Improved Pricing – the Quickest Way to Bottom Line Improvement

Improved Pricing – the Quickest Way to Bottom Line Improvement

 

Inflation, uncertain supply chains, exchange rate volatility, rising interest rates, shifting fiscal and economic policy driven by political instability – all of these lead to stress on margins, working capital and cash. We are now living in a world that is radically different from the relatively benign trading environment of predictable input costs and stable prices.

In this environment, businesses need the right tools to anticipate and react to changes quickly and efficiently. The fastest route to addressing inflation is through having a robust pricing strategies. A recent BDO survey of manufacturers reflects the pressure to address pricing, with over 59% of respondents expecting to go through price increases for the second time this calendar year.

In recent meetings with senior leadership teams, this issue has come to the fore, especially as businesses are looking to forecast and plan their future performance. Typical questions are:

  • How can we maintain or increase our gross margin?
  • Is our business strategy aligned with our pricing strategy?
  • Is the true value of our products and services mirrored in the prices we achieve?
  • Are we able to articulate the value of our competitive differentiation?
  • How do we address long term contracts that tie us in to an existing pricing regime?
  • How do we improve the price on existing contracts?
  • What contractual mechanisms exist to reflect ongoing volatility?
  • How do we plan, engage and negotiate price increases?

In this blog, we will explore a few of these critical areas:

1. The benefits of market segmentation

There is significant opportunity to improve margins through pricing if you are clear on your objectives. Are you looking to increase revenue, gain market share or improve margin? Many of our clients are considering entering into a sales process in the future, with focus being on increasing EBITDA and therefore valuation.

We typically find that 80% of profitability is driven by only 20% of the client base, so understanding which clients to focus on is critical, especially when there are capacity constraints. Going back to basics, it is important to understand how to segment your client basis, and the criteria to use:

  • Are they strategically important to your business?
  • Are you strategically important to them?
  • How profitable are they?
  • Who is your competition and how are you differentiated?
  • How strong are your client relationships?

Is there a procurement function running any buying processes? How hard or easy are they to work with?

  • How aware are you of the client’s decision-making process?
  • What additional opportunities may exist?

This process not only provides a shared understanding of where opportunities exist for improving prices, but also helps to drive alignment across the business.

2. Value Based Pricing

Value Based Pricing focuses on quantifiable financial benefits that your products and services provide to your clients. These may differ by market segment, and the level of competition that you face. Something that you may think has limited value based on its cost may actually have a huge impact on improving the profitability or reducing the risk for your client.

Applying this approach can improve margins by looking at the intrinsic value that you deliver, rather than pricing with reference to costs. For example, a client who provided a solution to improve the uptime of refractory kilns found that the cost of the solution was similar to inferior competitive solutions, but the benefits and attributes were not reflected in the price. We worked with them to define the financial benefit of this improved uptime. The value turned out to be massively higher than the competition, and through defining and quantifying these benefits, we were able to increase pricing five-fold.

3. Making optimal use of discounts and promotions

Economic downturns also tend to bring discounting to the fore of pricing decisions – should we discount, how much by, how long for, and to whom should discounts be offered? These questions arise in context of reduced marketing budgets, making each decision more significant.

The good news is that advances in methods, technology and data have created an opportunity to better understand:

  • Price responsiveness of demand, differentiated by product and customer characteristics, to inform the level of discounts
  • Individual customer value to inform targeting of discounts
  • Recent customer behavioural data to better time discounts prior to purchase

It is worth putting in the data and modelling effort to inform discounting. For example, one study found that the benefit generated from a fixed marketing budget increases by 18-40 percent when optimising timing and value of discounts, relative to just optimising the value.

4. RFP process and negotiations

If your business frequently interacts with procurement processes, including Request For Proposals (RFPs),understanding how RFP’s are developed, how they are assessed, who the key stakeholders are and what they are seeking can ensure that you are in the best possible position to successfully win work. Our advice is to agree an appropriate negotiations strategy early, including clearly defining your best and least acceptable outcomes. Early planning also allows you to identify and communicate with key influencers in the design of the RFP so when it lands on your desk, you are prepared and have clear roles and responsibilities within your team.

There are many areas where you can improve your pricing and negotiations strategies to truly maximise the value that can be achieved for your business. For more information, download our brochure, or contact Richard Austin, Jyrki Kolsi or Ross McWhir.

 

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