A disciplined approach to pricing strategy and innovations in technology can help companies seeking to accelerate their margin growth.
In their ongoing quest to drive top- and bottom-line growth, companies often look to strategies such as cost-cutting, product innovation or investments in fresh branding strategies and new distribution channels. But these strategies can take years to generate profits. Companies seeking faster results may be overlooking one of the most powerful levers of growth: a well-disciplined, well-informed pricing strategy.
Even among those executives who recognize the potential impact of effective pricing, many simply don’t know where to start. Their organizations may be lacking a depth of expertise in effective pricing strategy development, or they may be thin on the data and analytics that can inform intelligent pricing decisions. Or the wide range of options may be overwhelming and uncomfortably unpredictable. Yet without an effective pricing strategy, companies risk either leaving money on the table or pricing their products or services right out of play.
Three approaches to an improved pricing strategy
Any attempt to diagnose pricing challenges must start with a clear understanding of the company’s current state of pricing effectiveness. This helps to assess the relative strengths and weaknesses of the existing approach and identify areas for improvement.
Once those areas have been identified, the organization is better equipped to prioritize their actions to improve their pricing strategy. Here are three routes they can consider, along with some examples that demonstrate the kind of impact these efforts can yield. The key for most companies is to be open to new approaches — and to be ready to adjust as conditions evolve.
1. Address yesterday’s foundational pricing enablers
Current pricing challenges often stem from past decisions or events. For example, integrating a new acquisition or implementing a new enterprise resource planning (ERP) solution can create inconsistencies in data or processes that cause problems elsewhere in the pricing stream. Without stable product hierarchies or governance over pricing rules, these inconsistencies can often drive errors and extra work.
Businesses can begin to set the foundation for future improvements by first addressing fundamental issues, such as streamlining work roles and processes, updating legacy systems and establishing proper governance. More significant initiatives may involve implementing improvements to ERP and order-to-cash systems as well as customer relationship management and business intelligence tools, including efforts to resolve poor data quality.
Here’s an example of the potential impact of foundational improvements: EY’s manufacturing client was seeking to improve its pricing performance, as its existing approach was plagued by complex pricing design and inconsistent tools with which sales teams communicated pricing information to order-entry personnel. These deficiencies were creating errors and discrepancies downstream that then required considerable human effort and rework to navigate.
We worked with this client to simplify their price design, eliminate unnecessary pricing records and introduce a mobile app to help their sales teams to communicate correct prices to the order-entry teams. Within six months of these improvements, the company experienced a dramatic decline in data complexity and pricing errors, which in turn enabled cost savings through a head-count reduction in order-entry personnel, as well as greater visibility of all price data through more simplified and standardized processes.
2. Apply today’s leading-practice pricing strategies
Typically, effective pricing draws on such leading strategies as
- Implementing market-based price optimization
- Providing price guidance and incentives for sales professionals
- Offering product or service bundles to customers
- Harnessing customer analytics
While they’re hardly new, the fact remains that most of these remain underutilized. Considerable opportunity remains for companies to deploy these tools effectively to help drive growth.
For example, in analyzing recent transactions of a chemical company, an EY team noted that the company's average selling price was declining and that there were significant price variances across customers with similar volume. We worked with them to help implement advanced analytic models to provide key insights that the marketing team could use in setting price targets.
We also developed a segment-driven dashboard to highlight opportunities to improve price discipline. And by using transactional data as well as market data and industry-capacity levels, the company was able to create a recommendation engine, which improved their ability to generate price guidance for sales professionals.
Lastly, the company also made critical improvements to their people-related processes, including addressing control issues and improving governance. These multifaceted improvements to its pricing discipline have yielded significant margin growth, as well as valuable secondary benefits, including improved future sales forecasting, improved target and floor price insights and shorter sales cycles.
3. Introduce tomorrow’s pricing innovations
Just as developments in technology and analytics are driving unprecedented disruption in every industry, tech- and data-driven innovation in pricing models and tools is unfolding more rapidly than ever. Used effectively, these new tools can help companies to get out ahead of the competition.
For example, today’s rapid advances in data analysis, processing and storage enable companies to adopt pricing strategies that draw on deeper customer insights and real-time data. From mobile technology that maximizes connectivity, to powerful analytics solutions that harness valuable insights and more, companies must make strategic investments in new technology to design and implement effective pricing innovations.
As with any innovation, new and largely untested approaches can be harder to execute and measure, and they come with higher risks. Company leadership must be prepared to respond quickly to the unpredictability embedded in new models. After all, innovations can yield very different results.
As an example, an EY client in the agribusiness sector was facing tough competition from new entrants. Confident in their product’s superior performance, they felt they could challenge industry norms and offer a more innovative pricing model — one that is more dynamically based on the value to growers. This required new technology with the capability to develop advanced analytic models to effectively price the offerings, as well as significant changes to the operating model and the people running the business. As with any transition that requires simultaneous change across people, process and technology, this strategic shift presented both great risk and great reward. To mitigate risk, the business incubated an internal venture that leveraged agile approaches that they could adjust from the first pilot through early rollout. The early returns that the client has experienced have validated the initial strategy and have created a blueprint for future innovative business models.
Mapping a new road to pricing excellence
The road to pricing excellence will be different for each company, as each must accommodate the organization’s unique circumstances. For many companies, it may be some combination of the three approaches explored here, as each one offers risks and advantages that affect top- and bottom-line growth.
To ensure that pricing analysis does not end up as merely a theoretical or academic exercise, company leaders should steer forward with a pragmatic approach that leverages leading practices and technology that enables practical innovations. Being open to intelligent experimentation can help map a new path to potential margin growth through more effective pricing strategies.