Best-in-class companies manage their pricing strategy to expand margins on a continuous basis. David Burns, a partner in Bain's Customer Strategy & Marketing practice, outlines three questions that can help companies asses and preserve their margin health.
Read the Bain Brief: The Secret to B2B Pricing in a Digital World
Read the transcript below.
DAVID BURNS: Margin management is a set of processes, tools and, frankly, culture that companies use to expand margins over time. And best-in-class companies do this on a continuous basis, as opposed to periodic. And they create value by repricing pockets of their business, by capitalizing on volatility and pricing more dynamically, and by upgrading [the] mix on the product or customers over time.
Now on paper this is relatively easy, but a lot of companies struggle to do this well for a few reasons. First, data visibility is often an issue. Second, management commitment and frankly, their own visibility into the data is often an issue. Third, basic resourcing can be a problem. And fourth, a lot of people don't have a process or it's a relatively broken process to manage this.
Companies who do this in a best-in-class way reap large gains. They benefit from the underlying volatility in their business, they add margin over time to the tune of 50 basis points or more, and they reframe the conversation internally around margin dollars as opposed to just revenue or volume.
If you're not sure if this is an issue in your organization or not, ask yourself three questions. First, do I have the visibility I need, with the right granularity and speed, to understand changes in my margin rate, where there are hot spots, and what I should do about it? Second, am I set up to capitalize on volatility in my business? Up or down, am I more likely to win or lose when that happens? And third, when I get those hard-won gains on pricing or even procurement cost savings, am I more likely to keep those in my pocket or give them back?
The tools are getting better, but they’re no substitute for strong pricing capabilities.