Author: Paul Hunt
Companies that are quick to adopt new pricing models, or innovate new pricing models themselves, often see rapid growth and development. Unfortunately for the manufacturing industry, pricing innovation has been largely absent in the recent past. In this article, the author explores some growing trends in technology that will help pricers in the manufacturing industry adopt new and competitive pricing tactics. Author Paul Hunt is the president of Pricing Solutions and a frequent PPS presenter, instructor, and contributor. He can be reached at phunt@pricingsolutions.com.
The Pricing Advisor, June 2016
The strategy companies choose to price their products and services can be a key factor in their success or failure. Companies that are quick to adopt new pricing models, or pioneer them themselves, will often see rapid growth and development.
The recent influx of SaaS (Software as a Service) companies coming out of California are a perfect example of this. They aren’t providing services that are particularly innovative or new; they have just hit on a pricing model that makes their services accessible to new users.
Pricing Strategy in Manufacturing
Over the last decade there have been very few innovations in manufacturing pricing strategies. However, there are strong signs that change is coming.
We are beginning to see signs of market leaders experimenting with pricing strategies in order to differentiate themselves from their competitors. One high profile example of this is Michelin’s attempt to maintain and increase market share by implementing a ‘cost per landing’ on its commercial aircraft tires.
This strategy has many implications for both the buyer and seller. It gives airline operators a fixed cost that that can more easily reconcile with their other consumables and costs (fuel, landing tariffs and staff ).
It also means as Michelin maintain ownership of their product, they align their commercials with technical objective of longer lasting tires and hence can be even more quality driven. Finally, by changing the pricing model they gained market share and left many competitors out in the cold as customers became no longer interested in price per tire.
The Internet of Things
One area where manufacturing has seen considerable development over the last decade is in the technology available to measure performance. Though we are only beginning to see this information being used in pricing, we see it becoming increasingly relevant and useful in this sector. Pricing a product based on the value it delivers the customer is the ideal companies have always been working towards. However, in the past, value was an abstract, immeasurable quantity. This was particularly true in the manufacturing sector.
However, technology now means that more data is available on how your customers are using manufacturing products and what value they are getting out of it. Aligning pricing to value with this data available is now a question of identifying the right tools, the right metrics and then aligning your pricing strategy with this new, valuable data. In a similar way to pricing per airplane landing, we predict other industries be able to move away from capex purchases into pricing per machine process, per part produced, per hour of usage.
This change is happening. Early adopters are already experimenting with how The Internet of Things can help align their pricing and value proposition. It’s only a matter of time before this becomes common practice. As is always the case, companies who are able to adapt and embrace these new technologies will lead the way.
As we have seen before, and SaaS pricing is a perfect example of this, these shifts in pricing methodology open the door for more agile, small players to gain market share. For big manufacturing firms, this means that it’s very important to lead, not follow.