2 Ways High-Tech Manufacturers Can Manage Price Erosion

Unless your sales reps have access to the product and pricing information they need—at the time of interacting with customers—they won’t be able to leverage the prime opportunities that innovation presents, such as maximizing premiums during new product introductions or cross-sell, up-sell.

Mnet 177291 Money
Israel RodrigoIsrael Rodrigo

For high-tech manufacturers, the ever-increasing speed of innovation can be a double-edged sword. On the upside, continuous advances in technology allow companies to continuously improve and add value to their product lines. What’s more, introducing new tools and technologies opens up tremendous cross-sell and upsell opportunities. The downside? As new product release cycles accelerate, product lifecycles are getting shorter. The result is fast price erosion and shrinking margins.

Rapid product releases and price erosion can also diminish sales effectiveness. Unless your sales reps have access to the product and pricing information they need—at the time of interacting with customers—they won’t be able to leverage the prime opportunities that innovation presents, such as maximizing premiums during new product introductions or cross-sell, up-sell.

The two best ways high-tech companies can address price erosion and ensure sustained profit growth? By maximizing two key areas.

  1. Pricing effectiveness
  2. Sales efficiency

Pricing Effectiveness

For high-tech manufacturers, pricing effectiveness is often the best way to improve profits. The standard profit equation includes four levers:

Price x Volume – [COGS + SG&A] = Profit

It’s been proven over and over that by realizing a 1 percent improvement in price, you can deliver a range of 5 to 20 percent in incremental operating margin.  This is a much higher rate of return than equal improvements to cost of goods sold (COGS) or selling general and administrative expense (SG&A).

How can manufacturers make pricing improvements? Adopt a “Smart Pricing” approach, or the combination of two key technologies: data-based segmentation and pricing optimization. These tools will help you create meaningful pricing guidance for sales teams to add revenue to the bottom line.

Smart pricing allows companies to set prices scientifically, based on statistical, data-driven segmentation. Specifically, it lets you group together transactions based on a similar “willingness to pay” (which combines customers and products through a variety of relevant categories) to determine an optimized target price range. Through the use of advanced algorithmic models, artificial intelligence, and process automation, today’s leading price optimization solutions can help you better define—and continuously refine—your segmentation models.

Sales Efficiency

In today’s hyper-competitive high-tech market, manufacturers are continuously introducing new products and phasing out others. Unfortunately, sales efficiency often suffers as new product release cycles accelerate.

It has become a growing challenge for sales reps to keep up with the new information they need to negotiate and sell effectively. In order to identify the synergy that exists for each sales opportunity, sales reps need real-time access to up-to-date product and pricing information—at the time of negotiation.

To assess and improve your sales team’s efficiency, consider these 7 questions:

  1. Do they know all the current cross-sell opportunities that exist?
  2. Do they understand that if a customer asks for a discount, they can substitute an equivalent features product with similar or better gross margin?
  3. Do they have the right mobility tools to quote on the spot, increase win rates, and add to top line revenue?
  4. Can they see all pertinent pricing approved levels they have to go through prior to submitting the deal?
  5. Can they access the customer’s volume compliance data prior to going into the negotiation?
  6. Can they access the customer’s spend over time and how often the customer actually buys?
  7. Do they know the right target prices for each of the micro-segments they are selling into?

Ensure Long-term Profitability

In today’s competitive high-tech sector, the rapid pace of innovation has created new business challenges. Indeed, as sales teams struggle to manage price erosion and constantly evolving product mixes, many manufacturers are experiencing slower sales cycles and shrinking margins. To optimize margins, speed up sales, and ensure long-term profitability, high-tech manufacturers will make substantial gains by emphasizing these two key areas. In summary, here are key tips for each:

Pricing Effectiveness

  • Focus on pricing: A slight improvement in pricing can have a much bigger impact on your incremental operating margin than equal shifts in volume, COGS or SG&A expenses.
  • Adopt a Smart Pricing approach: Smart Pricing leverages data science to optimize pricing for each deal and customer—using segments that already exist within the industry—to help you boost sales and maximize margins.

Sales Efficiency

  • Enhance your commercial processes: operationalize your business rules for price, product, and proposal approvals, so that the relevant options are automatically and clearly displayed—as needed, in the moment.
  • Arm your sales team: Invest in developing the framework that provides necessary contextual information when interacting with customers and leverage modern tools that let you deliver Smart Pricing guidance directly to sales teams—at the time of negotiations—to achieve peak pricing and boost bottom-line revenue.

Israel Rodrigo is a Business Consultant at Vendavo.  

More in Best Practices