Bottom Line: Every pricing strategy is going through a hard reset from the pandemics’ economic fallout, making data-driven decisions a must-have going forward, starting with stabilizing pricing and margins.
Data is the best antidote against fear and panic. It provides guardrails, guidance, and insights that lead to better decision-making and, in the case of pricing, preserving margins. Manufacturers surviving in the chaotic wake of COVID-19’s economic impact began modeling worst-case pricing and volume scenarios in early February. Every one of them began deconstructing their sales pipelines, order backlogs, and negotiating for new order delivery dates, doing the best they can with the applications and tools they have. Of all the levers a company can use to stay profitable, pricing is by far the most powerful. A recent McKinsey study found that a 1% price increase yields a 22% increase in Earnings before Interest & Taxes (EBITDA) margins for distribution-based businesses. The same study found it would take a 7.5% reduction in fixed costs to achieve the corresponding 22% increase in EBITDA that a 1% increase in pricing delivers. The more integrated accounting, finance, production, sales, and service data, the better the pipeline, backlog, order, margin, and revenue decisions every business will be able to make. The more effective the commercial analytics, deal intelligence, and deal price guarantee applications, the more they’re able to choose the best possible pricing strategy during chaotic times.
Intelligent Pricing Protects Margins In A Downturn
Being data-driven through a crisis helps alleviate risk, demystifies what the actual revenue and order forecasts are, all leading to fewer pricing missteps in uncertain times. The better the data, the more precise projections of downside risk. Using advanced predictive analytics and machine learning, intelligent pricing can deliver commercial analytics, deal price guidance, and deal intelligence. Think of these three areas of commercial intelligence as part of an intelligence pricing engine continually and dynamically always testing and learning through the use of supervised machine learning algorithms. McKinsey’s recent article, Dynamic pricing: Using digital and analytics to take value pricing in the chemical industry to the next level, provides a framework that illustrates why intelligent pricing is needed today. And while the framework is in a chemical industry-oriented article, its core concepts apply to manufacturing.
McKinsey, Dynamic pricing: Using digital and analytics to take value pricing in the chemical industry to the next level,
Preserving margins and enough profit to keep operating during the pandemic requires an entirely new approach to pricing. Knowing in real-time how supplier costs, delays, and unforeseen events impact revenue is a must-have now. Real-time data integration and the speed it delivers is a must-have feature of any pricing system to take on and overcome the many challenges this pandemic has created. Having an intelligent pricing strategy that can quickly interpret, recommend, and act on pricing and margin insights will save more companies in this pandemic than the severest price cuts ever will.
The ideal intelligent pricing system would support real-time integration to ERP, CRM, pricing, and service systems and be built on a solid price management, dynamic pricing, and discount and rebate management platform. Personalizing offers and quoting via machine learning would need to be available across every selling and service channel. Vendavo’s B2B Commercial Excellence platform, coupled with their AI and machine learning expertise, is proving valuable for manufacturers facing the many challenges of operating today:
What Matters Most When Pricing In A Pandemic
Realize everyone is dealing with a hard revenue reset right now, and the need for demystifying sales pipelines, orders, and backlog is shared across nearly every business affected by the pandemic. After speaking with almost a dozen U.S.-based manufacturers over the last week to see how the pandemic is impacting their business, I learned the following:
- Set hard price floors for customers, segments, by SKU (Stocking Unit), vendor, product collection, and segment. Weighing transaction speed or the time it takes to release a sales hold on a price quote versus margin leakage needs to be considered when hard price floors are set. It’s also a good idea to define eligibility flags which customer, product, vendor, or segment prices are eligible for price exceptions that are sent to sales and senior management for approval.
- Price wars waste margins, and do you want a customer who only buys on price anyway? It’s time to quit any deal where there’s a price war going on now and save the margin. Besides, if you’re quoting to a customer who wants to drive your price to the floor or lower, would you take their business in better times? No. Let them go to competitors who are willing to sacrifice margin.
- Support the five most-proven sales strategies emerging out of this pandemic with more flexible pricing to match how your customers want to buy. Cross-sell, upsell, renewals, win back, and new customers are the five most proven selling strategies during the pandemic based on last months’ manufacturing sales. When defining cross-sell and upsell sales strategies, taking into account how offers and pricing can be personalized to the offer level is proving effective today. Bundling in services and transitioning win-backs to subscription-based models that may be more affordable today is also working. New customer wins are still happening, driven by improved deal pricing guidance.
- Using Configure, Price, Quote (CPQ) as a single console for managing pricing while achieving greater enforcement and guidance is a must-do in these times. Achieving greater pricing enforcement and guidance across all sales channels starts with CPQ being the central hub or reference system for price execution. It’s easier to manage product mix decisions and personalize pricing offers by customer, segment, channel, and product. It’s also an excellent way to get warnings or alerts of potential churn and risk detection by customer of low purchasing – all invaluable data to have during a pandemic.