Strategizing for Short-term Wins and Long-term Revenue Growth
Manufacturing companies are facing a challenging set of circumstances in the current climate, ranging from increasing customer procurement sophistication, escalating costs, to scaling digital capabilities, all against a backdrop of economic and geo-political uncertainty. At Revenue Management Labs, we have closely observed how these emerging trends and ongoing challenges impact pricing dynamics and consequently, margins and revenue growth. To help companies in the manufacturing sector to make smarter and more impactful business decisions, we have developed a series of pricing best practices that address those challenges and help build a resilient pricing strategy.
Key Takeaways
- Unpredictability in economic and geo-political factors puts pressure on pricing strategy to be agile and responsive.
- Increasing sophistication in procurement and strategic sourcing requires thorough understanding of customer willingness to pay and value differentiators to communicate price effectively.
- Effective data management and systems are emerging as prime differentiators, facilitating faster identification and capitalization of opportunities.
- Manufacturers transitioning to innovative, solution-based pricing strategies to increase customer lifetime value and maximize retention.
- Modernizing pricing processes and structures fosters repeatability and predictability, and safeguards profitability amidst dynamic environments.
Unpredictable Economic and Geo-political Factors Continue to Put Pressure on Pricing Strategy
The past few years read as a litany of global disruptions from the COVID-19 pandemic to geo-political conflicts, fostering an environment rife with unpredictability and volatility. While these events have tested the resilience of businesses and uncovered some flexibility built-in, they have also exposed significant weaknesses, underscoring the need for adaptive pricing strategies. When you add in lingering supply chain disruptions and escalating costs, exacerbated by conflicts such as the Middle East and Ukraine, the pressure on manufacturing operations has continued unabated for several years. The global and economic volatility underscores the need for agile and responsive pricing approaches.
- Lingering impacts on the supply chain and costs from COVID-19
- Conflicts in the Middle East have disrupted critical trade routes, primarily through the Suez Canal, creating delays, increased transportation costs, and shortages of certain products.
The Price Impact of Macro-Economic and Geo-political Unpredictability
For manufacturers, the perpetual state of change has led to rising costs but also unpredictability in costs, posing significant challenges for pricing strategies. The first of which is the speed at which the costs increased, causing margin compression.
A 2022 pricing survey, conducted by Revenue Management Labs of over 150 manufacturing executives, revealed a concerning gap of 6% between cost increases and the net price increase, meaning industry-wide, companies had to compress their margins. The real question is why manufacturing companies cannot keep pace with dynamic costs. The answer may lie in an underlying issue in manufacturing industry: the typical pricing review process is too slow and burdensome to adjust to accelerated cost increases. Speeding up the responsiveness of pricing strategy would then call for revisiting and optimizing the pricing review process.
The knock-on effect of accelerated cost increases is ever increasing compression of margins.
Why are Responsive Pricing Strategies Important?
Responsive Pricing Strategies give you the agility to stay on pace with changing marketing conditions to protect margins. Margin deterioration is extremely difficult to recover and is best avoided.
Addressing Uncertainty with Responsive Pricing Strategy
Historically, manufacturing firms have adjusted their prices every year or at the minimum completed an annual review. In the last few years, however, they were compelled to recalibrate their pricing strategies with greater frequency by high inflation and other factors. The pressing question is how to do this systematically rather than reactively or on an ad hoc, while keeping long-term profitability in view.
Over the years, we have developed a comprehensive and methodological approach to responsive pricing strategy. Our Balanced Revenue Management Framework solves for the three key pillars of pricing strategy: customer value, competitive landscape (market), and financial feasibility. If your strategy is misaligned, or does not effectively address the three pillars, the direct result is inaccurate price positioning and margin leakage. Indirectly, it causes a lot of internal and external pushback against price adjustments, which is avoidable with a responsive pricing strategy.
Client Story: Should they Adjust Prices or Absorb Increasing Costs
For example, a North American food processor came to us not knowing if they should adjust their prices or absorb increasing costs. Shipping delays from the conflict in the Middle East were driving their cost increases, and they were unsure if their competition was sourcing their materials from the same region and experiencing the same delays and cost increases. Also unclear was whether the issue will resolve quickly or if it would be a long-term concern. In this case, they needed to bolster their knowledge of competitive market and customer willingness to pay. Here, we recommended a more nuanced approach. Instead of raising prices across the board, they can adjust prices in markets where they have higher pricing power. That strategically distributes the headwind impact and mitigates risk from sudden cost increases. In the next section, we will discuss how to communicate that price increase to customers when they have become more sophisticated buyers.
