Inflation is already climbing, which poses a major risk for profitability over the next coming months and beyond. The first instinct for many executives will be to cut costs to protect their bottom line, but in the inflation economy, cost control alone simply is not enough to stay ahead.
It all comes down to pricing. McKinsey reported that sophisticated pricing analytics and software provide key insights for pricing more intelligently, and consequently, increasing revenue and profitability.
1. Measure Profitability at a Granular Level
The first step to better pricing management is greater profit visibility, but only 31% of companies measure profit margin as part of their sales analytics – and they’re missing a major opportunity. To gain more profit visibility, you have to analyze profitability accurately with up-to-date, precise, and actionable measurement data. Break it down by product, channel, customer, or some combination of the three to gain more accurate, specific insights.
2. Be Proactive with Pricing Action
With increased visibility into details behind business profits, you’ll naturally have more insight into changing market conditions. With more specific data, you can be proactive – instead of reactive – and aggressively identify and target competitive pricing opportunities to improve success within a specific channel, geographic area, product, or customer set.
More importantly, it’s easier to protect your bottom line with effective pricing than with a cost-focused approach. A company with a 65% gross margin and operating costs of 50% of sales would need to reduce its cost of sales by 3% or cut operating costs by 2% to equal the result of a 1% price increase.
3. Speed Up Pricing Approvals
Efficiency is critical. You need precise, up-to-date pricing guidance to speed up the pricing approval process. And it doesn’t matter how impressive the pricing strategy and price-setting process is – if you have delayed or inconsistent pricing approval, it will slow everything down.
The simplest and most effective way to speed up pricing approvals is with software that gives sales reps clear and timely pricing guidance for each individual deal.
That’s why purpose-built, enterprise-capable software is a critical component of a strategic pricing and profitability initiative.
4. Minimize Margin Leakage
With inflation on the rise this year, it’s important to avoid preventable margin leakage as much as possible. It’s “preventable” because the common causes are poor price setting with insufficient granularity, ineffective control of discounts or negotiated prices, or lack of understanding of costs to serve a particular customer: free shipping or unbilled handling costs.
All are avoidable if you can provide sales reps with clear guidance on pricing. With more detailed analytics, you can set data-driven pricing targets that support your business model and motivate sales reps to offer only appropriate discounting.
5. Optimize Your Pricing to Improve Profitability
Pricing optimization allows you to improve profitability while still meeting and even exceeding sales objectives. In most cases, this also provides a real competitive edge. Research found that only 15% of surveyed companies had adopted price optimization – so if you implement it at your business, you’re already at a unique advantage.
The easiest and most accurate way to optimize pricing is through AI and ML enhanced software that accurately segments customers by key factors like price sensitivity, buyer characteristics, and historical behavior. Critically, the segmentation must be clear and easily understood by the business, and especially the sellers. And in some cases, that means that the business will need to override the suggested segments – make sure that this simple adjustment doesn’t require PhDs and a 6-month project.
What Can We Conclude..?
While cost control is still crucial for running a successful business, a data-driven pricing strategy has a greater impact on the bottom line – and is ultimately what will set companies apart from the rest of the competition. Especially during a period of increasing inflation.