The Pricing Challenges as a Manufacturer
Manufacturers face their own unique pricing challenges: ever-changing products and the challenge of accurately estimating a fair market price/value for those products.
No surprises here! If you are a manufacturer, the goal should be to maximize profit!! Although some manufacturers feel that an increased sales volume is needed for increased profits, volume alone does not necessarily mean more profit. The ingredients of profit are costs, selling price, and the unit sales volume. They must all be in the proper proportions if the desired profit is to be obtained.
Bad news alert - no one pricing strategy or formula will produce the greatest profit under ALL conditions. To price for maximum profit, the manufacturer must understand the different types of costs and how they behave. Up-to-date knowledge of market conditions is also essential because the "right" selling price for a product under one set of market conditions may be the wrong price at another time.
The "best" price for a product is not necessarily the price that will sell the most units. Nor is it always the price that will bring in the greatest wadge of notes. Rather, the "best" price is one that will maximise the profits of the company. The "best" selling price should be cost orientated and market orientated. It should be high enough to cover your costs and help you make a profit. It should also be low enough to attract customers and build sales volume.
Pricing Managers will attest to the fact that determining real cost is not easy: in addition to the physical factors of cost and profit, price is subject to psychological factors, some of which are out of your company’s control. The best you can do to have control over these psychological factors is to do a good job of branding. To get the branding right, companies have to know how to develop the right underlying corporate image and positioning strategies.
Key Factors to Consider When Setting Prices as a Manufacturer
Production costs: Understanding the complete manufacturing cost, including raw materials, labor, and overheads, is crucial to set prices that cover these costs while ensuring reasonable profit margins.
Competitor pricing: Careful analysis of competitors' pricing strategies allows manufacturers to determine competitive prices that attract customers without compromising profitability.
Market demand: Evaluating the level of demand for the product in the market helps manufacturers establish appropriate pricing to optimize sales and revenue.
Value proposition: Assessing the unique selling points and value the product offers compared to competitors helps justify higher pricing and effectively communicate the product's benefits to customers.
Customer perception: Considering how customers perceive the product and brand assists in adopting the most suitable pricing strategy. Creating a brand image of the product that is impossible, or extremely difficult to copy is the key to having control over your pricing strategies. If you are able to do that, you will be able to employ the most powerful and effective of all pricing strategies – What The Market Will Bear (WTMWB).
The 8 Pricing Strategies
1. What the Market Will Bear
In markets where there is little or no competition, companies can employ a pricing strategy that optimises profits. It is often called a What The Market Will Bear (WTMWB) price. This strategy sets the price based on the maximum price the market will pay for the product. On the one hand, the company wants to realize the highest profits possible in the shortest amount of time to help recoup high start-up costs, such as research and development, production, and marketing costs.
On the other hand it may not want its profits to be so attractive as to entice a ruthless competitor to enter the market within the time window it needs to build market share and establish a leadership position. This strategy typically works because those likely to buy a new product – the Innovators and Early Adopters – are not particularly price sensitive. If there is considerable uniqueness and desirability built into the product brand, your company can employ a WTMWB strategy.
2. Identify underperformers
In good times companies may focus less on identifying areas that are underperforming because rising tides in profits tend to cover their losses. However, it becomes even more important in a down economy to identify underperformers so you can understand why certain customers or certain product lines might be costing your company money.
3. Use Pricing Analytics
Use a predictive, analytic tool, also known as a price optimisation system, to identify what is likely to happen in the future and to set your pricing/performance strategy to better react to those predictions.
The pricing analytics should evaluate past performance in specific market conditions and suggest what you’ll be able to sell in this particular product line in each region – and it will allow you to set and track prices and goals and monitor how those prices perform against those strategies.
4. Provide optimized sales pricing for your sales reps
The goal for the manufacturer is to set a price, get the price back to the sales reps, quote deals with those prices, monitor the outcome and then go back and reset prices if necessary. Having effective pricing software enables manufacturers to automate that process and really make inroads. With an automated pricing system or cpq solution, manufacturers can reset prices multiple times per day based on information that they gain in the marketplace. It allows sales people in the field to quote prices to customers from information and updates sent in real-time to their smart phones. The more information your sales team has available, the better it will help when negotiating long-term contracts.