Increasing Sophistication in Procurement Requires Strategic Customer Communications
Previously thought of a back-office support function, procurement is undergoing an evolution with increasing sophistication, widening influence, and expansion as its key markers. According to Amazon’s 2024 State of Procurement Report, rising costs for purchases is the top external challenge facing procurement teams, while business complexity is the top internal challenge That means for manufacturers, procurement teams are pushing hard for discounts or other price concessions, such as holding inventory or stronger contract terms, and using improved internal processes to justify it. They may also be employing a consultant with greater visibility and market intelligence as leverage to shift the conversation from value to costs.
- Rising costs for purchases is the top external challenge causing demand for price concessions.
- Business complexity is the top internal challenge for procurement professionals, a sign of increasing responsibility and sophisticated internal processes.
- Procurement professionals are using knowledge of the market and cost inputs, or an external consultant to shift the conversation to costs.
Price Concessions Can Lead to Commoditization and Long-term Margin Compression
If the manufacturer is not prepared to face the intensified pricing pressures from a sophisticated and data-driven procurement team, there are a few immediate and long-term impacts on revenue. Sales teams will face increasing pressure to provide price concessions to secure or maintain business resulting in margin compression. A short-term contraction in revenue can quickly shift to one with long-term effects. The long-term effect of aggressive discounting is often the commoditization of the product, which strips away its differentiating value and is extremely difficult to recover from.
Turning Customer Pressure and Sophistication into Value
A strategic response is key to addressing a sophisticated procurement team. We recommend fortifying these three key areas to mitigate the risks of margin compression and position themselves for sustained profitability:
- Secure price positioning through understanding customers’ willingness to pay and value drivers versus competition.
- Develop and hold your team accountable to pricing guidelines that hold the margin profile across customer segments.
- Empower the sales to team to effectively manage customer pushback and to focus on value differentiators instead of price with sell decks, business cases, and other tools that allow them to demonstrate value to the client.
The most effective response to requests for price concessions reframes the conversation around value using a combination of financial analysis, value add-ins, and competitive differentiation. That combination of value and analysis was to key to one of our manufacturing client’s successes in preventing a price compression.
Client Story: Reframing the Conversation around Value to Prevent Discounting
Our client was working as a co-packer for an industry leader. Their customer requested a price concession, threatening a potential RFP.
To help the client build a communication strategy and gain control of the conversation, we first identified value add-ins: such as holding minimum inventory, ensuring best-in-class defect level to eliminate the need for a client-side QA program, and competitive delivery terms. Then, we quantified the incremental financial value of the value add-ins and the potential cost of switching to another manufacturer, including factors such as the time and capital investment.
Putting dollars and cents to value of the manufacturer’s proposal as well as the associated costs of switching built a stronger case, and it bolstered the confidence of the sales team in the worth of the proposal. The result was that the account manager was effectively able to convince the customer that the current contract had the best value on the market and successfully secured a contract extension.
Data Management and Advanced Pricing Analytics Are Required to Optimize Pricing Strategy
The value of robust data management and analytics is clear to most manufacturers, yet many lag in developing the operational and technological foundations to successfully implement applications and extract value from pricing strategy. There is an inherent data complexity in manufacturing that often acts as an obstacle to implementing and maintaining a data management system. Manufacturers often have a high number of SKUs, custom work orders that are difficult to classify according to a standardized system, and inadequate or missing enterprise-level software.
Some common resulting issues we have seen include improper classification or grouping of SKUs, unstructured data, inability to allocate costs at the transactional level by product, inconsistent data classification across departments, underused data in developing pricing structures, and legacy or standardized pricing software systems that are inherently difficult to update. Even if the company is investing in advanced analytics, they may face limited technology stack options, high implementation costs, and disruptions to production that deter adapting and executing innovative pricing strategies.
- Disjointed or unstructured data prevent accurate pricing strategy.
- Underusing existing data means pricing structures are not fully optimized.
- Legacy or standardized pricing software systems cause friction when implementing innovative pricing strategies.
Data Management and Analytics Issues Impede Pricing Responsivity and Accuracy
Addressing data management and analytics challenges are pivotal for effective pricing responsiveness and accuracy, as illustrated by the challenges faced by a manufacturing client of ours.
Client Story: Solving 14 Disparate and Unintegrated Data Systems for Pricing
The manufacturing client was running at least fourteen different data systems cross-departmentally and across regions globally, which hindered the development and optimization of their pricing strategy. One primary root issue with data management emerged: the lack of standardization across systems and across departments. For example, the finance department was tracking account-level data but sales was tracking at the product level, while costing and procurement was tracking at the level of commodities.
