From time to time, companies move unexpectedly into new areas, challenging the established businesses in that space and shaking up traditional markets. One of the biggest Internet companies in the world, Amazon, has recently done just this, announcing in April its move into the B2B space. Its web-based distribution service, Amazon Supply, provides a broad range of industrial, manufacturing and scientific supplies to business.
However, Amazon is not the first company to challenge established markets. Airlines such as Ryanair and easyjet shook up their industry by bringing an entirely new approach to air travel, which in turn caused many other airlines to reconsider their pricing.
Similarly, Apple stirred up the mobile communications market with its introduction of the iPhone; a game-changing device that went far beyond phone calls and text messages and caused other mobile phone manufacturers to reassess their offering.
In today’s economic climate, we can expect competition to come from increasingly unusual places. The question is how can companies already established in their markets – smaller companies in particular – head off newcomers that look and act so differently?
The answer lies in the approach taken to sales and the way in which data is used to put together the best possible deals for both customer and seller. Many companies believe they are managing pricing effectively. In reality, this is not the case, at least not at the level of real-time detail required.
An analysis of pricing data for 1,235 service parts revealed that more than 75 per cent were sub-optimally priced when using a market-based pricing strategy. Fixing issues like this can deliver tangible results. McKinsey and Company points out that a one per cent increase in pricing accuracy can yield an eight per cent increase in profitability.
Given the challenges presented by competitors, pricing today needs much greater understanding, insight and analysis as a means of staying competitive. Pricing is far moredynamic now than it used to be years ago; part of the modern pricing strategy must be keeping up with the constant real-time changes that affect pricing decisions.
In these uncertain economic times, the cost of manufacturing a product can change according to minute-by-minute developments in market conditions and demand volatility. The ‘real’ price of a product can and should be altered to take into account these changes and accurately reflect the ‘real’ cost of its manufacture. A better understanding of real costs and real prices therefore leads to better profit margins.
There has been an explosion of information for making pricing decisions, enabling customers to easily search electronic catalogues and make price comparisons. The days of the blanket price list, assembled and issued once a year, are gone. As customers are becoming more savvy when it comes to finding a good price, businesses need to adapt accordingly.
Pricing alone, however, does not always win the customer. The type and the size of the deal are also important. Large newcomers, like Amazon Supply, might appeal because of their ease of use but are aimed at companies wanting to buy smaller numbers of goods at very low costs.
For larger volumes of sales, more traditional companies that can negotiate deals on hundreds or even thousands of parts make better business partners. The reality for many companies is that they will not be competing on price alone.
In much of the distribution market, for example, sales are negotiated on a wide variety offactors, including bulk deals, consulting, delivery schedules, financing, service agreements and training. Companies have to understand and manage their sales process in order to differentiate themselves and offer the best price as part of the overall package. This does not necessarily mean the lowest price.
The approach must be focused on using available data in the most intelligent way possible. Understanding and integrating accurate pricing data into sales strategies can help companies understand where they can win business based on what matters most to each customer. However, many companies assume they are addressing pricing properly already and so pay little attention to the effect it can have on sales.
The reality is that pricing is an issue that has to be tackled in a strategic, methodical and end-to-end way. It is rare that one person or team focuses on pricing or is accountable for it throughout the sales process. The global management consulting firm, McKinsey & Company, believes that less than 15 per cent of companies systematically research pricing. Price listings are often set by taking costs and adding on a percentage margin, regardless of analysis into customer situation or sales activity.
While many companies believe they are handling pricing, they might not be taking the scientific approach needed to ensure that valuable profit is not left unclaimed duringsales negotiations. The introduction of newcomers and irregular competitionmight make companies believe that they simply have to reduce pricing.
They might focus on lower margins, narrower cost coverage or market based pricing strategies. However, this can leave products sub-optimally priced since theprice is not set from data gathered about what the customer themselves would be willing to pay.
This type of insight requires the ability to pull data from multiple systems within and outside the company, gathering together available pricing intelligence. In the same way that business intelligence and Enterprise Resource Planning (ERP) have developed to help organisations run their businesses, pricing optimisation can also offer similar opportunities to grow business.
With a real-time, end-to-end pricing strategy in place, companies can design a consistent framework within which sales teams can negotiate, setting parameters for crafting deals that are based on data, not a hunch. This arms the sales team with information to reach the best possible deals, and ensure that profit margin is not needlessly left on the table. It can also help speed up negotiations and help companies understand when and how to offer a deal, but equally, to help guard against companies that challenge established markets on low price alone.