The Importance of Pricing for Organizations
Much has been written recently about graaiflation and contractionary inflation. Grain inflation has even become THE word of 2023. This phenomenon makes the work of a revenue manager or a business controller, for example, even more important. After all, certain choices, such as a higher price or less quantity in a package, may just have been made from data and analysis. How can an organization respond well to market dynamics with pricing?
Pricing is an important topic for influencing the profitability of organizations. Organizations face the challenge of understanding the various aspects of pricing so that choices can be made based on data. In this article, we name two topics that a business controller, for example, may have to deal with: double marginalization in the supply chain and the concept of marginal cost.
Double Marginalization
Double marginalization occurs when both manufacturers and middlemen, such as supermarkets, add their margins to the price of a product. This can lead to inefficient pricing structures and is a common challenge in the supply chain. Organizations are keen to optimize prices to influence profitability. So they will need to understand the ways in which the combination of price and quantity is interesting to themselves, as well as to the other parties in the supply chain.
An effective approach to influence double marginalization is to offer quantity discounts. To do this, business controllers work closely with the sales and marketing teams to implement tiered pricing structures, which encourages middlemen to buy and sell more units. This strategy helps lower unit margins, making the product more competitive while maintaining overall profitability.
Marginal Cost
Marginal costing involves setting prices based on the marginal cost of producing one additional unit. This approach is especially valuable when organizations have sufficient capacity and the ability to produce more. A deep understanding of the various cost components, such as cost of goods sold, cost of acquisition and cost to serve, and how they are related to pricing is essential here.
In both situations, it is crucial to conduct thorough analyses of both the internal organization and the external market. In addition to understanding the cost structure of an organization, it is also important to understand the market. This interplay requires good information to support the various stakeholders in this process.
To gain accurate insight into correct pricing, organizations can use various tools, such as SAP PaPM, PriceShape and Vendavo, for example. The goal is to calculate various price and quantity scenarios in a structured way, which provides immediate insight into the effect on the margin per product and the total margin of the organization.
Structural price reviews
We believe it is important for organizations to conduct structural price assessments, both internal and external, to closely track the impact on revenue and profitability. This is possible by deploying appropriate tools or technologies. This provides the opportunity to consistently calculate various scenarios, such as changing prices, quantities and costs and the impact on the margin. In this way, organizations can structurally respond to market dynamics.
If you would like to learn more about the various applications and technologies, please get in touch.
