A new pricing strategy gave this industrial supplier a long term sustainable profit.
Situation: A major supplier of industrial products wanted a long term improvement in margins.
The client was using a simple cost plus pricing approach. The sales force had developed a bad habit of giving significant discounts to most customers without demanding anything in return. No one person was in charge of pricing, yet there were many people involved in the process of setting prices. The CEO realized that something had to change.
The company had an annual turnover of over 1 billion. There was a huge potential to improve margins by introducing a strategic pricing program. What strategic changes should they make that would be effective in their highly competitive market? How long would it take to implement the changes? How fast would they see results?
Solution: A strategic move towards target pricing.
PriceGain worked with senior management to develop a long term plan for implementing a new pricing strategy and pricing organization. The strategy called for a distinct move, in small achievable steps, away from cost plus pricing and towards target pricing.
Target pricing works by dynamically adjusting prices based on analysis of historic transaction data, demand and customer buying habits. We designed a proprietary software pricing engine that combines information from the pricing organization and the client’s CRM system, calculates the correct price based on a set of pricing algorithms, and then delivers pricing updates to the companys ERP system. PriceGain then worked with the client’s new pricing organization to refine the system in order to optimize the pricing algorithms.
Results: An additional 3% return on sales!
Companies implementing a new pricing strategy, like the example above, will be able to offer more attractive prices on the most popular items, resulting in higher levels of customer satisfaction and a more competitive market profile. In addition, the typical immediate effect on results is a 3% increase in gross profits and long term an additional 2-5% increase; that is, the client achieved a very quick project breakeven and a long term sustainable profit.
The target pricing approach we selected for this client typically works very well if:
- The client has a large sales volume
- The client has large numbers of transactions with large numbers of customers
- The revenue leakage through the current cost plus pricing process and the lack of governance structure is significant.