This issue had a multiplying effect on the accuracy of their financial models and their ability to collaborate across departments and prevent conflict. The inconsistent data frustrated efforts to develop a company-wide pricing strategy, run analysis to identify customer segments, or assess the impact of price on volume. The result was a fragmented data system with little basis for confidence in a pricing strategy.
Our client was aware of their data management issues and lacked confidence in the accuracy of the costs and margins data across marketing, finance, and sales. They also found the costs of implementing a data management system prohibitive. Instead of implementing the perfect data management system, we developed a minimally viable database that would serve their needs. It took only 90 days to develop that database to the point where we would have confidence in the results from our pricing assessment.
Data management does not have to meet the gold standard to have a measurable impact on the accuracy of your pricing strategy.
Improving Data Management and Analytics Has an Outsized Advantage on Competitive Edge
The difference between perfect and a minimum viable data is exponentially larger than the cost and time to implement. It is necessary to factor in the time lost as the market continues to evolve and competitors continue to evolve along with it. We have repeatedly seen manufacturing companies embark on large data system optimization projects, which require hefty capital investment and take 2-3 years to implement, but then revert to legacy systems in the middle of the project to address evolving competition or other market pressures. What was initially a step towards modernizing their systems and taking a step toward digital transformation, quickly becomes a quagmire. Often, the companies then faced an added layer of complexity from significant internal resistance to the modernization of the data systems.
In fact, your data system does not need to reach that gold standard level to have a measurable impact on your analysis and consequently, the reliability of your financial modeling. While developing robust data system, it is equally important to identify the key data needs to setup the foundation to your minimum viable database and implement the system, as it is to identify quick wins and deliver results to build organizational confidence in data-driven decision making. As seen in the above example, that can happen surprisingly quickly even with complex data systems.
After you have created some internal momentum and confidence in making pricing decisions on data, the next step is to build a long-term plan to reach the level of data management best serving your needs and how you anticipate your business to grow. The minimum viable database solves the short-term issue, but the issues seen initially will surface again if there is no long-term plan in place.
In current environment, companies gain a competitive edge from the level of granularity they can go into with their analysis. The primary difference is being able to accurately identify the key drivers to performance and being able to accurately develop financial models to predict the impact of business decisions, increasing the effectiveness of your pricing strategy in comparison to competition.
Issues with Adapting Pricing Structure to Business Needs
For some companies, the primary issue with pricing comes down to the time it takes to adapt and align their pricing structure with evolving business needs. As pricing methodologies shift from conventional cost-plus models to more sophisticated value-based approaches, manufacturers find it increasingly more challenging to adapt to pricing models that also require strong data management systems.
The challenge is to put in place a pricing structure that quantifies the perceived value of products while remaining adaptable to rapidly changing business environments. If there is no pricing structure or it is suboptimal, it can often lead to significant price dispersion in your customer base, as pricing decisions gradually diverge from your overarching pricing strategy, resulting in a multitude of discounts, pricing tiers, and customer-specific pricing mechanisms. Additionally, it may lead to underpricing high-value segments, not realizing potential revenue or overpricing low-value segments resulting in lost sales opportunities.
Signs of a Suboptimal Pricing Structure
A suboptimal pricing structure often manifests in various ways. Common signs include numerous price points and multiple discounting schemes that can result in overly complex administration, inefficient management, and multiple errors. Typically, what happens is that the company will use temporary fixes to address the issues arising from suboptimal price structures, which only increases the likelihood of channel conflicts and causes added issues and complexities. Ultimately, these companies will find it challenging to implement rate increases across your customer base, notably affecting customers disproportionately and exacerbating existing price gaps.
The Opportunity from Optimizing your Pricing Structure
An optimized pricing structure and processes supports fast adaptation to changing market environments, competitive landscapes, and customer needs, while maintaining profitability. Essentially, there needs to be two fundamental characteristics, the pricing structure and supporting processes need to be both repeatable and targeted. Identifying customer segments based on their behavioral attributes helps you build a pricing structure that meets each segment’s needs and willingness to pay. With customer segments, the pricing structure is scalable and efficient.
Client Story: Inconsistent Pricing Causing Issues with Pricing Discussions
As we have seen in a client selling specialized manufacturing equipment across North America and Europe, inconsistent pricing across business units and regions was causing issues with pricing discussions. The sales teams were locking pricing for the duration of the contract or giving concessions, which increased business complexity and margin leakages from discounts.
