One of the first objectives of companies when it comes to pricing is certainly the definition of a price list for their products or services. The price list has long been seen as the starting point for companies on which to build their commercial strategy and related discounts, the basis on which to create price differentiations and discounts by customer type or, for example, geographic area.
To adopt a correct pricing strategy and identify whether margin targets have been met, it is essential for companies to check the actual prices at which sales transactions have been concluded and their deviations from both list prices and margin targets.
Price control, cost items
When we talk about marginality or trade margin, we refer to the so-called profitability. This, in fact, represents the earnings obtained through the sale of the goods and services offered by the company. Marginality thus results from the subtraction of the purchase price from the selling price. However, numerous factors that cannot always be controlled may come into play in the process. More specifically, market trends and the actions of competitors can be important elements that can interfere with the value of the margin.
All these factors have a significant impact on the margin, as do the following costs:
– raw materials: this includes the costs of materials used in the production of a good or service offered by your company;
– production: this includes the costs related to the operation of the facilities in which production takes place, those related to warehouses, as well as the wages of employees;
– development: the costs incurred by the company for the design and conception of the good or service offered and then sold to customers;
– distribution: the costs of the marketing department and those related to the distribution process;
– administrative: all costs of an administrative nature such as accounting.
Price control, methodologies
There are several methodologies to understand where marginality points have been eroded with respect to the reference price list, the first is certainly that of calculating for each transaction the deviation from the price list. This technique obviously has two main limitations, the first is that it does not consider the actual quantities sold, while the second is that it is difficult to analyze many products or SKUs, moreover in different markets, with this method. The next step, which is often undertaken, is to group the values by customer or geographic area. This can lead to the identification of interesting relationships about sales habits in certain regions or for customer categories on which erroneous behavior has been pursued and which has led in the long run to several margin points being left by the wayside.
A classic example of possible deviations from the reference price list are discounts for certain purchase volumes. Many companies design discount scales associated with different levels of purchased quantities for which increasing discounts are provided. Very often, however, even these scales are not observed. An immediate method of control involves the creation of a graph showing the relationship between sales volumes and discount percentages, so that it can be empirically verified on how many transactions the scheme set up upstream of the business strategy has not been adhered to.
Price control, additional analyses
More in-depth analyses can lead to the reconstruction not only of the commercial policies, but also of their decision-makers, thus enabling companies to verify at which level of the company organization chart margin points are possibly being missed the most. Finally, in the case of more advanced companies, refined evaluation processes are implemented, such as, for example, the decomposition of margin loss into various components by means of a price scale or waterfall model (the price waterfall analysis discussed in this article).
With this analysis, it is possible to identify the steps that led from the list price to the price actually invoiced by the company by understanding the weight of the quantity discount, logistics discount and special discounts. In addition, where necessary, it would be possible to investigate further by arriving at the net price by identifying advertising costs, as well as bonuses and ancillary costs.
We have seen various methodologies for measuring and controlling the selling price of services and products. Obviously, when the types of products increase exponentially in addition to the proliferation of target markets and customers, the analyses become increasingly complex. In these situations, companies should ask support to technology, using software to help management in the analysis and processing of a considerable amount of data, to be able to move from a simple price control to more in-depth analyses to understand the elasticity of demand and identify the optimal price point to maximize company objectives.