Enhancing business growth through proper price management
Achieving the maximum potential of a company's growth
Business is very competitive and no matter what the company is; they are always looking for the best possible way to maximize profits. There are a number of companies that use price management as a way to help improve their bottom-line. This creates value for their shareholders and maintains customer satisfaction because price reduction adds to demand. But what exactly is price management and what are some of the key elements that help a particular company? The following will cover some of the more important aspects to this approach.
Why do companies need price management?
Profits and efficiency are what all companies strive for. After all, profits are the sole purpose of any company’s existence. Price management helps address some of the key areas of concern that translates to an increase in profits. There are three fundamental areas that are addressed by price management: price optimization, price execution, and price enforcement. Price optimization is how prices for products are set. Price execution helps set rules on how the prices are communicated and delivered to buyers and salespeople. Price enforcement helps offer direction with contract compliance as well as deal negotiation. Each company tends to be at different levels of maturity when it comes to these basic areas. So each company may approach these areas in a different way.
Concerns that are addressed
Instead of focusing on volume based sales, companies place more of a focus on profitability. Companies will also try and eliminate some of the rogue behavior exhibited by sales teams. Companies also want to be able to clearly identify the “price shopper” who rarely buys. They will want to entice them to buy so having items priced at the appropriate level is imperative. Any company should be able to offer their best customers the lowest possible price. These are “core customers” and maintaining them is a continuous battle. Identifying an “all talk and little action” customer is also another concern. This is a customer that may say they want to purchase a large quantity of a specific product and receive a discount in return. But when it comes time for them to purchase the said amount, they don’t purchase the entire amount. There are many more areas that are addressed but these are just a few examples.
The Price Waterfall
This is a concept that companies use to help them maximize profits. This focuses on the set of prices, adjustments to price, and the elements of cost and how they translate to the net price and ultimately the net margin. There are some standard elements that are used when it comes to the price waterfall. List price, invoice price and pocket price are a few examples that are common from industry to industry. But other elements that will affect how a company sets a price will be unique to that industry and may vary from company to company within that industry.
The price waterfall must take into account many different aspects. It will consider the base price and how it gets to the list price. Then the discounts that were given must be factored in that will get to the invoice price. Other considerations are bonuses, possible rebate terms and any other discounts that were offered that ultimately affects the pocket price. This is a very detailed process that is meant to make a company as informed as possible when it comes to setting the appropriate price for a product.
Price management also deals with areas like building a price list and deal and contract management. All of these factors should translate to about a 1 to 3% improvement to pricing. This ends up going straight to the bottom line that makes for extremely happy shareholders.