Pricing is a critical lever that can have an immediate impact
Is your supply chain disrupted? Are you losing customers? Are you experiencing labor shortages? Is revenue and profit below 2019 levels? Is inflation causing costs increases? In conversations with multiple manufacturing executives, the answer is a resounding ‘yes’ across the board. While there is a wide range of actions being taken to mitigate these forces, most will just do that, ‘mitigate’ – not help you drive immediate revenue growth. One lever that is often overlooked during times of disruption and uncertainty is pricing. This blog will go into different ways you can use pricing as a key growth lever that can and should be pulled to grow your business and increase profitability during these challenging times.
One of the fastest levers that can be pulled to mitigate profitability decreases is price. Michael Marn and Robert Rosiello, writing in The Harvard Business Review found that increasing the price by 1% has an 11.1% increase in profit, 40% better than the next lever (see exhibit 1). Essentially, every $1 of price improvement goes directly to the bottom line, whereas if you increase volume, for instance, only the gross margin becomes profit.
Source: The Harvard Business Review
Pricing opportunities take many forms. Many times, large customers are getting the same price for their products as smaller customers. Manufacturers need simple tools to help right price their products so that the right customer is getting the right price. Price sensitivity, SKU velocity, SKU contribution, customer segment performance, and customer profitability are all dimensions of a pricing analysis that will uncover opportunities to help you regain your profit and revenue streams. Manufacturers need to drive towards a granular data set that will enable price sensitivity at the product, customer, and market level, product profitability, and velocity, price band analysis, and other pricing levers. So, what do these tools tell us? Price sensitivity tools will tell you what products you should modify (up or down) based on a particular customer or market preference. For example, if the price of diapers goes up 10%, I don’t care (or even notice). Why? I have a grandchild, but I rarely buy diapers so if the price is reasonable, I just get them. My daughter, on the other hand, knows the price and will go to another store if there is a saving. We can use price sensitivity tools to price your products more precisely to your customers at the SKU and customer level. This, in turn, allows us to understand how profitable our products are and how fast they are selling. Many times, a product manager will think his best product is the one with the highest profit or that sells the most volume. SKU velocity and product profitability reveal products that we may want to highlight in our marketing efforts, with our sales or customer service people, or with our e-commerce engines.
What causes pricing initiatives to stall, take longer than expected, or be less impactful than anticipated? There are several answers: alignment with business strategy, focus/prioritization, training, change management, and data. Data, specifically transactional data, and a single customer view, is often the first challenge that manufacturers struggle with. Is it cleansed? Has it been de-duped? Has it been unified across different sources? Is there one database that is the single source of truth regarding your current customer base? This is critical to understanding price sensitivity, SKU velocity, customer loyalty, and pricing tiers and discounts. A pricing expert, one who has worked in pricing for years, can start you on the path to profitability without typically expensive pricing software. Pricing software is a great tool and there are many high-value tools but data (quality data) is critical to getting started, regardless of whether you are doing your own pricing analysis or using a pricing-specific software. A benefit is that, if and when you decide on pricing software, your data is unified, de-duped, and cleansed.
Is There Any Solution to Get Unified Data? Yes!
There are a few paths to getting to a unified, single source of truth data set to enable you to drive pricing improvement (as well as use in other aspects of your business). ERP integrations, Master Data Management projects, and setting up corporate data lakes are methods that various companies have tried – however, these are all expensive, arduous, lengthy, and high risk. According to McKinsey, 40-70% of large IT projects and transformations fail or exceed their budget or schedule by 50% or more. A pragmatic approach that more manufacturers are exploring is leveraging a purpose-built Installed Base Platform to unify, cleanse, de-dupe, and enrich the data, and then organize it into a data model that will support not only pricing analysis but a wide range of commercial and operational use cases. Typically, data from CRMs, ERPs, Field Service, warranty, maintenance records, Bill of Materials, etc. can all be ingested into an Installed Base Platform. An Installed Base Platform will use domain-specific technology to handle the data unification and quality issues found in manufacturers’ data, connect the data to a proven data model, apply built-for-purpose analytics that manufacturers need, and make the data accessible to various applications covering multiple use cases. By using a purpose-built platform, an effort that could have taken years can be done in 8-12 weeks, at a much lower cost and almost zero risk.
In addition to pricing analysis, leveraging an Installed Base Platform can also identify gaps in your sales and marketing efforts, such that combine with pricing, you can quickly begin transforming your efforts to more align with the current economic situation and, with an understanding of your top (and bottom customers), using price sensitivity for your customers and the products they buy from you, begin the road to improve profitability.
An Installed Base Platform can also enable manufacturers to hyper-target their marketing campaigns (especially digital marketing, use data to predict likely sales, better segment their customers based on behavior, and provide a better view to guide sales, service, and support resource allocation.
How Do You Get Started?
The first step is to understand the business strategy and challenges, such that any pricing actions are aligned with this strategy. An effort typically starts with discovery and then sizing of the potential pricing levers to focus efforts on those likely to achieve the highest ROI. Pricing efforts achieve the greatest results when they can leverage lessons learned and best practices from others. No sense reinventing the wheel. Anthony J. D’Angelo, Professor at Syracuse University, wrote “Don’t reinvent the wheel, just realign it.” Leveraging strong pricing and data experience will enable organizations to move faster, with less risk, and with a higher likelihood of success.
With deep pricing expertise, combined with change management, customer service, technical service, and sales force training, executive management support, you can expect quick results at the EBIDTA level. For example, a $500M revenue company saw $25M in realized incremental profits, across the globe, in different markets, over a 3-year period.
About Dr. Leo Stevens
Dr. Stevens has been working as a commercial strategist and pricing expert for over 20 years at 5 global firms, with revenue ranging from $300M to$5B. He has helped business units within those companies, with revenues of less than $40M grow to over $100M with his pricing, sales, and marketing strategies. Combining his sales background, marketing background, and global experience he has directed and driven pricing projects around the world in a variety of areas including products, services, configurable products (fire suits, safety equipment, first aid kits) with list prices from $1 to $5M per unit. He quickly looks for the “low hanging fruit” to help fund longer-term strategies for growth.
Rob is the Chief Growth Officer for Entytle. He has held leadership roles at the intersection of technology, data analytics, and various traditional industries (including manufacturing, transportation, energy, maintenance/service, and others). He has held roles as both a consultant (with McKinsey & Co) and as a technology partner to help companies take advantage of data analytics, streamline their workflows and digitize their practices in order to drive better business outcomes. As Chief Growth Officer, Rob leads Sales, Customer Solutions/Onboarding, and Customer Success for Entytle and is responsible for ensuring customers maximize the value of their relationship with Entytle.
Entytle is the leading Installed Base Platform provider, serving dozens of manufacturers across a range of verticals from oil & gas, rotating equipment, instrumentation, packaging, processing, material handling, and machine tools. Customers include leaders in their verticals such as Johnson Controls, Baker Hughes, Dematic, Duravant, Hardinge, and GEA.
Entytle’s Installed Base Platform, along with the Insyghts application, have helped manufacturers drive sales & marketing in their installed base as well as a variety of other use cases to help manufacturers digitize and modernize their workflows. Entytle’s Installed Base Platform is purpose-built for manufacturers and addresses data unification, data quality, domain-specific analytics, federated access, and control as well as connections to other platforms and web and mobile interfaces for leveraging installed base data.