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by Chris Chiappinelli, MA Editorial Staff Posted on Thursday, May 10, 2007 3:15:29 PM   | Abstract: | Every customer may be important, but not every customer is profitable, and manufacturers are beginning to realize the detrimental effect of signing a deal at any price.
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Most people will endure the drip of a leaky pipe for only so long before they call a plumber. Manufacturers, on the other hand, have tolerated leaks for years, and few have sought professional help. In this case, the leakage is revenue, and the principal driver, analysts say, is faulty pricing. Products sold for less than optimal prices cut into profit margins, and when a company lacks the discipline to plug these leaks, they become part of the corporate culture, and the dripping goes unchecked. Comprehensive price management has a relatively short history in the manufacturing sector. In progressive businesses, price managers and analysts have conducted manual excavations of past deals and other sources of pricing insight, and then used that data to establish more profitable pricing. In less-developed companies, salespeople have made concessions and offered discounts that have little to do with the deal's profitability and much to do with increasing sales commissions. In fact, that remains the prevailing MO of today's manufacturer when it comes to price management. The fallout from lax pricing policies can be significant, as companies across all sectors admit to leaving as much as 5% of margin on the table when selling products. In the semiconductor industry alone, that could mean billions of dollars in unrecognized revenue, according to a recent Accenture survey. While more than three-quarters of the manufacturers in the study said they had formal policies for setting prices, 56% admitted that they use "ad hoc discounting practices" sometimes or often. Accenture calculated that for every billion dollars in revenue, that practice translated into $16 million to $23 million in lost sales for those semiconductor companies alone. Experts point to the lack of centralized pricing analysis and nonexistent enforcement as two main culprits. Many manufacturers are unable to sort through all of their data on pricing and discern the levels that best meet margin goals. Laura Preslan, senior manager of Deloitte Consulting LLP's Pricing and Revenue practice, says this leads to "management by pricing hunch" instead of by pricing data. But even if companies set profitable prices, they often fail to enforce those through the sales process, experts say. "Historically, salespeople have been sort of cowboys," says Julie Fraser, principal at manufacturing research firm Industry Directions. "Once they get in front of the customer, they can say and do whatever they want, as long as they rope that thing to the ground and get the deal." The salesperson, she says, wants to make quota and make the customer happy. "Well, in making your customer happy, there's a lot of opportunity to make your company unprofitable. There are revenue leakage opportunities there." In general, lack of information is not the problem; manufacturers have a wealth of data on hand that can guide them toward the best prices for their products — for example, sales forecasts, current and past contracts, and market demand studies. But few companies have the time or the processing power to collect and analyze it all. As for maverick salespeople who give away margin just to cut a deal, few realize that this is what they're doing, because the company pays commission based on sales volume, not on margin. Some manufacturers have dealt with revenue leakage by making price management part of their business. Leading — and often large — companies typically maintain a pricing department staffed with analysts who do nothing but study the terrain of past deals and market forces, including competitors' pricing, with the aim of creating contracts that deliver the most profit possible. Page : 1 2 3 4 ... NEXT |