Strengthening and Transitioning Pricing Models in the Midst of Crisis

In the wake of the coronavirus crisis, many manufacturers need to reevaluate their pricing models. In a recent article from Industry Week, author Stephan Liozu suggests a two-part plan for transitioning to a better pricing model.

Cost-Based Pricing Improvements

First, manufacturers should focus on improving their current cost-based pricing system. Liozu suggests working towards a more mature system. He explains that manufacturers generally fall into one of five stages, from basic to advanced, when it comes to their cost-based pricing system.

1. Static Unintentional – The informal state of companies that do not strategize to manage pricing or their pricing process.
2. Dynamic – Developed in the 1990s, dynamic cost-based pricing systems incorporate strategies for adjusting pricing based on the shifting price of inputs.
3. Analytics-driven – This system uses historical data to inform future pricing decisions.
4. Hybrid (Cost + Value-based Pricing) – This more advanced stage sees manufacturers drawing on both quantitative and qualitative factors, including customer value information, to develop pricing strategies.
5. Advanced – This last stage combines the best aspects of all previous stages into a dynamic, data-supported, intuitive, formalized pricing strategy.

Manufacturers should work to transition towards the fifth stage, advanced cost-based pricing system.

Transition to Value-based Model

In addition to fine-tuning their cost-based pricing system, manufacturers should consider when and how to make the transition to a value-based pricing system. Liozu explains that this transition does involve a number of significant obstacles, including:

• The high upfront cost of investing in creating and initiating customer intimacy programs.
• The relatively large timeframe for realizing a return on your investment in this type of program.
• The need for a dedicated budget in order to deploy value-based pricing (and the various extra resources that developing this requires).
• The need for both sales and marketing teams to be involved.

While these obstacles are significant, Liozu nonetheless believes that it is important for manufacturers to focus on making this transition, even now during a time of global crisis. He offers the following framework for making the pricing model switch:

1. Encourage your marketing and sales departments to develop customer-value thinking.
2. Focus on where your products differentiate from those of your competitors and seek to extract value there.
3. Work cooperatively with digital and innovation teams to seek out new veins of business and revenue.
4. Seek out brainstorming opportunities and other sources of training within your professional community.

For further details, click here to read the article in full at Industry Week.