effectively improve success rates in the market place.
Thus, deviations from the initial simulation should be fed back to the tooling deployed and considered in subsequent simulations and implementations. This will ensure that learnings are happening at a sufficient rate and that price increases will become increasingly targeted, while reducing the error margin over time.
4. Act – Full Price Increase
Obviously, a differentiated price increase approach requires a redesigned communications process. Hence, before implementing the price increase, ensure that your communications department is up to date, understands the significance of the changes and communicates appropriately.
When implementing differentiated increases, companies will not only consider customer-specific pricing requirements and hence reduce friction and risk with their key customers, but we have also found many companies to eventually move from relatively long update circles (e.g. updating prices once a year) to continuous price updates. This means that reactions on adverse developments such as cost increases can take place immediately, thus reducing margin leakage. Moreover, once implemented a continuous pricing process based on ERP embedded tooling will free up time within pricing departments, which can in turn be spent on value-adding strategic and analytical activities.
Increased performance in pricing directly translates to bottom line growth. Many companies have realized this and are searching for ways to grow their pricing capabilities.May 2019
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