A Better Approach to Pricing Configured Products
How does a B2B manufacturer figure out how to price a product it’s never sold before and may never sell again? How do you, as a pricing analyst, determine the truly optimal price for a product that’s built-to-order or uniquely configured?
This is a common pricing problem faced by many manufacturers of finished goods and OEM parts, in verticals as diverse as commercial lighting, power distribution equipment, packaging automation and industrial coatings. For many of these companies, their offerings are built or configured to satisfy a customer’s unique engineering specifications. Given all of the variables involved, the configured combinations that are possible can easily number in the thousands, if not millions.
Of course, list prices and standard costs are rarely available for every possible configuration or specification. And there are very few, if any, examples of prior sales of the exact same configuration to a similar customer to provide any sort of intelligence or guidance about market price levels.
As a result, product managers and sales teams end up flying blind without the customary guardrails for effective pricing. Profitability suffers due to all the guesswork, gut-feel pricing and arbitrary rules-of-thumb that become workarounds. Customers and channel partners start to grumble and complain about the lack of consistency in the prices they are being quoted. Finally, because it takes so long to work through all the issues and turn around a quote, close rates are lower than they should be.
Considering these problems and unintended consequences, it’s not too difficult to see how millions of margin-dollars can slip through the cracks. In fact, Zilliant’s 2020 Global B2B Benchmark Report found that manufacturers lose up to 18.67 percent of annual margin due to subpar pricing practices, with 100 to 300 basis points of gross margin that is recapturable. Many of these missed margin dollars can be laid at the feet of configured pricing challenges.
Rethinking Configured Products Pricing
These challenges, combined with the ever-increasing pace of B2B commerce, have motivated manufacturers to reimagine the way they set price, negotiate cost, and respond more quickly to each customer segment with strategic pricing. Price optimization software makes it possible to account for each cost factor within a Bill of Materials (BOM) and calculate market-aligned pricing per component or the total solution that meets pre-defined margin targets.
When each transaction is specific and not SKU-based, each component must be designed and costed before price can be considered. Being able to create the initial product selection that allows you to get to a final configured product is a massive data management challenge.
Many manufacturers go about this by gathering all the built-upon costs and adding a markup. But how rigorous is the decision-making for that markup? Is it a guessing game based on gut-feel or what you consider a rule-of-thumb fair margin? For those that haven’t invested in pricing software, the answer is usually yes. This means there’s almost certainly money left on the table, and in some cases overpricing, which results in lost sales and customer dissatisfaction. Once costed, you then must determine how much pricing power you have versus your competitors and determine a price accordingly.
There are better ways to arrive at the markup through price optimization. Zilliant Price IQ®, the leading B2B price optimization solution, is proven to effectively deliver market-aligned prices, even for configurations that are being built and sold for the first time. This is because Zilliant’s price optimization engine uses advanced techniques to determine the factors that drive price response. By analyzing the characteristics of the configuration and the customer that is purchasing it, the system derives commonalities to help set prices more consistently across the endless number of potential configurations. Characteristics could include how much raw material the product will need, how complex the configuration is, where the customer is located, what industry the customer is in, how much revenue the customer relationship represents, and more.
With all these factors considered, two different best practices emerge in a data science-driven pricing process:
1. You can build up to a cost and use price optimization to determine the optimal markup based on the product configuration and selling circumstance.
2. Or you can build up to a cost, apply a markup to a list price and then optimize for discount guidance.
Either tactic brings real transaction data and customer/product price elasticity into the decision, delivering sizable growth to the bottom line. To effectively execute an intelligent configured product pricing strategy requires modern price optimization and management technology.
As the leader in this space, Zilliant offers a proven solution set to optimize prices and seamlessly deliver price to sales reps and end customers.
Zilliant Price IQ® is the market-leading B2B price optimization solution. It rationally aligns price/customer/order/product relationships and statistically measures what drives price response in the market, while enforcing necessary guardrails and producing price guidance for all the different ways price is expressed in B2B.
Zilliant Price Manager™ is the ideal price management solution to give B2B teams greater control over pricing and the ability to dynamically make updates as market conditions change, for delivery to any sales channel.