Avy Punwasee is a partner at Income management labs. RML helps companies develop and execute pricing solutions to maximize profits.
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Practitioners like myself have been preaching for years the benefits of strategic pricing and its growing importance in today’s CEO’s toolbox. The bottom-line impact prices have on a company is undeniable; my company found that a 1% improvement in price often results in an 8%-12% improvement in profitability. This is based on the average we’ve seen across the projects we’ve done. Most companies are in this range unless they have very low margins, in which case they will get more than the 8%-12%, or very high margins, in which case they may see less than the 8%-12% .
The hardest part is finding that 1% in price and establishing a sustainable pricing strategy. By eliminating the difference between price increases, increased or decreased discounts and shifts in the portfolio, opportunities and weaknesses can be identified.
With the current state of the world, after years of pandemic and now facing inflationary pressures, it seems that passing increased prices on to customers has never been easier. Customers expect it and pass those price increases down the value chain. While passing on price increases may work right now, I don’t think it’s feasible in the long run, and CEOs need to understand that these market conditions won’t last forever, making price increases ineffective. A situation like this calls for adapting your pricing strategy to market conditions so that you enable your organization to maximize profits. Having a strong mix management process in place can help mitigate the price headwinds and hit the 1% mark.
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What is mix management?
Mix management is the process of optimizing profitability by increasing the average price of a portfolio of offerings by influencing the proportions of the portfolio. Many companies have segmented offerings – think ‘good’, ‘better’ and ‘best’ options – and this framework creates a mix management strategy by trying to maximize the share of business done in the ‘best’ category relative to the ‘best’ category. “Good.”
There are many marketing, sales, and pricing strategies that can be used to drive customers from one offering to another with varying degrees of effectiveness.
But this example is overly simplistic; many companies are much more complex. Portfolios can span countries, regions, and channels, with hundreds or thousands of customers and offerings. Understanding mixes can be complicated, especially on a granular level, because mixes involve many factors such as price, channel, region, customers, etc. Most CEOs have an idea of ​​which region, product line, or channel is more profitable, but I found that very few companies are actively engaged in activities to influence their mix.
How can leaders get started calculating the mix?
If this is your first time trying to actively manage mix, here’s how to get started.
• Break down your offers and understand which ones are more profitable for you.
• Look at what investments you are making and validate that they are focused on the profitable mix drivers (for example, if you produce and sell materials, make sure you prioritize your most profitable offers).
• Ensure sellers are incentivized to focus on your mix-enhancing offers.
• Track your improvements around mixing; measure how you are doing and open and close the gaps with teams. What is measured, is done.
What else should business leaders keep in mind?
Before you can take action to influence the mix, the first step is to identify and understand the impact of different drivers (discounts, channel, region, etc.) on the bottom line. Ongoing rate-mix analysis can help you determine the financial impact at a granular level of volume shifts within the portfolio to higher or lower income-mix buckets.
The mix effect on your portfolio is beneficial if your premium offerings gain more market share, which can be achieved by establishing a sound pricing strategy. The mix effect would be considered negative in the scenario of low-priced offerings gaining more market share.
Overall rate mix analysis helps companies understand what aspect of the business is undermining their pricing strategy and where corrective action can be taken to maximize profits.
Some additional factors to consider when calculating the mix are:
1. Normalize the calculation.
Using a standardized calculation (such as per pound, per gallon, per hour, etc.) for a unified unit of measure (UOM) makes it easier to understand the interplay between different products and services in the portfolio.
2. Go into detail in the calculation, not the presentation.
It’s important that the calculations are done at a granular level to isolate movement between portfolios, but for many companies this becomes thousands of rows of data. Putting the calculations together makes it easier to spot trends and avoid going down a rabbit hole.
3. Keep it simple.
Rate mix calculations can be a powerful tool, and executives often want to see every possible iteration of the data. This creates spin with little action. Don’t let the ocean boil – stick to three to four categories that are usable. If you can’t trade, don’t measure against it.
Far too often mixing is seen as an academic exercise, as many fail to follow the above advice when creating visibility. But it’s a really powerful tool CEOs can use to gain a fundamental understanding of what’s affecting their business performance. By reviewing the information on a consistent basis, you can establish a baseline and identify micro-trends that occur intentionally or unintentionally through the actions of the organization.
To harness the real value and impact of mix management, it is essential to create visibility not only for the organization, but also for senior leadership to drive initiatives to improve weaknesses. The most important step is creating a consolidated plan of action to drive an incremental positive mix or reverse bad trends. Encouraging the sales organization to focus on the “better” and “best” offerings versus the “good” or to focus on certain customer segments or regions that are more profitable can go a long way toward improving the financial performance through mix.
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