Gross Margins of 50% used to be standard for manufacturers up until around mid 1990's. This margin structure resulted in the old adage.
Sales were free to focus on moving volume and the limited reporting systems available during the nineties perpetuated the volume and market share myths that drove many companies into protracted price wars or bankruptcy.
Globalisation of the economy and the online world now sees low cost countries compete with the western world for all types of products and services from aluminium extrusions through to clothing apparel and furniture. Their cost structures allow them to compete with margins of 30% or less.
Domestically, excess capacity and new low cost super sites are being developed, and variably costing product offerings have become an entrenched part of the marketplace.
Channels to market have either consolidated with market concentration (e.g. grocery retailing) or they have disaggregated with the advent of online purchasing (e.g. online travel).
The impacts on pricing practices include:
- Changing the business model to low cost or high value add
- Refine pricing management approaches to ensure channel integrity and market profitability
- Understand the value drivers and maximise the price paid by customers for these value drivers
The last point is a guiding principle of value based pricing:
Detailed analytics are required to know how to raise or adjust pricing by SKU, by product group, by customer and or channel.
Critically, but often overlooked is the role of the business cycle in the development of a pricing strategy.
The common mistake companies make in managing margins is the failure to recognise the point in the economic cycle where margins can be expanded.
Typically, a price rise is left until too late in the business cycle, resulting in a non stick price rise.
As the cycle shifts, demand falls away and market prices begin to fall in response.
The net result is a failure to optimise margins when demand can sustain price adjustments and earnings decline when demand softens due to dramatic price swings as competitors use price to chase illusory market share or volume objectives.
How Pricing Insight can help your business:
Margin expansion planning or MxP is Pricing Insight's structured approach to help you build gross margins across the product or service portfolio using value based pricing principles.
MxP is supported by a number of discrete business models that can be readily integrated into your go to market planning.
These margin protection plans include:
- Volume rebate management programs
- Discount control systems
- Customer pricing menus SKU analytics and
- Customer price segmentation