How does a B2B manufacturer find out the process to price a product it has never sold before and may never sell again? How do you, as a pricing analyst, decide the truly optimal price for a product that’s built-to-order or customized uniquely?
This is a common pricing problem faced by a lot of manufacturers of finished goods and OEM parts, in verticals that are as diverse as commercial lighting, power distribution equipment, packaging automation, and even industrial coatings. Many of these companies have offerings that are built or configured to satisfy a customer’s unique engineering specifications. Given all the variables involved, the configured combinations possible can easily count in thousands, if not in millions.
Of course, the list prices and standard costs are not available for each possible configuration or specification. Also, there are very few examples of previous sales of the same configuration to a similar customer for any sort of intelligence or guidance about the market price levels.
As a result, product managers and sales teams end up being blind without any customary guardrails for better pricing. Profitability suffers big time because of all the guesswork, gut-feel pricing, and general rules-of-thumb that can be worked around. Customers and channel partners begin to complain about the lack of consistency in the prices that are being quoted. Finally, since it takes such a long time to work through all the issues and bring a quote, close rates are much lower than they should be.
Considering these problems and unintended consequences, it’s not too difficult to see how millions of margin dollars can slip through the cracks. Zilliant’s 2020 Global B2B Benchmark Report found that manufacturers lose up to 18.67 percent of annual margin because of subpar pricing practices, with 100 to 300 basis points of gross margin that can be captured again. Most of these missed margin dollars can be put at the challenges of configured pricing.
Rethinking Configured Products Pricing
These challenges, combined with the ever-increasing speed of B2B commerce, have motivated their manufacturers to re-imagine the way they set up their prices, negotiate the costs, and then respond quickly to every customer segment with strategic pricing. This is where CPQ software has changed the game forever. The price optimization software has made it possible to bring in every cost factor within a Bill of Materials (BOM) and then calculate the market-aligned pricing of every component or the total solution meeting the pre-defined margin targets.
When every transaction is specific and not SKU-based, the components must be well-designed and cost before price can be considered. By creating the initial product selection, CPQ e-commerce allows you to get a final configured product is a pretty massive data management challenge.
Many manufacturers do this by gathering all the costs and then adding a markup. But how tedious is the decision-making for that specific markup? Is it a guessing game on gut feel or what you consider a rule-of-thumb fair margin? For those that haven’t invested in pricing software, the answer is a definite yes. This means that there’s almost certainly money on the table and that in some cases overpricing, which results in lost sales and customer dissatisfaction. Once cost, you need to then determine how much pricing power you have v/s. your competitors and then determine a price accordingly.
There are better ways to arrive at this markup through price optimization. Zilliant Price IQ®, a leading B2B commerce solution, is proven to deliver market-aligned prices, even for the configurations that are built and sold for the first time. This is because Zilliant’s price optimization engine makes the use of advanced techniques to determine the factors driving price response. By analyzing the characteristics of the configuration and the customer purchasing it, the system derives common aspects to set prices more consistently across countless potential configurations. Characteristics can include how much raw material the product needs, how complex the configuration is, where the customer is located, what industry the customer is in, how much revenue the customer relationships represent, and much more.
You can build to a cost and then use price optimization for determining the optimal markup that’s based on the product configuration and even the selling circumstance.
Or you can also build to a cost, apply a markup a list price and then optimize it for guidance on discount.
Every tactic brings real transaction data and price elasticity inside this decision, delivering a huge amount of growth to the bottom line. To effectively execute a smart configured product pricing strategy, modern price optimization and management technology are needed.
As the leader in this space, Zilliant delivers a proven solution to optimize prices and deliver their prices to sales reps and end customers.
Zilliant Price IQ® is the market-leading B2B price optimization solution. It rationally aligns price/customer/order/product relationships and statistically measures what drives price response in the market, while enforcing necessary guardrails and producing price guidance for all the different ways price is expressed in B2B.
Zilliant Price Manager™ is the ideal price management solution to give B2B teams greater control over pricing and the ability to dynamically make updates as market conditions change, for delivery to any sales channel.
Know more about the configured product pricing for the manufacturers, connect with Zilliant or also download the same episode of the B2B Reimagined podcast.