Kick Off a Value-Driven Pricing Strategy for Optimal Profits
A value-based pricing culture helps distributors improve business, shifting toward pricing determinations based on what customers value, what they perceive as the distributor’s value, and the price that value is worth. In the long term, such a strategy differentiates companies in the market. If you work to develop such a strategy for your business, your customer conversations will shift toward problem-solving instead of price. As a result, your sales team will be able to sell better, and you’ll capture the margin you deserve.
Here’s an overview of tips and essentials to kick off a value-driven pricing strategy in distribution.
Insider Tips for a Value-Driven Strategy
At ACTvantage, we’ve worked with hundreds of distributors to improve key functions, such as pricing. As a result, we’ve compiled critical considerations as you shift toward a value-driven pricing strategy.
Value-Driven Pricing Starts with Culture
When using value to “drive” your pricing strategy, that strategy won’t have wheels if you don’t involve all relevant departments and keep your people informed and engaged throughout the process. And it won’t have gas if you don’t explain the value of the new strategy, why you’re implementing it, and how it helps employees achieve success and maximize their time.
Start by establishing a cross-functional team of individuals from each department designated to drive decision-making and unity. Include people from the following teams: Sales, purchasing, operations, marketing, pricing and finance.
You must also give employees information and motivation. Again, this should be a conversation, not a blindly delivered mandate. Your employees’ feedback can mean the difference between a strategy that works and a strategy that drives growth and profits.
New Strategies Don’t Fix Broken Processes
Your current processes could get in the way of progress when building a value-based culture. First, assess your pricing process with an eye toward improvement. Next, look at everything through a lens of people, processes and technology and find what’s lacking and document it. Then, determine how you might solve for these issues to ensure a smooth path toward a value-driven culture. For example, you might find you have problems with the culture at your company, difficulties with change management, lack of funding, etc.
Before You Go, Know Your Destination
Set clear goals for your pricing strategy that tie to your three main value drivers: suppliers, customers and products. Regardless of whether it’s an overall business goal or specific goals within each department or location, the more specific you are, the better your results will be. And when you add your value triangle to the mix and make it the core of your strategy, it amplifies your value-based culture.
Plan to Test Vigorously – and Continuously
Select pilot locations that most closely reflect your business as a whole to test your new strategy. Be sure to have a thorough project plan and team to kick it off, measure how it’s performing, understand outcomes, and adjust.
Your project plan should include your objectives, scope, budget, timeline, project sponsor, project manager, project team and any external help that may be necessary. Your project team should include frontline staff members, from inside sales to branch managers and marketing managers.
You can apply your new pricing strategy, observe results as they unfold, and fine-tune your approach with your plan in place.
Then, once you’ve replicated the strategy across your other locations, review and test your strategy regularly to ensure that it works appropriately for your business. Finally, we recommend you overhaul your pricing strategy at least once every few years or as needed.
This evolution is critical to a value-based pricing culture. The value will change, demand will change, and expectations will change. As such, the effectiveness and alignment of your strategy will undoubtedly change as well.
Essentials of a Value-Based Pricing Strategy
At ACTvantage, we favor six variables that are most effective when implementing a value-based pricing strategy: customer value, supplier value, product value, item visibility, purchase value and realized margin.
In addition, a value-based pricing strategy must allow for flexibility to account for the variables in play. Those variables might signal that a lower price is warranted due to a lower cost to serve a specific customer or vice versa. That’s why it’s essential to set limits – minimums and maximums for margin on products. Create rules for pricing and price multipliers according to customer and item groups.
Finally, your new pricing strategy and processes may warrant a software integration or full technology upgrade. Before you can extend the new plan across your business and implement it in your ERP system, you must evaluate your current technology and make the changes necessary to be successful. Such an assessment takes time and involves evaluating multiple options for software, integrations, partnerships, etc. Prioritize solutions that your staff will more readily adopt, such as software with user-friendly dashboards that are actionable and easy to navigate.
If you’re ready to build a value-based pricing culture at your business, get in touch with us at ACTvantage.