Robust data analytics are critical to any successful strategic pricing endeavor. Here’s why:
Client ERP systems and websites capture immense amounts of customer-related data. The best pricing organizations rigorously analyze their data to glean critical pricing and profit-improvement insights from that data. Examples include:
- Customer segmentation
- Historical growth & performance by segment & size
- Price levels by segment, size, geography, & sales person
- Period to period price realization by product, customer & segment
- Price elasticity by segment & category
Do Small Customers Pay More?
In this case more rigorous data analysis is needed because looking at customers in groups can hide some of the true story. Although the margins on smaller customers may be higher on average than large customers, it does not necessarily mean that there aren’t some small customers with inappropriately low margins that can and should improve.It is analogous to a team batting average in baseball (we like sports analogies). The Yankees may have a team batting average of .280, but they might have some players hitting much closer to .200. Most baseball fans would say a player batting .200, unless it is a pitcher, is under-performing. The coaches and fans may be generally happy with the team average, but they expect that .200 hitter to improve.
Pricing in B2B markets is similar to baseball. There is usually a lot of variation within actual prices paid and margins earned. Analysis of price levels can help find those underperformers that must be corrected.
If your company looks at the averages of groups of customers, there are probably several under-performing customers or products that are hidden from your view. Strategic Pricing Solutions can help you analyze the data to determine if your customer prices look like Figure 1, or more like Figure 3. If they resemble Figure 3, we can help you begin to correct them.
Are there Geographic Differences in Prices?
“Our market is different”. “New York is more competitive”. “The west coast is more competitive”. Statements like these are heard in most national or international businesses. Most people within the companies generally believe the statements are true, and they may indeed be true. But if there is no data analysis process employed, these statements may be no more than folklore and therefore may not really represent competitive behavior Accepting those statements as truth simply enables sloppy pricing and lower margins.
Are Margin Reviews Sufficient?
How can you tell if your customers are paying the right price? For most companies, the answer is by looking at margins for segments of the business. If one segment shows much of an increase or decrease, that change is investigated. But is that amount of pricing analysis enough? Even if the company is profitable and earning a nice margin, does that necessarily mean the pricing is sound? The answer is no.
What if your company is more thorough and looks at the gross margins of each customer? Perhaps you stack rank them and create action items for the low-margin customers. Is that enough? The answer is maybe not.
A customer gross margin represents the average margin generated by all of that customer’s purchases in a period. But for a variety of reasons, some products have higher margins than others. For example, the gross margins on computer accessories tend to be much higher than the gross margins on the computers themselves. Suppose the average margins are 10% on computers and 30% on accessories, resulting in an overall average margin of 15%. Also assume the seller makes money with those margins. If one customer only buys accessories, perhaps as a reseller and the margin on that customer’s purchases are 16%, is the customer paying a fair price? The answer is probably not. Even though the customer’s overall margin is better than average, the customer appears to be paying less for the products it buys than other customers pay.
These are all very difficult pricing scenarios to assess if there is not a rigorous data analytics process in place.
Are High Prices Causing Lost Volume?
Measuring the impact of price levels and price changes is a critical part of strategic pricing. Making decisions based on gut feel or a few anecdotes can cause misaligned prices and lower profits. Analyzing the right data can help get the facts.
Contact us to learn more about pricing analytics.