Pricing Strategies For The Downturn

Learn how you can leverage effective pricing strategies to identify and capitalize on profit improvement opportunities during the downturn and beyond.

Manufacturing.net recently caught up with Jamie Rapperport, co-founder and executive vice president of Marketing and Business Development at Vendavo, a price management and optimization vendor in Silicon Valley. Rapperport has extensive experience helping companies develop and drive profitable pricing strategies, and his insight provides actionable guidance following a viewpoint article we published in June that introduces the importance of price management and optimization. 

Read the Q&A from our discussion to learn how you can leverage effective pricing strategies to identify and capitalize on profit improvement opportunities during the downturn and beyond.

Mnet: In your eyes, what is the top issue facing manufacturing executives today?

Rapperport: Manufacturing executives face dramatic energy and raw material price volatility.  Pair that with unprecedented turmoil in the financial markets, decreasing sales and downward pricing pressure, and we’re left with the most incredible strain on profits these industries have ever seen. Successfully responding to these challenges and sustaining profit margins in the current environment is the most important issue facing executives today.

Mnet: So what can manufacturing executives do about that?

Rapperport: Given the current economic environment, it’s clear what they can’t do: continue to cut costs and dramatically increase sales. Those traditional methods of protecting profit margins are virtually impossible for the vast majority of companies today.

Therefore, instead of struggling to cut costs by reducing workforce, curtailing new investments or consolidating operations, organizations should turn to the most influential and yet overlooked driver of profits: active price management.

When leveraged effectively, pricing can play a significant role in capturing profits.  It presents an opportunity to improve the bottom line and is something companies can act on today, regardless of the business climate.

Mnet: How do you see companies' organizational structures changing to accommodate the need for pricing strategies?

Rapperport: Most organizations struggle in this area. They don’t have pricing leadership because multiple internal parties are involved; and they’re not sure who owns the process: marketing, sales or operations.

To capture the full potential of strategic pricing practices, companies need to have executive sponsorship at the highest level of the organization. In companies that successfully execute pricing strategies, it is not uncommon to have the CEO or group president as the executive sponsor.

Appointing an executive specifically in charge of pricing, the Chief Pricing Officer, is also a critical step for companies who want to develop and deliver on a pricing strategy consistent with corporate objectives.  An effective pricing executive will help companies define pricing strategies, identify profit opportunities, coordinate and manage price dissemination, implement change and deploy new technologies.

Mnet: You spoke about raw material volatility earlier. How can companies address it with pricing strategies?

Rapperport: First, organizations should develop “pricing playbooks” to outline the specific courses of action necessary to improve profits during the current economic downturn. By taking this first step, companies are positioning themselves to improve realized price and increase profit margins in a matter of months.

The most important component in addressing volatility is improving price responsiveness. Companies that want to protect existing profits and capture new opportunities have to adapt to market conditions rapidly. They need to continuously fine tune pricing across products and services to ensure that it is aligned with prevailing market conditions.

Equally important is the need to communicate prices across the network of sales reps, partners, and distributors -- arming them, in a timely manner, with the pricing they need to compete effectively.

Mnet: What should companies do to address ongoing pressure from customers to lower prices?

Rapperport: Downward pricing pressure can be very challenging -- particularly given the current economic conditions. However, there are a few proven strategies companies can use to mitigate that pressure. 

Set granular pricing: Every customer has a unique set of criteria that defines their “willingness to pay.” Yet, most companies use an average price approach, ignoring these differences and foregoing an opportunity to sustain profits. In a downturn, rather than reducing prices across customers, companies should set prices and negotiation guidance by taking into account the Pricing Power (unrealized ability to raise prices) and Pricing Risk (measure of what is at stake for the business) for each segment of their business.

Control “maverick” selling: There is good revenue and then there is bad revenue. Bad revenue results from low or negative margin business, and is often an output of “maverick” selling by sales reps and channel partners. This behavior is most common when companies don’t have negotiation polices or don’t enforce them. Companies can jumpstart their strategic pricing policies by tightening guidelines and establishing target prices, approval levels, and floors to increase the consistency of negotiations. In one instance, an industrial manufacturer was able to increase price by 9 percent in less than a year by effectively controlling maverick selling through the use of pricing strategies combined with the right price management and optimization software.

Mnet: Do you see any other opportunities for companies to improve profits in this economy?

Rapperport: Yes, there are two often-overlooked areas that can help companies generate substantial margin improvement.

Identifying and addressing low-margin business: Most companies analyze the profitability of their businesses at an aggregate level -- for example, it could be at the divisional, regional, product or channel level. However, a transactional-level profitability analysis is more effective because it identifies low-margin customers and deals. By accurately identifying low-margin business and associated root causes, companies can make informed decisions on whether certain deals make strategic sense despite their low profitability, or whether corrective action needs to be taken.

Tightening cost-to-serve recovery: Cost-to-serve items such as freight surcharges for expedited shipping, technical service costs for design, and product support costs, are often viewed by companies as unavoidable costs of doing business. Few companies make a serious and systematic attempt to recover many of these costs, and the result is significant, unnecessary margin erosion. In tough economic times, it is critical for companies to tighten these policies and ensure appropriate cost-to-serve recovery at an individual customer level.

Mnet: You mentioned negotiating more profitable deals.  How much does a company stand to gain from a strategic approach to pricing?

Rapperport: McKinsey & Co. points out that even a small 1 percent increase in realized price can deliver up to 10 percent increase in operating profits.  In our experience companies realize profit improvement of up to 1 percent of sales ($10 million in profits for every $1 billion in sales) in as little as four months. Over an extended period of time, pricing strategies can build a platform for ongoing process improvement; they drive profits and give companies a competitive edge. 

Mnet:  This seems important in a downturn, but how does it also map to needs in the long term?

Rapperport: Even before the downturn, companies began to realize that pricing could be used as a key profitability lever. Looking forward, pricing strategies are really about improving profit margins and gaining a competitive advantage. Putting a solid pricing strategy in place now addresses a fundamental business issue and provides tangible results that will continue to benefit the company as the economy turns around.

For more information on Jamie Rapperport and Vendavo, visit www.vendavo.com

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