Delivering Efficiency and Value Through a Market-Based Pricing Approach

To embrace this brave new sustainable and customizable packaging world, and its growing presence in cyberspace, manufacturers must make lighter, more compact and eco-friendly packaging that makes product shipping easier and more efficient and economical. They must also design more personalized packaging to fit branding goals.

Adjusting to these changes will create higher upfront costs and — as efficiencies kick in — lower ongoing costs. Meanwhile, the economic impacts on downstream commerce — even down to the micro market level — will be highly variable. To get their pricing right in response to all of this, packaging companies should move from cost-plus to market-based pricing. Not only is a market-based approach unique to each sub-market, it also allows systematic pricing calibrations to capture the best value on each transaction.

Cost-Plus Pricing: While many packaging companies typically start with cost-plus pricing because it seemingly yields a set transaction margin, it is problematic for several reasons. Sales reps may lack the price discipline to capture those margins, needlessly discounting customers who are willing to pay that price or even more. Conversely, you may lose other customers who aren’t willing to pay the standard margin rate but would be willing to transact at a level still accretive to the company. Taking a one-size-fits-all approach to pricing really fits no one and will yield a sub-optimal outcome.

Rules-Based Pricing: Rules-based pricing can be more versatile and disciplined and be tailored to customers or markets, but sometimes the rules don’t capture the right value. They might be derived from an in-house knowledge base that is gut-based and parochial. They might be tied to basic guardrails from competitor or industry benchmarks that are, respectively, too erratic or imprecise to guide pricing decisions. So, while a rules-based approach is an improvement over cost-plus, it is still fraught with risk.

Market-Based Pricing: The most promising method is a market-based approach that is grounded in analytics and aligned with your business strategies. It can include safeguards to ensure it’s as safe and predictable as cost-plus while capturing the profit potential of an approach aligned to each customer’s willingness to pay. It’s important that the math not only provides the correct initial price guidance, but that it is also structured to recalibrate over time as performance changes and strategies adapt. This approach has less to do with collecting better or new sources of data — though that isn’t unimportant — than with making better use of the rich lode of existing data.

Getting pricing right is more important in a digital world

eCommerce transactions are just starting to happen between packaging companies and their customers, and as they become the norm, they will further challenge the industry to create a flexible yet stable pricing structure that meets customer needs and expectations. Translating a sales rep-driven guided selling and negotiation process into a digital world is no easy feat, and there will be no one-size fits all answer. Ensuring your pricing approach and capabilities can adapt along with this channel will be essential.

Further, as your digital go-to-market approach takes shape, you will face critical price strategy questions related to cross-channel alignment. (Should a customer get the same price online as they do talking to a sales rep?), incentives (what pricing incentives should be used in which channels, and how will you provide the right governance to prevent double dipping?) and execution (how can we meet the pricing needs of customers that transact across channels?) All of this again points to a more flexible market-based approach being the right fit.

How to Achieve This Pricing Vision

Packaging companies are exploring several strategies to achieving their pricing vision, and there is no one right answer.

Some companies are looking to get the most out of their proprietary data by hiring an in-house team of data scientists to analyze it and provide ongoing price guidance. Others are buying off-the-shelf pricing software that can be installed to manage revenue. Other times, companies are looking simply for one-time recommendations from consultants to be able to execute on their own.

Alternatively, others are deploying a hybrid solution that marries a custom SaaS offering with analysis by outsourced data scientists. The value here is that consultants with a broader perspective on the industry can best exploit a SaaS product that would be more attuned to the unique needs of the business.

Turning Pricing Challenges into Opportunities

As the packaging industry continues to adapt to changing market demands, the need for more systematic and targeted pricing capabilities will grow. Pricing capabilities that make the best use of new data and analytics technologies and the personal, can flip the pricing challenges into pricing opportunities. By welcoming the knowledge contributions of key stakeholders throughout the business, and getting them to wholeheartedly embrace artificial intelligence tools that can set and manage prices at scale and in real-time, packaging businesses can put themselves in a powerful position to markedly improve the customer’s experience — and their profits, too.