Pricing Strategy #5: You Can’t Afford to Ignore Shrinking Revenue and Profits
Ok, I know what you’re thinking: “Duh! Master of The Obvious!” But before you consider ditching this post, please know there are far more businesses that ignore shrinking revenue and profits than not.
You’d be surprised.
It’s not like there are companies out there completely unaware of their margin shortfall. The dumb part is throwing inventory dollars at a problem that could be easily solved with Price Optimization software.
What’s Weighing Down the Balance Sheet?
“Profits are being left on the table, and most businesses lack the tools to notice where they are being left, let alone fix them. Working capital tied up in underutilized inventory is another large missed opportunity.” – Cliff Isaacson, EVP, Product Strategy, Blue Ridge.
Let’s look at how things are done now and why it’s not working.
- Capital in Inventory. The balance sheet is out of whack because, in their quest to ensure product availability and minimize lost sales, companies react by throwing inventory dollars at fast movers. Big dollars. The total cost of holding inventory can represent a shocking 25-30% more than the inventory’s unit cost value. In addition, having your cash tied up in inventory-related expenses has an opportunity cost that can translate to as much as 15% or more!
- Supplier Minimums. When ordering from suppliers, there’s a need to “fill the truck” or “fill the container”. You end up with millions of dollars tied up in the longer tail of the assortment. Because those items are NOT on your radar as key items, the damage goes unnoticed.
This blatant disregard for the balance sheet is exactly why distributors continue to see profits shrinking, even after revenues rose 8% in 2019.
No More Faith in ‘Old Reliables’
Add a little Coronavirus to the economic chaos, and normal fast movers become erratic.
With COVID-19 shifting customer demand to essential goods, there are new products, new product categories and new customer groups to analyze. Most businesses are entering alien territory unarmed.
A strategy that relies solely on maximizing unit profit or unit margin for old faithful A-items is going to result in costly overstocked items. End. Of. Story.
Harness Change (and Kick *%$ at it) with Pricing Analytics
Too much is changing too fast – either due to shifts in customer willingness-to-pay, competitive pricing (especially in ecommerce where prices are highly transparent and more threatening), or some other market pressure.
Figuring out where you are losing revenue and profits is actually very easy. In just a few clicks, analytics-driven Price Optimization software gives you a complete, real-time picture of change. You can even simulate how a new pricing move will impact your bottom line – so you can adapt your strategy with confidence.
A Natural Fit with Supply Chain Planning
Intelligence-driven pricing analytics software can zip through hundreds of thousands of SKUs across multiple channels and locations to find the optimal price and orchestrate with demand forecasting to achieve a number of desired results:
- Strategically shape demand across fast-movers and long-tail assortments
- Identify the best products to respond to promotions, temporary price reductions and clearance pricing
- Uncover quick revenue opportunities you didn’t even know were there, such as underpriced items based on competitive price analysis
- Right-size inventory levels to free up working capital
Price Optimization software is a great way to adjust demand on overstocked items and maximize OVERALL profits, versus maximizing unit profit or unit margin.
This post belongs to our series, “6 Pricing Strategies You Can’t Afford to Ignore.”
Read this series from the beginning
Also, definitely check out this related post: “The Chicken and The Egg: Using Price Optimization and Pricing Analytics to Shape Demand”