Pricing: The Real Differentiator in a Commodity-Driven Business
April 28th, 2021 | 6 min. read
By Robert Smith
Pricing: The Real Differentiator in a Commodity-Driven Business
Commodity-driven businesses are challenging to run successfully. Price transparency is high, and value differentials versus competition are low to non-existent, driven primarily by service differentiation. Earnings and margin targets are heavily impacted by volatility in underlying raw material and energy costs. As well documented by many consulting firms, price is the biggest lever available to a company to address earnings improvement, with far higher leverage than cost reduction or increasing volume. Additionally, most commodity-oriented businesses are mature and the temptation to improve business by seeking additional market share or volume simply leads to price wars and earnings reductions. All of this adds up to a highly competitive landscape requiring keen insight, agility, and speed to navigate successfully.
Most companies in this environment are also balancing the above challenges with the need to digitally transform their operations while continually reducing operating costs. COVID-19 has driven the need to have more effective online and back-office operations to support ways of selling and delivering product that more closely resemble online B2C experiences. This has proven difficult in environments where many companies rely on outdated processes, systems, and technology.
From a senior leadership perspective, a key question to ask is whether the pricing, sales, and marketing teams in your company have the processes, systems, and technology in place to successfully support earnings and margin goals, while simultaneously addressing digital transformation and cost reduction goals. Successfully addressing these needs can provide the following benefits to your company:
- Reducing margin compression and increasing earnings
- Enabling sales, marketing, and pricing teams to have the insight necessary to identify and plan necessary pricing actions
- Improving the speed and agility of planning and implementing pricing actions
- Reducing effort and risk by increasing automation and reducing pricing errors and their consequences
How can these be achieved? How can pricing become a positive differentiator for your business? Let’s look at each of these a bit more closely.
Reducing margin compression and increasing earnings
In today’s fast moving business world, when margins can fluctuate dramatically from month to month due to underlying raw material and energy changes, it’s critical to have analytics in place to look at past and expected future margin performance on a product and account-specific level. This requires tight integration into ERP systems for cost history and forecast, as well as the ability to apply this information to customer price history and forecasts at every level in a product hierarchy. Can your pricing and sales teams do this?
Enabling sales, marketing, and pricing teams to have the insight necessary to identify and plan necessary pricing actions
With such insight, business teams can begin to insightfully plan and implement pricing actions to address expected margin deficiencies. The planning needs to take advantage of existing knowledge and technologies to enable actions for the right products and customers that have a high likelihood of success. Leveraging machine learning and artificial intelligence makes this possible today. Additionally, these capabilities allow sales to face customers with accurate price targets for their products, as well as pricing guidelines that can equip them to make appropriate adjustments without having to escalate them through time-consuming approval processes.
Improving the speed and agility of planning and implementing accurate pricing actions
Additionally, these plans and actions need to be developed and executed with speed, quickly bringing the right price to the customer. Speed wins business and brings customer delight. It shows that the seller knows and understands the market and the pricing that is correct for each customer. Speed also provides an advantage over businesses that have failed to upgrade systems and processes to operate in a business world moving at ever-increasing speed. It becomes a positive differentiator for your business.
Reducing effort and risk by increasing automation and reducing pricing errors
Finally, automation increases can bring timely implementation of mass price changes, improved price realization with speed and fewer errors due to elimination of manual entries, and accurate and efficient application of formula and index-based pricing. As many commodity products will be sold to customers seeking the use of external price indices or formulas to govern price changes, having the ability to import these indices or formula cost factors and automate application of them will reduce pricing errors, minimize invoicing errors, and reduce customer short payments or delayed payments.
This all sounds great…is there an “easy button” to help my company get to these outcomes? Yes, Pricefx is a software-as-a-service price management solution that seamlessly integrates with your team’s existing technology stack to bring all pricing data into one place for excellent visibility, management, collaboration, analysis, and execution. Consider the potential contribution of these modules to your company’s pricing effectiveness:
- The PriceAnalyzer module shows you where the pain points are – which products and accounts need adjustment based on ongoing changes in market prices and underlying costs. As broader price change initiatives are implemented, opportunities for additional adjustments can be identified here.
- The PriceBuilder module enables you to structure your product and customer-specific price lists, evaluate what-if simulations of price changes for impact on key goals, and set pricing policies and guidelines. It enables rapid execution of mass price changes to address margin compression issues.
- The PromotionManager module enables definition and automatic calculation of index and formula-based pricing to eliminate errors in calculation and to enable speed of implementation of price changes. Additionally, external indices and price markers can be fed automatically into PromotionManager, enabling speed in execution and eliminating errors from rekeying of data.
- PriceOptimizerAI allows the determination of product and customer-specific target prices and guardrails for timely execution by sales teams. It can also help determine the appropriate timing of price changes to avoid margin compression in light of customer-specific price change constraints. PriceOptimizerAI is a “clear box” methodology, meaning you can see and understand how guidance is calculated and make adjustments as necessary to support your objectives.
- The QuoteConfigurator module lets you leverage price and margin targets and guardrails, and empowers the sales team with automated approval workflows, clear pricing guardrails, and pricing rules for quicker and more confident quoting than ever before.
- As a cloud-native application, when new features and technology emerge, your pricing team has rapid access to these capabilities without costly upgrades. A recent example of new capabilities that can help in margin realization is Velo. Velo enables recognition of value drivers for differentiated products and applies them to price setting activities to ensure differential value is not negotiated away.
To wrap it all up, with Pricefx, you can be leveraging price as your differentiator by doing it best: always giving the right price to the right customer at the right time and closing those deals fast.