Five key factors in pricing

• Ensuring profitability is a key strategic objective for companies - especially in difficult market conditions.
• Pricing is a key lever when it comes to realising all potential for increasing value.
• An efficient data-based approach is the prerequisite for an optimised pricing strategy.

At first glance, it's just a number. However, the price of a product or service is far more than just the amount that has to be paid for it. The price reflects the positioning on the market. Prices can be used to secure competitive advantages or increase customer loyalty. The right price also determines whether a company is profitable in the long term and generates profits. Especially in view of the tense economic situation, inflation and increased costs for raw materials, the question of the right price is more important than ever.

A precise analysis of the pricing strategy often reveals numerous potentials for increasing value. Adjusting prices has an immediate effect and is therefore one of the most effective instruments for achieving short-term EBITDA improvements.

A highly simplified example shows why price is the most efficient lever for realising the full potential of profit and increasing profitability: Let's assume that the cost of manufacturing a product is 290 euros. Then a sales price of 300 euros generates a profit of ten euros. A price increase of three per cent (nine euros) already leads to a profit increase of ninety per cent, namely from ten to nineteen euros. This simple calculation shows that optimised pricing is an effective key to improving business profitability.

Pricing is a process that depends on several factors that are known in advance. Therefore, a standardised approach that focuses on five key areas is suitable for delivering a customised and optimised end-to-end pricing solution - from price definition to price execution and price control. Companies should answer the following questions in this context:

1. What is the right pricing strategy?

2. What is the right price?

3. Is the right price organisation in place?

4. Are we effectively implementing the set prices?

5. Is the entire pricing process under control?

Pricing is not simply about increasing prices and margins. A smart and sustainable pricing strategy and market positioning should be in line with the strategic goals of the organisation and the perception of customer value.

In order to achieve sustainable pricing, it is therefore important to first analyse and evaluate the existing pricing strategy, including market positioning, customer perception and company ambitions.

A tailored pricing strategy can then be defined that corresponds to the organisational goals. The definition of an optimal price level and discount structures requires a deep understanding of the organisation and the company's product portfolio.

In order to obtain a reliable basis for decision-making, there is no way around a data-based approach. Data & analytics can be used to analyse and understand the purchasing behaviour of consumers and select an optimal pricing method. In this way, customised prices and purchase incentives (e.g. discounts) can ultimately be calculated.

Improved pricing practices result from the right combination of people, tools and processes. Taken together, these three elements form the organisational structure for customised pricing and should therefore be optimally coordinated.

Companies should therefore first ensure that the right employees with the necessary skills are in place or are trained accordingly. Selecting the right tools and technologies is also crucial, as these provide the data and insights to determine the optimal, customised price. It is also important to define and develop associated processes so that the pricing strategy can be implemented efficiently.

Die effiziente Umsetzung einer Preisstrategie hängt ebenfalls von der Bereitstellung von Data-&-Analytics-Tools ab. Diese ermöglichen es, ineffiziente Preisgestaltungsmethoden zu identifizieren, zu korrigieren und damit den Wertverlust zu minimieren. Die genaue Analyse der Preisgestaltung versetzt Unternehmen in die Lage, das Verbesserungspotenzial suboptimaler Ausführungen auf Transaktionsebene zu erkennen und zu quantifizieren.

In a final step, suitable KPIs should be defined and utilised in addition to the technological pricing infrastructure and governance mechanisms in order to create transparency and measurability and to be able to monitor the effectiveness of adjustments to the pricing strategy.

The implementation of suitable tools and metrics provides the information required to react quickly and efficiently and thus ensure that the optimum price is achieved (see Figure 1).

In view of the tense situation in the global economy and increased energy and commodity prices, the question of the right price is more important than ever. With an adequate pricing strategy, companies can position themselves on the market in the long term without jeopardising their profitability. In particular, identifying hidden potential in the pricing strategy is essential in order to achieve optimal prices and thus prevail against the competition in the long term.