Use These Pricing Strategies to Grow Your Manufacturing Company

By Philip Huthwaite on November 10, 2016

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Manufacturers face their own unique pricing challenges with ever-changing products and demand.

It's a real conundrum to accurately estimate a fair market value for manufactured products whilst at the same time managing to keep a close eye on the bottom-line. Just keeping the whole process ticking over can be an achievement in itself ; looking forward to a healthy profit at the end of a revised pricing process should provide momentum and be an added bonus in these difficult times.

Although some manufacturers feel that increased sales volume is needed for increased profits, volume alone does not necessarily mean greater profit. Costs, selling price and unit sales volume must all be in the correct proportions if the desired profit is to be obtained.

The bad news is that 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 - or appear, on the face of it, to bring in the most money for your company. Rather, the "best" price is one that will maximise the profits of your company. The "best" selling price should be both 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.

 

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In addition to the physical factors of cost and profit, price is subject to psychological factors, some of which I'm afraid to say, are out of your company’s control. The best you can do to have control over these psychological factors is to do an excellent job of branding your products and developing the right corporate image and positioning strategies.

Creating a brand image of your product(s) 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).

In these uncertain times, here are 6 pricing strategies to consider:

1. What the Market Will Bear (WTMWB)

In markets where there is little or no competition, manufacturers can employ this pricing strategy. This strategy sets the price based on the maximum price the market will pay for your product.

In the case of a new product your company will of course need to realise the highest profits possible in the shortest amount of time to help recoup research, development, production and marketing costs. At the same time, you don't want your 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 your product brand, your company can easily employ a WTMWB strategy.

 

2. 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 strategy to better react to those predictions.

The pricing analytics will evaluate past performance in specific market conditions and suggest what you’ll be able to sell in a particular product line in each region. This will allow you to set and track prices and goals and monitor how those prices perform against those strategies.

 

3. Provide "hot off the press" pricing for your sales team

The goal for the manufacturer is to set a price and communicate that price to the sales team in real time to their smartphones so they can quote with those prices. With an automated pricing or configure price quote (cpq) solution, manufacturers can reset prices multiple times per day based on information that they gain from the marketplace.

The more information your sales team has available, the better it will assist with their negotiations. Of course you will need to monitor the outcomes and reset prices when necessary. Having effective pricing software enables manufacturers to automate the whole process of pricing and really make substantial inroads into their respective markets.

A by-product of an optimised pricing solution is that it makes it easier for your sales team to make a decision on whether to discount - or not.

 

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4. Focus on customer satisfaction

A pricing software system 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.

 

5. Set prices that capture value

This pricing strategy considers the value of the product or service to your customers, as opposed to just considering the costs incurred to create and produce it. A value-based approach maximises your profitability, no matter what the manufacturing environment.

You will need to determine how much money or value your product generates for your customer, originating from factors such as, for example, increased efficiency, health, happiness or stability. Companies that produce pharmaceuticals, chemicals, computer programs, software and artwork often use this pricing strategy.

Your 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). This pricing strategy involves putting yourself in their shoes - and thinking as they do.

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 lifecycle of existing products

  • Capture maximum value of new product offering

  • Identify high-value customer segments

 

6. Understand that not all customers are the same

Pricing is the one area of business where manufacturers may behave as if all their customers are the same by setting one price for each product – and not deviating from that price under any circumstances.

The key to developing a comprehensive pricing strategy involves embracing (and therefore profiting from) the fact that customers’ pricing needs differ in three primary ways: pricing plans, product preferences, and product valuations. If you offer your customers "pick-a-plan", "versioning", and "differential pricing" you can best serve these diverse needs.

  • 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 your customers is to offer basic, standard, and premium versions of your product (s). These options allow customers to choose how much to pay for a product – and what will best suit their own 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 demographics, quantity ordered, delivery time, payment terms, etc. Also called discriminatory pricing or multiple pricing.

 

Conclusion

Manufacturing can be highly competitive, where innovation is often the only critical differentiator. 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 underutilised 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.

 

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Sources

http://sloanreview.mit.edu/article/is-it-time-to-rethink-your-pricing-strategy/

http://www.steelvalley.org/blog/132-costing-and-pricing-strategies-for-manufacturers-in-northwest-pennsylvania

http://www.reliableplant.com/Read/25705/Tips-better-pricing-manufacturers

http://www.businessinsider.com/3-powerful-pricing-strategies-businesses-should-always-consider-2013-10?IR=T

http://www.leveragepoint.com/customers/manufacturing

http://slsaj.com/slsaj/wp-content/uploads/2011/10/12-Pathirana-and-Heenkenda.pdf

http://www.manufacturing.net/article/2010/03/top-five-pricing-strategies-come-out-ahead-economic-recovery

http://pricepointpartners.com/manufacturing-price-

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

Pricing for Profit:how to develop a powerful pricing strategy for your business, Peter Hill 2013

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