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Current turmoil in the financial markets, highly competitive markets, and downward pressure on product prices strain the profits of companies both large and small. Now more than ever, companies must turn to the most influential, yet overlooked driver of profits: active price management.
It’s not uncommon for companies to realize profit improvement of up to 1% of sales ($10 million in profits for every $1 billion in sales) in 4 to 6 months by addressing pricing opportunities. The following steps can help companies execute successful strategic pricing initiatives:
Improve price responsiveness. To prevent margin erosion, companies should continuously fine-tune pricing across products and services so that it aligns with prevailing market conditions. Communicating prices across the network of sales reps, partners, and distributors also arms teams with the pricing data they need to compete effectively.
Address low-margin business. Companies can accurately identify low-margin business and associated root causes to make informed decisions as to whether certain deals make strategic sense despite low profitability. This way corrective action can be taken if needed.
Tighten cost-to-serve recovery. Tough economic times demand tighter cost-to-serve policies. Companies can classify customers into categories such as "strategic" and "opportunistic" to ensure appropriate cost-to-serve recovery for opportunistic customers while serving the needs of strategic customers.
Set granular pricing. Rather than using an ad hoc approach, companies should set prices and negotiation guidance according to different customer segments. Segment-specific pricing considers factors such as customer perception of product value, prevailing market conditions, and position vs. competitors.
Control "maverick" selling. The absence of guidelines on pricing negotiation, or the ability to enforce them, creates substantial variability in negotiation outcomes. Companies can increase negotiation consistency and improve margins by establishing target prices, approval levels, and floors.
A well-executed pricing strategy provides companies unparalleled opportunities to improve profits, and the steps above will help any company get started.
Director of Marketing
Palo Alto, Calif.
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