How to Sustain Profits in a Downturn Using Effective Pricing Strategies - Page 2

Best practice No. 3: Tighten cost-to-serve recovery

Many companies consider cost-to-serve items such as freight surcharges for expedited shipping, technical service costs for design and product support costs as the costs of doing business. Seldom are these costs recovered by companies. The result is significant, unnecessary margin erosion. In tough economic times, it is critical for companies to tighten the cost-to-serve policies. By classifying customers into categories such as strategic and opportunistic, companies need to tighten cost-to-serve policies, ensuring appropriate cost-to-serve recovery for opportunistic customers while effectively serving the needs of strategic customers.

Best practice No. 4: Set granular pricing

Most companies today use an average price approach, ignoring the differences in how the value of their products is perceived across different segments of the customer base. The result is unwarranted margin erosion. A better, more effective practice is to identify fine-grained customer segments based on relevant attributes, and then set optimal prices and negotiation guidance for each segment. The optimal prices should be set taking into account a segment's Pricing Power (the indicator of a company's ability to realize a price change) and its Pricing Risk (the measure of what is at stake for the business).

Best practice No. 5: Control maverick selling

"Maverick" selling by sales reps can lead to bad revenue or revenue resulting from low or negative-margin business. Factors such as non-existent negotiation policies or the lack of enforcement of current negotiation policies can drive this maverick behavior. The result is dramatic variance in margins across similar deals. By establishing target prices, approval levels and floors, companies can improve the consistency of negotiations to improve margins and price realization. For example, an industrial manufacturer used pricing strategies and the right price management and optimization software to tighten pricing guidelines and improve price realization by nine percent in less than a year.

Pricing strategies provide companies with an unparalleled opportunity to resist downward pricing pressure and preserve margins. By investing strategically in pricing, companies can dramatically improve profitability, even in the toughest economic conditions.

/images/stories/heads/knowledge_center/bhatt_tapan70x70.jpg Tapan Bhatt is Director of Marketing at Vendavo. Tapan is responsible for the company's global marketing strategy and execution. Tapan has over 10 years of experience in product management and product marketing. Prior to joining Vendavo, Tapan was a director of product marketing at Siebel Systems. Tapan has an MBA from the University of Chicago, Graduate School of Business. He can be reached at