Part 1: How much revenue does your company really keep from each transaction?
While ERP systems promise solutions for almost every industry or business need, these systems are limited from a pricing optimization perspective. Price management software should help companies make more informed pricing decisions by employing more sophisticated pricing optimization methodologies, continuously supporting the pricing process and controlling margin leakage. Price management systems enable sophisticated pricing trough value- and market-based pricing methodologies. In addition, these systems enable a view of the elements that cause margin leakage, such as market adjustments, trade and volume discounts, rebates and service costs. Based on these key functionalities, the true potential profit picture emerges.
1. Base Price – ERP systems are limited to a cost-plus approach. ERP systems can’t handle competitor information for market-based pricing, price drivers, and technical parameters for value-based pricing or bill-of-materials pricing for kits. Pricing solutions are designed to work with a series of advanced methods and store pricing-specific product segmentation to support differentiated pricing rules. By using a pricing solution approach, companies can identify incorrect prices on the item level as well as the general price level in a segment. Then, they are able to raise the prices of underpriced items to increase profits and lower the prices of overpriced items to increase market share, sales and revenue.
2. Regional Price – ERP systems lack the functionality to apply different cost sources from different warehouses when calculating market-specific price lists. In addition, when using markup factors to adjust market prices from a base price, some ERP systems limit users to a single dataset, like item type. In many cases, users need the item type dataset in combination with additional datasets, like product line and category, to set market-specific price lists. Also, in situations where local subsidiaries have power to set local prices, ERP systems will have a problem reporting on large deviations in prices between markets. Price management functionalities provided by pricing solutions enable business users to drive local revenue and profit, and also identify where local prices are out-of-line, ultimately lowering cross-border sales.
3. Net Price – ERP systems cannot provide the sales team with any negotiation support using target price levels and min-max corridors – the target boundaries that are recommended for setting the customer’s price. Enabling fact-based decision support based on historical negotiated prices and competitive intelligence will result in improved success rates on quotations.
4. Pocket Price – ERP systems lack the functionality to calculate margins using off-invoice costs, and these systems have a hard time calculating and executing credit notes. This leaves managers and salespeople in the dark about negative margins and leaves finance in the dark about end-of-year expenses that can have a high impact on profit and cash flow. Companies that rely on ERP systems also cannot gauge which items and product groups are underperforming from a pocket margin perspective. Pricing solutions visualize margin leakage from off-invoice costs and allow companies to take action on key accounts with low pocket margin. It is crucial to measure profitability after off-invoice costs, such as rebates, bonuses and service costs. Pricing software can monitor and forecast rebates based on up-to-date data across different ERPs. This incentivizes managers to drive sales on a customer basis because information on rebates and bonuses is readily available. Revenue is increased by pushing volumes on key accounts.
5. Pocket Margin – ERP systems are generally good at comparing costs from different suppliers, but they lack the functionality to review prices in between similar items. Because ERP systems don’t keep information on price drivers or store competitive information, companies that use these systems cannot identify ways to lower costs by reviewing similar items. For example, pricing solutions can review the attributes of similar items like a 5.0 meter hose and a 5.1 meter hose. If the 5.0 meter hose has a higher cost than the 5.1 meter hose, there is a high likelihood that the cost of that item can be reduced. Market-based pricing identifies where competitors are able to sell an item for less and where cost prevents companies from lowering the price and growing market share. It is necessary for companies to review the target price to identify where the cost is too high so that they can apply strategies to reduce the cost and increase profits.
By using a pricing solution to manage pricing optimization, companies can overcome the limitations of ERP systems and have clear insight into the factors that impact cost and the opportunities to drive revenue – ultimately improving overall margin.
Part 2 will cover how to determine if your solution has the key elements to support your organization’s pricing process. Price decision making, price execution, price adjustment and evaluation, and information gathering need to be supported by a price management system that minimizes manual effort, improves margins and decreases price complaints.
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