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How Pricing Controls Can Prevent Revenue Leakage

Posted by Ashley J. Swartz on Jul 1, 2021 12:00:00 PM

FRC_Banner-01I’d like to begin with a bold statement: If you haven’t updated and refreshed your pricing across your entire portfolio of products in the first half of 2021, you’re missing revenue opportunities.

Let me back up to offer some context. The cost of certain raw materials has gone up significantly for many manufacturers, and not all are able to pass those increased costs on to their end customers. The cost of goods is not all that is disrupting the supply chain of many manufacturers: Labor costs in some areas have increased, and logistical bottlenecks across all transportation sectors remain, which means delayed deliveries and higher shipping costs.

Why This Isn’t All Bad News

If you consider these points in a vacuum, the financial outlook for sellers looks grim. But what’s sometimes missed is the impact of these disruptions on current inventory, which may become significantly more valuable now that supply is constrained.

I’m not suggesting that everyone raise their prices immediately but rather suggesting that you look for opportunities to protect and increase profit by adjusting prices in response to the current market, competition and costs. With an annual “set it and forget it” process of pricing, most B2B manufacturers are missing out on revenue and profit upsides because a labor-intensive manual pricing process doesn’t allow them to update pricing more frequently to optimize profit with confidence.

But value and price should increase and customer objections should be muted when increases in cost and demand affect the entirety of the supply chain and are in the news every day. Because price optimization is something typically only done by large players within B2B sectors, the current market is disproportionately affecting the profitability of midsize firms.

The fact that large swaths of inventory are inherently more valuable doesn’t mean that securing higher prices is easy or straightforward. It requires considerable analysis, good judgment, a deft touch and situational awareness. Erratic and inconsistent pricing can hurt a firm and cause tension between your sales and product organizations, as well as frustrate customers, and undermine the important role that price plays in managing profit.  

The Importance of Pricing Controls

In the absence of sound pricing policies, controls and workflows to govern the use of pricing exceptions, discounts and allowances, salespeople will frequently deviate from recommended prices and offer discounts to get a signature on the dotted line. It’s a natural inclination but one that can result in substantial revenue leakage (i.e., revenue left on the table.) In an analysis of the transaction-level data of seven different sellers, Furious found that pricing variability was the greatest source of lost revenue opportunity.

The downsides of ineffective and inconsistent pricing practices are generally known and understood, but they’re greatly amplified in the current moment. At Furious, we’re helping our clients develop data-driven pricing that is frequently updated to ensure that current market conditions are accurately reflected so sales teams have confidence in their asking prices. We also implement pricing controls to help sales teams sell inventory for its correct value. These controls will result in certain transactions being declined for failing to meet financial thresholds but will increase the yield of a company’s product portfolio overall.

Anywhere from 10% to 20% of a typical B2B manufacturer’s products contribute to 80% to 90% of total revenue. Starting to crawl before you walk by focusing on top-selling parts that contribute the greatest revenue and maybe the most susceptible to price erosion and price competition is a great starting point.

If you act decisively in these areas, your company’s road to recovery from COVID-19 may accelerate and be shorter than you think.

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