Dramatic volatility in energy and commodity prices, significant turmoil in the financial markets, and a strong downward pressure on product prices are sharply eroding profits of companies across industries. Here, Knowledge Center contributor Tapan Bhatt shares five best practices that will help your company use pricing strategies to protect margins, survive the economic storm and emerge stronger than your competitors as the market recovers.
In
this current economic climate, cost-reduction strategies that involve
reducing work force, curtailing new investments or consolidating
operations are the most tried and tested lever for protecting profit
margins. However, for most companies today, additional cost-reduction
opportunities-without significant negative impact on business
performance and customer service-are no longer available. In this
challenging environment, companies must turn to the most influential
and yet under-leveraged driver of profits: active management of price.
A recent study makes clear the power of pricing: a small one percent
increase in realized price can deliver up to a 10-percent increase in
operating profits. The importance of pricing is further validated by
the proven success of pricing investments by leading companies across
industries. For example, a leading global manufacturer that invested
strategically in pricing achieved substantial margin improvement. The
strategic pricing investment included a combination of organizational
pricing leadership, revamped pricing processes and the use of pricing
software to enforce and support those new processes.
Another recent survey affirms the benefits of pricing initiatives
and investments. The survey found that almost half of the respondents
achieved a return on their pricing investments in a year or less. It is
not uncommon for companies to realize profit improvement of up to one
percent of sales (or $10 million in profits for every $1 billion in
sales) in less than 6 months from short-term pricing opportunities. In
the long term, companies can use pricing strategies to create a
platform for ongoing pricing improvement.
In order to take advantage of the pricing lever to sustain profits
in an economic downturn, companies must transform pricing practices
from tactical to strategic, and they must elevate the pricing
strategies to the highest levels in the organization. The following
five best practices will help your company use pricing strategies to
protect margins, survive the economic storm and emerge stronger then
your competitors as the market recovers.
Best practice No. 1: Improve price responsiveness
Pricing "status quo" is the path of least resistance and is often
adopted many companies. In highly-volatile markets where raw material
and energy costs are fluctuating wildly, competitor pricing is changing
quickly and overall buying environment is uncertain, one thing is
certain: pricing status quo will result in continued margin erosion.
Companies that want to sustain profits in a downturn need to be more
responsive than ever before; they need proactively fine-tuned pricing
across products and services to ensure that it is aligned with
prevailing market conditions. Moreover, it is imperative for companies
to efficiently communicate prices across the network of sales reps,
partners and distributors, arming them with the pricing they need to be
competitive.
Best practice No. 2: Identify and address low-margin business
Profitability analysis at a transactional level and on a
deal-by-deal basis is the key to identifying hidden margin improvement
opportunities. Most companies miss these opportunities as they analyze
profitability at aggregate levels such as divisional, regional or
channel. Transactional analysis provides insight into whether discount
policies were consistently applied across deals or whether surcharges
such as freight were recovered effectively. Armed with such insights,
companies can make informed decisions about whether certain deals make
strategic sense despite their low profitability or whether corrective
action needs to be taken.
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