Many companies are losing up to 10 percent of their operating profit because they don’t have the marketplace, competitive and customer insight to use pricing as a competitive weapon.
A value-based approach
That’s an alarming statistic — but there are exceptions. Some companies in your industry are pricing effectively because they know the value of their products and services across their different customer markets.
Because they have a commitment to the basics, they know precisely what it’s costing them to produce, sell, distribute and service their products across customer segments. More importantly, they’re using analysis, processes and tools that can deliver insight into which of their products are profitable, and how products and services can be bundled and priced to increase customer value creation and generate longer-term revenue streams.
Such insight underpins an optimal product portfolio. It also drives the proprietary innovation behind product and service differentiation, one of the core components of high performance in any industry. Your customers will pay more for the product and service solutions that fulfill their particular value expectations.
The nature of your industry presents plenty of pricing challenges. With so many product options and configurations, it’s hard to compare prices among different deal structures. Frequent launches of additional options make it difficult to understand true cost and thus price appropriately. Independent distribution channels can cloud your view of the end customer.
The upshot: industrial products companies often price in a less than ideal manner — especially when they don’t know enough about the true components of cost. Many companies may be leaving significant profit on the table as a result. Even if their cost data are relatively good, the margin they add may not be in alignment with the value their solution delivers to customers.
Sustained price differentiation can only be achieved by a total understanding of how to create value in the marketplace — customer and product value. A more holistic, market-driven and, above all, value-based approach to pricing may sometimes be more appropriate than cost-plus. Our High Performance Business1 research shows that companies that have taken this route have achieved pricing power, resulting in higher gross profits and revenues. What’s more, they’re growing faster than their peers.
Know what the customer wants
As part of Accenture’s extensive research into the characteristics of high-performance businesses, we have determined that four pillars support high performance in industrial companies. Pricing power, coupled with innovation, is one of them. And pricing power, in turn, is underpinned by four essential capabilities that all high-performance industrial companies share:
• They have insight into what customers value — so they can be sure that their products and solutions deliver that value
• They understand their total cost to serve — so they can optimize price for profitability
• They have gained insight into the specifics of their product portfolio — so they can optimize its contents and develop an appropriate pricing strategy • They have the organizational rigor to sustain pricing power — by motivating their sales forces appropriately and exercising control over their pricing process.Gaining insight into what customers value is absolutely fundamental to pricing power. Without it, you just won’t know enough about the value that different customers attach to different products and solutions to be able to price optimally. And without these insights, you can’t develop a successfully segmented product portfolio strategy. In your industry, where so many products can be highly customized, such knowledge is especially important.
Value — and thus your pricing strategy — may differ from customer to customer and region to region, even for the same product. Early in a product’s life, value excitement and potentially limited supply may allow you to demand a price premium. But that probably won’t last. You must have really detailed and continual insight into customers, regions and product life cycles in order to price any product optimally over time.
In today’s global economy, this becomes even more important. The global geography of markets may very well affect optimal price, as differing world cultures can greatly influence the value of goods and services.
Your pricing strategy, moreover, will probably have to evolve to keep pace with evolving customer values. Early life cycle premiums may dissolve as both product and market mature, so be cautious about locking yourself into long-term supply contracts designed to support manufacturing volumes or service over market cycles.
Companies with pricing power make very sure that they know their individual customers right across market cycles. ”Customers talk, we listen” is one of Danaher’s core values. And the company uses some pretty rigorous marketing analytics to ensure that it really does understand what each individual customer values.
ITT Industries greatly enhances its responsiveness to the diverse and constantly evolving values of its customers by bringing its product development engineers, as well as its salespeople, into direct contact with customers. Other companies, too, keep track of evolving customer values after the initial sale by ensuring that their engineers and salespeople maintain customer contacts.
Companies with these insights are able to identify and segment their channels and customers accurately and effectively, developing different pricing strategies for each segment. What’s more, because they know precisely the price point at which an individual customer will refuse a particular product, they can tailor their pricing to suit that individual’s perceptions of value.
Understand your total cost
Understanding your total cost to serve is the flip-side of this customer insight. With supply chain complexity deepening, most industrial products companies struggle to understand even their base cost to manufacture. Costs like rebates, promotions, selling costs and the engineering costs associated with customized products, as well as the associated service costs, are all components of true cost — yet all too easy to lose sight of.Since a failure to understand true cost will inhibit your ability to do long-term or usage-based deals with customers, it’s obviously important to develop ways of capturing true cost — and some companies are successfully doing so. Manufacturers implementing ERP packages, for example, now have robust data-gathering systems that can deliver the information they need to know the full extent of their costs, including customer retention costs by product and across channels.
Such clear and comprehensive knowledge of true cost is invaluable. It means that even if you do price on