Three Well-known Pricing Models
Holistically pricing can be categorized into three models – cost based, demand-based and value-based. Competition and customers equally drive the success of these pricing models. Enterprises can adopt any of these pricing models based on business objectives and market position.
Let us delve a little deep into each pricing models,
Cost-Based Pricing: Based on the cost and complexity of the product the list prices are set. Cost-plus pricing and mark-up pricing strategies are involved in the understanding of the marginal cost of the product and defining specific mark up or margin on top of that.
Demand Based Pricing: This involves an understanding of the demand for the product in the market and considering supply conditions to set current and future prices. This pricing strategy can also be used for overall demand shaping and increasing market share for the product.
Value-Based Pricing: Many companies are trying to move away from purely cost-based or demand-based pricing to understanding customer’s requirement and willingness to pay across each product-market segment. Feature-based pricing connected with bundle pricing and discount optimization is one of the most talked pricing model adopted by most of the companies.
A successful price management strategy is supported by a successful value management strategy where the value is created and communicated in the market to align the competition and customers.
Value chain is evolving and so does the pricing strategies
Distributors are becoming the key factor in the whole price management process as they are getting closer to the consumer. Value-added distributors are causing the whole value chain shrink and come down to just ‘manufacturers’ and ‘consumers – distributors being a connector with multiple business models. They are not just providing individual parts but providing overall solutions by combining multiple software, hardware, service providers to the end customer (B2B or B2C) through their own value-added resellers. The whole business model for distributors is getting more and more complex. They realize the importance of having a differentiated pricing strategy defining their value proposition – speed, service, and a wide range of product offerings. The below key areas are emerging for distributors as a part of this evolution,
End-to-End Technology Solutions: Top electronics suppliers like Ingram, Synnex, Arrow, and Avnet provide cloud solutions, mobility solutions, Data center and Point of Sale (POS) solution. A mobility solution provided by Synnex offers the device to infrastructure to the management of connectivity for any enterprise from multiple vendors.
Support and Services: Customer support and technical support is one of the key focus areas for all value-added distributors. Training the value-added resellers about the new product and solution to see maximum positive customer experience is the key. Some of the distributors in the lower part of value chain focus only on specific product portfolio and on providing ‘pre’ and ‘post’ sales technical support for the products. NewWave Technologies Inc is a full-service distributor with specific vendors and provides customizable warranty services to the customers.
E-commerce: Today’s more innovative distributors have already deployed the chat, mobile-ready self-service channels as part of their e-commerce channel. The distributors that allow customers to do business wherever and whenever. They will continue to grow faster than the companies that can’t give their customers viable online choices. Digi-Key, Mouser, Newark element14, and many others offer online chat capabilities. Arrow has MyArrow for their customer to manage information.
Design: Value-added distributors are also supporting product design. Digikey provides whole design eco system to engineers with 1000 in-depth free reference designs available. Mouser’s new Intelligent Bill of Material (BOM) tool, called FORTE can manage the risks in any current design.
Operational Efficiency: Given the new technology trends, heavy competition, and challenges in managing the product portfolio that have small product life-cycle, Yield Management becomes an important concept. Distributors are evolving technology stacks which includes Warehouse Management Systems to Warehouse Execution Systems with efficient and global logistics solutions are key differentiators.
Technology is speeding-up the evolution
Bain predicts that by 2020 annual revenues could exceed $470B for the IoT vendors selling the hardware, software and comprehensive solutions. Based on the proliferation of Industrial Internet of Things (IIoT) devices and the networks and terabytes of data they generate, Accenture predicts AI will contribute an additional $3.76T GVA to manufacturing by 2035. Bain predicts cloud service providers and analytics and infrastructure software vendors will have the most influence over IoT purchases.
Looking at the stats, it is very clear that the demand for the technology and electronics products, be it hardware or software, is exponentially increasing. Firms are focusing on different parts of the strategy to be able to fulfill the demand. Till now Electronics Component Manufacturers were concerned about pricing based on demand generated and involved in adopting strategy “direct to consumer.” This was to avoid all middle costs and pricing purely based on product cost and expected margin. Agile manufacturing was adopted to be aware of the demand in real-time and allocate capacity and manufacture appropriate quantity. It is very obvious that Agile manufacturing strategy comes with a lot of challenges. As the demand at the consumer level is very volatile, and manufacturing process is a mid to long-term strategy (whether the business is built-to-stock or built-to-order) driven and cannot be changed as frequently but definitely works for ‘New Products’ production planning. Getting back to the already seen high demand for electronic components and current under supply situation, manufacturers are focusing on reducing fixed cost so that they will be able to produce in larger quantity in future.
According to Electronics Weekly, CapEx of all the electronic manufacturers are at high which is being invested in setting up new Fabs and R&D to be able to catch up with the new technologies which can be produced in low cost. The bottom-line is Technology is acting as a catalyst is the fast-changing pricing world.
How Pricing Analytics helps enterprises
To summarize, manufactures have moved the focus from demand based pricing model to first fixing up the cost of production and catching up the increasing demand in the market. Price differentiator will be new technology to fulfil higher demand with lower variable and fixed cost.
[table id=9 /]
Feature-based pricing comes out to be a key pricing analysis which can be adopted across multiple focus and developing areas for distributors or manufacturers. BRIDGEi2i’s pricing analytics team has helped many of the Technology and Manufacturing clients to understand, define and implement most effective, optimized and right kind of pricing strategy based on the problem and key performance metric they are trying to drive.
What is your biggest Pricing Problem? Please write to us. BRIDGEi2i Analytics Solutions has strong pricing analytics capabilities in all of the above areas, and we would be happy to discuss.
On that note, read 8 Must-have Analytics Capabilities for a B2B Firm and see for yourself where Pricing fits in.