How you can defy cost volatility by choosing the right price
Commodities and shipping prices are now going through the roof and this is causing business owners and pricing managers headaches. A side effect of the global pandemic is a double-digit increase in commodity and shipping prices. Businesses are now making more costs while the prices of their products haven’t increased much according to the DNB. This is pushing the profit margins of companies down. Businesses face two options now: either decrease their profit margins or increase the price of their products for customers. However, research shows that a 1% increase in your price can increase the operating result with 8.5%.
Now could be the time to change prices, but how could this be done properly, without losing customers or margin? According to the latest research of McKinsey, decision makers could follow these 4 steps to implement new price strategies for pricing success.
Step 1: Build up an analytical database
Businesses should first focus on building up an analytical database with relevant data, to remove the impact of ‘the gut’ on decision making. Relevant data could be transactional data, key contracts with suppliers, historic cost-pass through decisions and their impact and current cost-pass through policies. At the same time, data on the costs and future costs of products needs to be gathered.
This removes the abstraction surrounding your current pricing strategy, as all the relevant data is in one database. Now, you can identify quick gains and this could act as the starting point for the implementation of new dynamic pricing strategies.
Step 2: Determine pricing strategy
The goal of a successful pricing strategy is to protect margins, grow product revenue or increase market share. However, if the costs of a product are volatile, then the price of the product needs to be tailored to multiple situations. The one-size-fits all optimal pricing strategy doesn’t exist. This depends heavily on the business environment and on the current economic situation.
Organizations that are highly effected by price sensitive commodities need to have a safe pricing. They need to be able to pass through the rising costs of commodities on the buyer. These businesses could choose a cost-plus-margin pricing strategy. For example, a candy company bases the price of its sweets on how much sugar costs plus an additional margin. However, this is a reactive approach and it is not fully optimizing margins as price increases happen after the price of the product has risen.
Organizations that are more focussed selling complex products could thrive best by having a customer value-based pricing strategy. This strategy bases the price of their products on the value of what customers want to pay for a product. Businesses determine this by looking at competing products or the value a product or service offers to the customers. To see what pricing method could work best for your business, you could this 1-minute Pricing Strategy Assessment.
Other non-pricing activities could be switching to different suppliers for a lower cost price or changing the content of a product while maintaining the same quality.
Step 3: Incorporate sales force in the process
Implementing a new pricing strategy is one thing. Communicating this to your clients is something completely different. Once the pricing strategy is set, the sales force needs to be properly trained and updated about the new pricing.
The sales director or commercial leader needs to identify which questions buyers could have about the new pricing – and come up with good answers for them. These new strategies could be explained during sales trainings. To train the sales team and, maybe even more important, to strengthen the confidence of the team. According to McKinsey, this could also be the time to discuss your relationship with the customer or client. This could end up to be a win-win for both side… if done right!
Step 4: Track impact of pricing strategy
During times of great change, such as now with the double digit increase in commodities and shipping prices, the results of changes in your pricing should be checked frequently. How could you know if your decisions have an impact if you do not measure it?
Checking the effectiveness of your decisions could be done on a weekly or bi-weekly basis or on a client level. This way you can make sure that your pricing has impact and that you do not throw away any of your precious profit margin.
This seems logical and it is. However, sometimes businesses could have the perception that they do not have the necessary data or knowledge to implement new pricing strategies. Contrary to that belief, most businesses do have enough relevant data to perform simple price analyses. After this, businesses could focus on maximizing their dynamic pricing strategies. These strategies base price on variables instead of having one fixed price, to maximize margins even more.
With SYMSON, you can get this all, in one machine learning platform. SYMSON makes it easier for pricing and data managers to implement dynamic pricing strategies and to do demand forecasting. The platform helps you to automate mundane tasks and it gives advice on how to increase your profit margin.
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