Pricing Strategy

Situation: A US based manufacturer came to us saying they wanted to increase revenue and profitability. Who doesn’t? When we started working with them we found out that they had not invested the time and effort to determine how much it costs them to manufacture the different products they sell. They had a high level idea, but with a large number of different product configurations it had not be broken down to a more granular level. At the same time, they did not have a well thought out pricing model. Their discounts for volume started at too low a level and margins decreased rapidly for larger customers. This discount structure was not scalable to the volume levels they wanted to reach with individual customers and their customers had no skin in the game for the amount of discounts they were receiving. This combined with the developing economic troubles was the perfect storm that could seriously jeopardize their success.

Solution: First we stopped them providing such a dramatic discount at low volumes and created a more manageable discount structure. In parallel, we started the process of collecting more data points in the product manufacturing process so we could get a better handle on what each part cost to make. In addition we looked at the competitive pricing landscape and determined that they were underpriced. For example they had resellers that were doubling or even quadrupling their price and still selling it. With the competitive analysis combined with what resellers were getting we were able to come up with a more competitive price commensurate with the quality and value of their products.

Results: Within two years of starting the pricing analysis and implementing changes we have seen a significant increase in revenue and profitability. Even with the downturn in the economy and a flat year followed by a decline in units sold they were able to offset this with more aggressive pricing. The bottom line is that we were able to increase revenue by 8% the first year and 20% in the second for a total of $1.6M they would not have had if pricing had remained the way it was.