Product F is a clear winner — a much higher-than-average margin-per-unit and also a very high profit-per-minute. In this case, aggressive marketing campaigns could be conducted to increase demand and the volume for this product (as they could be for Product D, too). However, a significant price decrease could also be considered without sacrificing profitability as another method of increasing demand substantially.
Product E is unfortunately a clear loser. Unless a significant price increase and productivity gains can be implemented, it should be considered whether to shift the production capacity this product takes to more profitable products.
These possible pricing strategies are based on individual products' position on the Figure 3 topographical chart — i.e. their profit-per-minute status. The possible strategies are shown in Figure 3.
Figure 3: The Position of A Product in the Profit-per-minute View Determines Possible Strategies Including Price Increases and Decreases
Using Strategic Pricing as a Lever
Knowing profit-per-minute at a detailed level enables strategic pricing changes for products based on their profit-per-minute values relative to company targets. But consider the possibility that the bubbles in the charts represented customers or deals. Prices can be decreased to increase demand from highly profitable customers or increased to drop demand from less profitable ones. Deals can be put together with pricing that will meet or exceed company target profit-per-minute/ROA goals.
Profit-per-minute removes the self-imposed constraints that might be present with companies trying to increase or maintain margin per unit numbers. It allows pricing to be set strategically knowing its impact on profitability, even if that might mean lowering the price on a below-average margin per unit product.
Once target prices are determined based on a profit-per-minute approach, market and competitive conditions can be brought into consideration and prices adjusted accordingly. When prices have been finalized, they can be fed to price management and enforcement systems. But without first knowing the relation of prices to product, customer or deal profitability, price management and enforcement is not based on a solid foundation.
Until recently, there was no easy way to use strategic pricing as the foundation for pricing initiatives. Determining profitability based on profit-per-minute for manufacturers making hundreds or thousands of products for numerous customers in multiple plants was an insurmountable problem. However, progressive manufacturers are now employing solutions that encompass both margin and velocity information to base pricing initiatives on granular profitability information. Manufacturers can now use strategic pricing to execute prices that will put that missing $100 billion a year back into their bottom lines.
About the Author: Richard Batty, director of Product Marketing at Maxager, is a 22-year veteran of the IT industry with experience in marketing, product management and operations. He has a background at Hewlett-Packard and an IPO startup. He may be reached at firstname.lastname@example.org .