Despite varying opinions on the economic outlook for 2024, savvy manufacturers and distributors are busy preparing for more growth initiatives. The key is to optimize commercial processes today – building in agility – so you’re ready to accelerate whenever the time is right. Otherwise, you risk missing opportunities because you acted too late.
From inventory allowances to more marketing, you have many options when it comes to growth strategies. One of the most impactful is price improvement. Ensuring you’re offering customers the right price at the right time is a sure-fire way to boost your bottom line, improve sales efficiency, and delight your customers. While it may seem counter-intuitive, price improvement has a greater positive leverage on the bottom line than cost-cutting – every time.
What is Price Optimization?
Price optimization is the process of deciding the most effective pricing for a product or service. It is how organizations find the optimal price that their customer is willing to pay for a product: not so high that they risk losing that customer’s business, not so low that they sacrifice margin. It’s exactly the right price, for the right product, for the right customer, at the right time.
Some companies employ professional pricers, while others include the work within their marketing, sales, or product teams. In some cases, the finance team handles pricing, working in partnership with other departments.
The process of optimizing price includes a wide range of factors that are often custom to the individual organization and their goals. Almost always though, your first consideration will be where you most need to optimize:
- Starting prices – What are your best possible starting prices after considering a wide range of both internal (costs, labor, profit goals) and external (economy, market dynamics) factors? Sometime called list prices, this level represents an amount that you’d be satisfied with, if you knew nothing else about a particular transaction. For this reason, this level tends to be higher than negotiated price levels.
- Discounts – With a higher starting price, negotiations will yield lower prices after negotiation. How can you ensure you’re enticing new customers and retaining existing customers with appropriate discounts? Are your discounts compelling without eating up all your profit?
Pricing software for manufacturers and distributors handles all the data required to optimize prices, automate pricing analytics, and easily execute pricing changes across the organization. As costs fluctuate and customer behaviors change, more companies are turning to pricing technology for more efficient, profitable decision-making.
The Benefits of Price Optimization
Research from McKinsey & Company shows implementing price improvement delivers significant organizational profitability - a 1% price improvement results in an 8.7% increase in operating profit. More specifically, price optimization will:
- Maximize sales and profits. The best possible price points allow companies to achieve their true potential, particularly when it comes to maximizing sales and profits. Customers are more likely to pick up on products and services when they’re priced optimally, and companies reap the benefits by selling more, profitably.
- Enable fast reaction to market changes. Pricing software makes it possible for companies to react quickly to changes in the market, outsmarting and moving ahead of their competitors by offering goods and services at the best possible prices for any given circumstances.
- Provide insights into customer behavior. The more data a company has, the better it can understand its customers – if that data is converted to information that helps the seller build relationships. And with this understanding comes immeasurable opportunities. Data, information and real understanding allows companies to offer products they know their customers will love – at prices they’re sure customers will respond favorably to.
- Deliver fast, measurable ROI improvements. With pricing optimization software, it’s easy to see how things are improving. ROI due to pricing improvements can be separated from other commercial causes and closely monitored, with all changes available to view in real-time. This fact-driven approach enables teams to respond to fluctuations in demand quickly, maintaining the best possible ROI for the company.
How to Get Started
Successful price optimization strategies will vary from company to company but almost always, the core ingredients include a strong understanding of your customer base and access to data and real-time insights that ensure your team no longer relies on guesswork or hunches.
Start optimizing your pricing with these basic steps:
- Solidify your Strategy Implementing a Price Optimization strategy can be a big step, which is why it is crucial to have a comprehensive business strategy that includes value expectations for the new initiative. What data is necessary to understand differences in price? Do expectations differ from Division to Division, Product to Product, or Channel to Channel? What does your roll-out plan look like? Does your sales team’s compensation align with the new strategy? These questions and more should be answered within your business strategy prior to implementation.
- Know Your Customers The key to knowing how to optimize pricing rests within each potential audience. Users of pricing solutions and price management software must have some understanding combined with a relevant level of control. Likewise, teams must have a good understanding of their target customers to achieve the best pricing optimization strategies.
- Organize and Analyze your Data Make use of specialized pricing optimization software to organize and analyze data with ease. By keeping a careful eye on the most important metrics, teams can tweak strategies and provide a fully flexible and dynamic service. Tracking transactional metrics, such as the optimized target, the actual negotiated price and the final invoice price, will give insights into performance and effectiveness and highlight what is and isn’t working.
- Measure Value Through Real-Time Insights Far too many companies make the mistake of compiling data and only looking at it from time to time. Beat the competition by leveraging insights continuously, as part of your standard business process. In doing so, you’ll put your company in a position where it can respond to any changes in demand quickly – and profits will soon soar as a result.
- Discover Opportunities with AI and Automation AI and automation can help companies offer the best possible pricing at any given time. According to the Pricing Excellence Report and 2024 Outlook, 51% of respondents use AI in their pricing processes to some degree today or have plans to implement it in the next 12 months. Use cases include analyzing data such as market trends, historical transactions, product preferences and competitor actions, predicting customer behaviors and creating good-fit personalized discounts/promotions, monitoring competitor prices, and improving sales forecasting.
Price optimization is a proven strategy for growing profitability. With better economic times on the horizon, there’s no better time to optimize for excellence, get to know your customers better, and fuel fast, appropriate action to market changes.