We assessed their pricing structure, built-in consistency across regions and business units, and helped shift discounts to value add-ons such as added service. Repivoting the conversation to value and having consistent pricing structures in place contributes to ongoing positive customer experiences and profitability.
Refocusing on value add-ons and pricing consistency can have an outsized impact on long-term profitability.
Transitioning to New or Innovative Approaches to Offers that Meet Customer Needs
Traditional approaches to pricing in manufacturing focus on selling the product and often use a cost-plus pricing approach. Increasingly, we are seeing companies switch to innovative models such as pay-per-use pricing, e-commerce, solutions-based or monetizing aftermarket services. One motivation behind the switch is a need to differentiate themselves and gain a competitive edge over companies still using traditional pricing tactics and offers. A second motivation to transition the traditional adversarial customer-versus-supplier-relationship to a long-term partnership, characterized by helping customers with their needs and sharing industry knowledge and expertise. Generally, the trend is characterized by shift in the mindset of many manufacturers from product-based business model to one that is focused on customer needs and solutions.
The key to shifting to a customer-centered approach is effectively using data understand and quantify value add-ins and critical needs. The challenge lies in managing the increasing complexity faced by the manufacturer, and also now navigating the challenges faced by their customers. Increasing business complexity calls for a clear data-based pricing structure and a strategy that is equipped to handle changing circumstances. A true solution-based pricing approach is still more aspirational but stiving for a data-first mindset to pricing will set the foundations for that shift.
Unlock customer value through adopting an innovative approach to defining offers.
Using Revenue Management Principles to Identify Critical Customer Needs and Optimize Offers
When done intentionally and with sound analysis backing it up, adopting a new pricing model has the potential to both deliver a competitive edge through customer satisfaction and perceived value while increasing the lifetime value of a customer in more subtle ways.
Client Story: Improving Customer Relationships Leads to Revenue Growth
A manufacturing client wanted to increase their stickiness with customers by optimizing their offers. The first step was to identify customer pain points and opportunities, then use those insights to tailor the offers. We used max-diff analysis to determine the challenges faced by customers and validated them with in-depth customer interviews. Since our clients’ strategic customers struggled with timely project execution and parts sourcing that often brought about delays, we integrated a bi-annual project review into the service agreement. In that review, account managers would share insights on their project management, and compare them with industry standards and best practices seen across their broader client base. By focusing on their sales team on supporting their clients’ business goals, they saw an immediate improvement in their relationship with clients. Over the course of 12 months, the strategic investment in their client relationships increased their share of wallet, a financial gain from addressing a client’s pain point.
Client Story: Moving to a Solution-Based Offer to Raise Prices
Another manufacturing client adopted our recommended approach to pricing that focused on the financial value they bring to customers. It allowed them to increase their price by 4% higher than initially planned in their cost-plus pricing model. We completed a customer analysis, market research, and financial assessment to identify potential drivers. Through the analysis, we identified a common issue with vendor complexity. Many of their clients were managing multiple vendors on large projects. They could solve an issue for their client and manage their own risk. Revenue Management Labs analyzed the value created by the manufacturer, identified the optimum share percentage, and then set up new pricing framework, to ensure our client captured a significant share of the value created.
Build Your Innovation Roadmap Based on Pricing
This is where pricing and innovation go hand in hand, and where knowledge of the market, competition, and customer needs inform the roadmap of immediate and future opportunities. Some of the changes may force your hand such as more customers expecting to order online and bypass sales altogether. Other changes can be intrinsically motivated and how you set the standard for your industry and differentiate yourself from competitors. The north star in everything here is the customer and finding innovative ways to add value to your offer. In the long-term, they will see you as a partner in their success. It is not magic but rather based in data-driven analysis of customer needs and keeping abreast of changes in the market.
What Comes Next?
Prioritizing Long-term Revenue Growth
In an era marked by perpetual change and mounting uncertainties, building pricing capabilities play a pivotal role in driving short- and long-term profitability. By embracing agility, data-driven decision-making, and innovative pricing models, manufacturers can navigate turbulent waters and lay the groundwork for sustained growth. Pricing innovation is influenced by larger transformation in the industry characterized by digitization and integrating new technologies. Also called Industry 4.0, the digital transformation is leading manufacturers to new levels of responsiveness to customers. For pricing, it means the pace of innovation will continue to accelerate, and the companies that are able to adapt and change at the same pace will continue to outpace competitors.