With an optimized sales pricing strategy, you’ll also help sales people that tend to discount much more than they should. With objective evidence from a price solution, it makes it much easier for a sales person to make a decision on whether a discount is necessary.
5. Focus on customer satisfaction
Dynamic pricing software with a product analysis tool will boost customer satisfaction and improve efficiency, speed up order processing and help identify substitute product lines that might better fit a customer's needs or budget. This analysis allows a salesforce to look at the whole picture, rather than just on a transaction-by-transaction basis. This can help identify customers that purchase multiple products across different product segments. Your sales team will have the advantage of being able to create a 'package deal', a one-stop shop for customers, allowing you to increase and enhance their purchasing capacity.
6. Set prices that capture value
A value-based approach maximizes your profitability, no matter what the manufacturing environment. This pricing strategy considers the value of the product or service, as opposed to the cost the company incurred to create and produce it. To do this, the company determines how much money or value its product or service will generate for the customer. This value could originate from factors such as increased efficiency, happiness or stability. Companies that produce pharmaceuticals, chemicals, computer programs, software and artwork often use this pricing strategy.
The right way to set prices involves capturing the value that customers place on a product by “thinking like a customer.” Customers evaluate a product and its next best alternative(s) and then ask themselves, “Are the extras worth it?" or is the discounted product as good as the "high end" one. They will ultimately choose the product that provides the best deal (price vs. attributes). If a new product offers a better value (more attributes and/or cheaper price), many will defect – unfortunately that's life!
A value-based strategy enables manufacturing companies to:
- Deploy this strategy across a broader range of customers and markets
- Establish value-added supplier relationship
- Extend the life-cycle of existing products
- Capture maximum value of new product offering
- Identify high value customer segments
7. Create a value statement
Every company should have a value statement that clearly articulates why customers should purchase their product(s) rather than what your competitors are offering. Be specific in listing the reasons to boost the confidence of your salespeople so they can look customers squarely in the eye and say, “I know that you have other options, but here are the reasons why you should buy our product.”
8. Understand that not all customers are the same
Pricing is the one area of business where companies behave as if all their customers are identical - by setting one price for each product. The key to developing a comprehensive pricing strategy involves embracing (and profiting from) the fact that customers’ pricing needs differ in three primary ways: pricing plans, product preferences, and product valuations. Pick-a-plan, versioning, and differential pricing tactics serve these diverse needs.
Provide pick-a-plan options
Customers are often interested in a product but refrain from purchasing simply because the pricing plan does not work for them. While some want to purchase outright, others may prefer a selling strategy such as rent, lease, or pre-pay. A pick-a-plan strategy activates these customers. New pricing plans attract customers by providing ownership options, mitigating uncertain value, offering price assurance, and overcoming financial constraints.
Offer product versions
One of the easiest ways to enhance profits and better serve customers is to offer good, better, and best versions – or bronze, silver and gold if you prefer! These options allow customers to choose how much to pay for a product – and what will best suit their requirements.
Implement differential pricing
For any product, some customers are willing to pay more than others. Differential pricing is a method in which a product has different prices based on the type of customer, quantity ordered, delivery time, payment terms, etc. Also called discriminatory pricing or multiple pricing.
Pricing Strategy is Important Yet Simple
Manufacturing can be highly competitive, where innovation is often the only critical differentiator. Manufacturing companies need to capture the full value of their broad product lines throughout their entire life cycle and through multiple distribution channels in order to be a leader. Since pricing is an underutilized strategy, it creates fertile ground for new profits.
The beauty of focusing on the pricing strategies mentioned here is that many of the concepts are straightforward to implement and can start producing profits almost immediately.
- Pricing for Profit:how to develop a powerful pricing strategy for your business, Peter Hill 2013
- The Strategy and Tactics of Pricing, Tom Nagle and John Hogan 2016
- Pricing with Confidence:10 ways to stop leaving money on the table, Reed K. Holden and Mark Burton, 2014