Terms like “major disruption”, “volatile”, and “all-time high” have become so commonplace over the last few years that they’ve lost their meaning. We’ve learned by now that we have to expect the unexpected and that we have to design our businesses around the idea that everything could upend overnight. If we’re not able to adapt, we simply won’t make it. And this couldn’t be truer than for those in the manufacturing industry.
At Pricefx, we have over ten years’ experience helping companies in the manufacturing industry develop successful pricing plans and to respond quickly and appropriately to sudden and unforeseen changes. In fact, we were recently awarded the Silver Stevie® Award in the 2021 US Business Awards® in the category of Manufacturing Solution.
In this article, we’ll explore some of the biggest challenges manufacturing companies will be facing in the year ahead, and the key pricing metrics they should be focusing on to mitigate them.
Setting the Scene: The Manufacturing Industry
The economy has taken a bashing these last few years. Not a single industry has been left unaffected—some positively, most scrambling to catch up with the urgent need to digitally transform.
With the prices of raw materials (from iron to plastic) and transportation sky rocketing, supply chain disruptions and worker shortages jeopardizing long-standing contracts, plummeting customer confidence reflecting fears of a global recession, the need for rapid diversification of channels, and changing consumer demands in the projection of a climate meltdown, manufacturing companies have had a LOT on their plate.
The competitive landscape has intensified and manufacturers are turning to technological advancements and software to help them stay relevant and increase revenue through operational efficiencies and a more segment-aligned value-based approach to pricing.
But if recent history proves anything, volatility, in its countless forms, is here to stay. Change is something we can depend on. Manufacturers know they have to be adaptable to survive and that they need the pricing plans and tools to help them respond to change quickly and adeptly.
So, let’s explore some of the biggest challenges, trends, and key pricing metrics manufactures should be focused on in the coming year.
Key Pricing Metrics for Manufacturing
With the long list of challenges manufacturers are dealing with, it’s time to get competitive through granularity.
Challenge: Ever-Fluctuating Costs Eating Into Margins
Pricing Metric: Real-Time Data From Raw Material Indices
Key to enhancing profit in a volatile market is being able to track the prices of materials and components used in the production of your products with real-time data inputs direct from the indices. You need to accelerate your speed of repricing so that you’re always passing costs on to customers and not swallowing them in your margin or failing to pass reductions on when applicable. For this you need a responsive pricing solution that can dynamically reprice in real time based on raw material input data.
Challenge: Leaving Money On The Table
Pricing Metric: The Value Of Your Offering
Meaningful cost-cutting efforts in the manufacturing industry were maxed out even before the pandemic hit, when sudden reduced demand tempted manufacturers towards greater and greater promotions and discounts. But these will only kill the value of your offering, could lead to a price war, and can be almost impossible to recover from.
This year will see manufacturers moving to a new mindset where the path to profits and growth in the competitive landscape comes through revenue not discounts. Value-based selling—pricing based on the willingness to pay of certain segments of customers—will take center stage. You’ll therefore need the systems in place to help pricing teams understand where your value lies and to create value-based strategies that align to your business goals.
Challenge: Vicious Competition
Pricing Metric: The Significance Of Rebates
Manufacturers will begin to focus more on customer loyalty. Rebate incentives encourage customers to keep coming back to you and can even help you create mutually beneficial relationships where you grow together.
The trouble with rebates is that they are notoriously difficult to keep track of. What terms were agreed with whom? How does this one-time agreement impact our long-standing terms? Which customers are nearing a threshold? How long will it take us to pay out? Are we giving money away?
To build a successful and competitive rebate program, manufacturers need full visibility of their customers and which terms apply and to be able to track rebates, processing payouts, and create win-win scenarios.
Challenge: Building A Strong Pricing Strategy
Pricing Metric: Sales Histories
No matter the size of your organization, tracking sales histories is incredibly important. You need clear and comprehensive sales data in order to identify trends, spot region or seasonal patterns or cycles, predict future sales and volume, calculate budgets and set prices.
When combined with customer, competitor and market data, sales histories can help you build a successful pricing strategy for the year ahead and can help you identify potential problems before they occur and remedy them before they have impact.
Challenge: Time Inefficiencies Are Putting Customers Off
Pricing Metrics: Sales Turnaround, Lead Time And Production Downtime
If your customer is waiting too long for their order, or the experience of dealing with you is protracted or painful, you’ll not keep them for long. It’s essential you’re measuring and improving on KPIs around operational and service efficiencies.
You can accelerate turnaround of ordering, quoting and approvals with clear pricing guidelines and automated workflows, by ensuring sales reps have access to the full picture for each customer, and by having all customer and pricing data in one place.
Your lead time (the amount of time required to manufacture one of your products) should be calculated and understood to prevent losses, maximize profit and fulfill orders quickly and efficiently. We expect to see a more significant move toward predictive maintenance in order help reduce the financial loss due to unplanned downtime thanks to accurate real-time condition monitoring, reporting, and optimization, enabling manufacturers to schedule in advance.
Challenge: Unpredictable Bottom Line Figures
Pricing Metric: Total Cost-To-Serve Figures
Cost to serve is the total amount it costs you to serve your customers, from order-taking, through fulfilment, to any aftersales services, taking discounts, promotions, rebates, and any other customer benefits into account.
By tracking the metrics above (sales turnaround, lead time, and downtime), you’ll get a good idea of where you can be saving on pre-production and production costs to serve. But one area that’s often a hidden (yet major) expense for manufacturing businesses is warranty cost, which can vary from 1% – 5% of the final sale price. This can amount to billions of dollars annually for large-scale enterprises and have a very real impact on the bottom line.
It is therefore essential that you have full visibility down the pricing waterfall in order to clearly see how your list price will eventually hit the bottom line.
Key Takeaway For The Year Ahead: The Devil is In the Detail
When it comes to driving performance, there is no lever more powerful for a business to pull than pricing. And the most important component to a great pricing strategy for manufacturing will be granularity.
By enabling dynamic pricing changes based on real-time raw material indices, taking a value-based approach to pricing, focusing in on individual customer sales and rebates, eradicating inefficiencies in processes and production, and gaining full visibility of your entire waterfall, you’ll be ensuring relevance and profitability during this highly unpredictable time.
The year ahead will be about getting down and dirty with detail, and adapting and managing price fluctuations.
Check out 8 strategies to combat unpredictable changes and supply chain issues in the article link in the image below.
Jose Paez is a Solution Strategist at Pricefx with 14 years of experience as a pricing practitioner. In his career, he has led in every aspect of pricing from analysis and optimization to pricing strategy definition and execution. His experience in driving and implementing initiatives in digital transformation has given him insight into the typical roadblocks organizations face and the best paths to release the untapped potential of pricing organizations.