Many companies are losing up to 10 percent of their operating profit because they don’t have the marketplace or competitive and customer insight to use pricing as a competitive weapon. That’s an alarming statistic—but there are exceptions. Some industrial companies are pricing effectively because they know the value of their products and services across different customer markets.
Accenture’s High-Performance Business research shows that companies that practice this value-based approach have achieved pricing power, resulting in higher profits and revenues. Pricing power is underpinned by four essential capabilities that all high-performance industrial companies share:
• Insight into what customers value
• An understanding of the total cost to serve
• Insight into the specifics of their product portfolios
• Organizational rigor.
Gaining insight into what customer’s value is fundamental to achieving pricing power. Not knowing the value that different customers attach to different products and solutions will make it difficult to achieve optimum pricing. Moreover, value—and thus the pricing strategy—may differ from region to region and country to country. Early in a product’s life, value excitement and limited supply may enable a price premium, but that won’t last. The bottom line is that pricing strategies must keep pace with evolving customer values.
Understanding the total cost to serve is the flip side of having customer insight. Costs associated with rebates, promotions, selling, and service and engineering relative to customized products are all components of true cost that easily can be overlooked. Failure to understand true cost will inhibit long-term or usage-based customer deals, so it’s important to develop ways of capturing it. Some companies are doing so.
Manufacturers implementing enterprise resource planning (ERP) packages, for example, now have robust data-gathering systems, which provide the full extent of costs, including customer retention costs by product and across channels. Such knowledge gives companies the ability to determine true profitability per product, per customer.
This is a huge advantage when it comes to gaining insight into the specifics of a product portfolio. The system allows a company’s sales executives to identify precisely which products are selling, which customers are most profitable and how the business is performing in each region.
Growth through mergers and acquisitions has resulted in some companies acquiring competing products and brands. Segmenting product portfolios by profitability and volume will provide the basic analysis to allow identification of these competing products. Enriching segmentation in terms of geographies in which products are sold, types of customers they are sold to, as well as their value propositions, will provide still greater decision-making insight.
Having organizational rigor, including sales discipline and a controlled pricing process, will enable companies to capitalize on all of these insights. Sales discipline requires that sales staffs truly understand and adopt prescribed margin targets. And, to sustain this discipline, staffs should be rewarded for creating more business long-term.
To maintain a controlled pricing process, rules, policies and management commitment are needed to consistently optimize price. This should be combined with an infrastructure that provides a basis of analytical rigor and compliance. Imposing well-defined limits of authority on sales channels and adopting the right material incentives will ensure that pricing policies are well understood and adhered to.
Pricing for profit may seem to be elusive, but it’s plainly within reach—and well worth the effort in the interest of gaining a competitive advantage. Price increases usually reach the bottom line in one piece, while the advantages of lower unit costs or higher sales are diluted. Thus, for a company with 10 percent margins, a 10 percent price increase could produce a 100 percent increase in profit.
Paul Loftus, email@example.com, is North American Practice lead for Accenture, a consulting firm in New York City.