How Manufacturers Can Use Price Optimization for Revenue Growth
by Miranda Drewitz
Anyone who understands the very fundamentals of how a business works knows the importance of product pricing.
A business, especially a manufacturing business, succeeds by producing a product and then selling that product to a customer for more money than it costs to make the product.
It’s as simple as that.
However, even in the most basic of manufacturing businesses, there are many factors that make the process more complicated.
Manufacturing and selling a product requires resources of many kinds, and in order to understand how much it costs to manufacture the product, you need to be aware of the cost of all of those resources. You have to take into account each and every cost of manufacturing, from initial product development through distribution, and the price you set for the product has exceed the total in order for you to make a profit.
But what if that price is more than your customers want to pay? Then you’ll have a problem because you won’t be able to turn a profit on the products you sell, and you’ll go out of business.
On the other hand, if you’re delivering a product that your customers value highly and you set your price lower than they’re willing to pay, you’re leaving profits on the table. Your company’s revenue will not as great as it could be. It’s to your advantage to understand your market so that you’re pricing your product at the level that the competitive landscape will bear.
Price optimization is the process of finding the right price level, neither too high nor too low, so that you can sell the most product at the greatest profit margin. Set your prices too high and you’ll sell fewer products. Set your prices too low and your gross revenue suffers. An optimal price finds the perfect balance right in the middle of the spectrum.
Price optimization software solutions can quickly increase profits by 10% or more, but to use them effectively, you’ve got to know how to successfully implement a cost-optimization process in your company.
Goals of Price Optimization Processes
The foundational goal of a price optimization process, of course, is to find the best pricing strategy for your products so that you can maximize your revenue growth and profit margins.
To make that happen, though, you’ll have to reach some milestones in the implementation of the process.
First, you’ll have to get buy-in from your whole organization, with all your business units committed to supporting the process.
When that’s done, you’ll have to develop a strategy that’s based on market data and that accurately reflects your customers’ view of your products’ value.
Finally, you’ll have to set specific goals that the entire organization can work toward in the implementation of the strategy.
Getting Buy-In from Everyone
Everyone in the company, from product development to finance and sales, is a stakeholder in the price optimization process, and they all have a role to play in the implementation of the process.
Product teams are crucial in defining the factors that influence a product’s value, and finance contributes an understanding of the true cost of the product. Pricing teams develop a strategy and set prices, and marketing and sales teams develop strategies for implementing and optimizing new pricing structures.
An effective price optimization process brings all these teams together and assures that they are all working toward the same goals and have a thorough understanding of the process.
Looking at the Data
In order to optimize your pricing strategy, you need data, and, fortunately, most manufacturers have lots of data to work with. Historical data of your marketing, sales, and costs are essential for the process, as is similar data for your competitors. Price optimization software offers tools to track pricing data for your competitors in real time, giving you accurate current data to work with.
An analysis of all this data can give you a picture of the market values and how your products are performing in the market.
What Your Data Can Tell You
The data you collect internally can tell you which of your products’ features are delivering the most value to your customers, whether you’re meeting sales goals, whether you’re using resources efficiently, and whether your development and marketing processes are working efficiently.
When you have an idea of where you’re failing to meet your goals, you can make adjustments in terms of product pricing, features, or marketing to try to find improvements.
Constant data analysis allows you to make these adjustments regularly so that you’re always searching for the optimal pricing strategy.
What Your Competitor’s Data Can Tell You
Comparing your data to that of your competitors allows you to see where you stand in the competitive landscape. Are you charging much less than your competitors for a comparable product? If you are, you’re losing money. Are you charging much more? In that case, you’re probably losing sales, which means that you are, again, losing money.
Moving your prices relative to those of your competitors can shift your position in the market, but you always have to be aware of internal data that influences your costs.
Using Price Optimization Tools and Technologies
E-commerce price optimization tools are designed to make the entire process as easy as possible. The tools aggregate and analyze cost and pricing data, both from your internal sources and from your competitors, bringing the price optimization process into focus and keeping your goals in sight.
Staying Flexible with Your Pricing Strategy
No matter what market you do business in, that market is always in flux. Customers’ needs change, and the value they derive from your products change along with their needs. Your internal conditions change, and your competitors evolve.
Thus, price optimization is not something you do once. It’s a continuous process, and to do it effectively, you need to leverage all the tools at your disposal in an on-going, organization-wide process.