This is the fourth and final post in a four-part series by Zilliant Senior Vice President of Products and Science Pete Eppele on how best respond to cost volatility vis-a-vis price. Read the first, second and third posts for a primer on the topic.
Setting the optimal pricing strategy for each unique business, and discrete micro segments within that business, requires the input of in-house experts. In an approach called “experts plus equations,” industrial B2B companies are empowered to take a smarter, more scientific approach to understanding and setting pricing strategies that mitigate cost volatility. Certainly, getting to this level of granularity and applying discrete cost strategies isn’t possible with in-house analysis, but it is possible with advanced pricing optimization.
First, pricing scientists can provide visibility into the price-cost relationship with a historical cost analysis, revealing unprecedented insight into how prices have actually changed in response to cost changes in the past.
Next, in-house experts apply their knowledge on dynamics unique to their company to determine when, where and by how much to pass along cost changes to customers. For ease in analysis by the expert, micro segments are often bucketed on similar attributes.
Finally, those discrete strategies are applied to the deal-specific, market-aligned price guidance generated by a price optimization software application and delivered to the sales team in a simple, actionable format. Closing the loop on a smarter approach to responding to cost changes via price, the historical analysis is performed as often as is necessary for the business, typically on a weekly cadence. Company experts can continue to refine and adjust when, where and by how much to pass along costs to customers.
With this scientific approach, industrial B2B companies no longer have to be restricted when costs swing, and they can instead set more effective strategies based on a comprehensive understanding of how well they’ve responded to cost strategies in the past. For instance, this specialty chemical manufacturer was able to deliver 185 basis points in margin rate improvement, despite an environment of high cost volatility.
As B2B companies manage through this prolonged deflationary period, they have to consider how to respond when costs and commodity prices inevitably rebound and they need to raise prices in order to protect margins. Regardless of the economic condition, a scientific and thoughtful approach to pricing strategy can help companies weather the cost volatility storm.