The digital transformation in pricing is increasingly picking up speed: Market prices are becoming more and more transparent, purchasing companies more professional, and competition is intensifying in numerous industries. Many companies are struggling under these trends, but at the same time are making insufficient use of the opportunities offered by digitization.
A leading global manufacturer of paper machines was faced with the key challenge of elevating its after-sales pricing to a new evolutionary level. The starting point was a global patchwork in pricing: Local and regional companies could largely decide freely when it came to setting prices. This was increasingly exploited by global key accounts and impacted profitability. In addition, pricing was largely characterized by time-consuming and error-prone manual processes.
In order to remain competitive in the long term, product data and price-relevant information had to be collected in a structured manner and efficiently made available to pricing managers. To this end, the error-prone calculations were replaced by a digital and central pricing solution using individual Excel tools.
“Companies are increasingly recognizing the potential of systematic and software-supported pricing. By combining relevant data such as market prices, hit rates and sales history with sophisticated algorithms, pricing can be made much more consistent, competitive and profitable at the same time.”
“The biggest challenge in this project was to ‘translate’ the given complexity of our internationally operating client into software: i.e. to implement best practices and to adapt it to our client’s business model via extensive configurations. We managed to do this through direct communication and working on the software requirements together.”
“At the project start, our client’s data was untapped. Hence the first step was to build a data cube to understand the historical development of spare parts sales. Based on this analysis, we managed to derive the key success factors for pricing. Finally, we were able to create sustainable added value for our client’s pricing from these previously disregarded connections.”
The cornerstone of the project’s success was the joint development of a global pricing strategy with our client. The existing pricing system was put to the test in this strategy. The existing approach mainly relied on applying a largely undifferentiated mark-up factor to production or purchase costs. Although the cost base to ensure healthy margins should be taken into account in pricing, the sales price should not depend solely on it. This is because customers often have a higher willingness to pay for parts perceived to be of higher value.
A key element of the new pricing strategy was therefore to further develop from purely cost-based pricing with flat-rate markups to a value-based pricing logic that takes into account the willingness to pay and competitive levels of different applications and regions. To do so, we developed and fine-tuned pricing algorithms that derive optimal target prices based on the relevant data. The data input included market prices, hit rates, costs, sales history and the prices of similar products. On the basis of all available information, we developed models and algorithms that can be used to determine value-based and market-driven prices.
The next step was to do justice to the increasing price transparency in the market. One particular requirement was to create a globally consistent pricing architecture and enable global pricing management to control prices centrally. In order to provide the necessary computing power to implement the algorithms on the one hand and to control prices consistently and uniformly on the other, we adapted our PRIMA (PRIce MAnager) pricing software to our client’s newly developed pricing logic and integrated it into their system landscape. A key factor for success here was the intensive involvement of the globally relevant users in the development phase as well as extensive training around the globe during the international rollout.
To ensure long-term success in pricing, an appropriate concept of roles and controlling in the pricing process had to be established in addition to the aforementioned measures. We therefor developed a comprehensive KPI monitoring and price controlling system and mapped it in the software. The goal was to make the success of pricing measurable, to identify inconsistent pricing in the local company at an early stage and to automate pricing. This gave pricing managers the possibility to make targeted, fine adjustments.
In order to measure the customer’s perceived value of a product and to optimize pricing on this basis, the Homburg und Partner team developed powerful algorithms. This way, we managed to determine the willingness to pay in a targeted manner and to utilize these accordingly. The software implementation enabled the pricing algorithms to be integrated into the process. This resulted in consistent pricing for the product portfolio.
Thanks to the introduction of a pricing software for our client, manual steps in pricing could be made superfluous. Instead of determining the price architecture individually via the product portfolio in each country, the pricing software now enables the client to bundle these and many other processes in global price management at headquarters. Local staff members were relieved and could focus on other, strategically important tasks. By automating and bundling processes, we were also able to significantly reduce response times and the average time it took to prepare offers.
Since our client’s local pricing managers often used simple calculation programs or homemade tools to determine prices, this led to a lack of long-term process security, for example due to tools that had become “orphans” or the loading of outdate data on local computers. Furthermore, these tools quickly reached their computational limits for comprehensive portfolios and also posed considerable security risks. Our pricing software enabled the customer to assign reading and writing rights in a differentiated way to minimize sources of error. The effects of price adjustments on key performance indicators could also be fully simulated before going live thanks to the increased computing power. This significantly reduced the risk of sub-optimal pricing.
A comprehensive price controlling system was established in order to make success measurable. This also meant the potential for further fine-tuning of pricing could be continuously identified. The relevant indicators developed together with clients, included price stability (price fluctuation over time) and price consistency (consistency of prices between countries and channels). Here too, the introduction of pricing software served as a direct lever, as it enables standardized management reports with relevant KPIs to be generated with just a few clicks. This way, we managed to lastingly secure a high degree of transparency and tidy pricing controls.
In the run-up to the introduction of the new pricing logic, we used a simulation model to forecast expected KPI effects. Economic developments, price-volume effects and sales shifts between countries were also taken into account. Based on this, we were able to provide planning reliability to our client. After the go-live of the new pricing system, performance indicators were continuously determined by our performance controlling department, compared with the plan and specific measures for fine-tuning were derived. Very early after the go-live, we were able to realize significant revenue and margin effects. This way, the initiative paid for itself within a few weeks. Continuous analyses reinforce the initiative’s lasting effect.
If you are interested in finding out more about our services regarding software-supported pricing for B2B companies or would like to discuss similar approaches for your company, please do not hesitate to spend a few seconds to leave an inquiry via our contact form. Our partner Daniel Lindner will personally contact you promptly after that. Alternatively, you are welcome to contact us by emailing or calling us!