Price management is a critical function for high-tech firms today. It means balancing prices for products or services based on production costs, competition, and market demand. By optimizing prices, you fix on the best prices to maximize profits by ensuring your products are competitive in the marketplace.
But price management can be challenging. You must accurately analyze customer behavior, market trends, and the competitive landscape to determine what you can price without losing customers or sacrificing profits.
Why pricing matters
Pricing has a direct impact on the bottom line. According to a landmark study published in the Harvard Business Review, a 1% price improvement can result in as much as a 11.1% margin increase.
High-tech manufacturers like semiconductor firms or makers of electronic components are challenged to manage and optimize prices because of the complexity of industry market dynamics.
Such companies can’t just “set and forget” a price for a product. First, they must establish the list price, which is typically published in product catalogs and on the manufacturer’s website and represents the highest price the manufacturer hopes to get. But, realistically, the drop from the list price to the actual prices paid by businesses purchasing in bulk – either directly or through distributors or other middlepersons – can be quite significant.
A price waterfall is a graphical representation of the various elements that contribute to the final price of a semiconductor product. It is a tool used by semiconductor companies to analyze the cost structure of their products and to identify areas where they can reduce costs or improve margins.
Manufacturing capacity is key to pricing strategies
Manufacturing capacity is the biggest driver of semiconductor pricing. That’s because the cost of producing a semiconductor chip is largely fixed, and thus the cost per unit decreases as the number of units produced rises. The initial cost of building a semiconductor fabrication facility (fab) is very high because the manufacturing process requires highly specialized equipment and human expertise. However, once the fab is operational, the cost of producing each additional chip is relatively low.
What do you need to consider?
When setting prices across the entire portfolio, the first step to enable your company to action against those prices is the create price lists, which can be stored in a pricing table. It is typically a table that houses all the prices across the company, companies often start out with a spreadsheet that lists products or services along with their corresponding prices at different points in the supply chain – such as the distributor book cost. The pricing table also includes additional information such as discounts, minimum order quantities, special price agreements, and other terms and conditions.
The pricing table is updated regularly to reflect changes in market conditions, supply and demand, and other factors that may affect pricing. By using a pricing table, semiconductor companies can make better informed pricing decisions and optimize profitability. To take it one step further, companies can evolve from spreadsheet-based pricing to software-based pricing.
How can the right vendor help?
Most vendors offer the ability to set list prices. A good profit optimization solution needs to be flexible enough to enable price changes into downstream systems. Prices for product and service SKUs need to be validated against business constraints such as key cost parameters, corporate objectives, and competitive economic data to ensure revenue optimization and compliance instantaneously.
And the right solution should help you with all your price lists, not just your list prices. If you think about all the other price points that you have to update if the list price changes, you also want a solution that you can configure using different formulas, filtering, business rules, or processes to update those other price lists as well.
For more information on how to set the right prices, download the ebook, Profit Optimization and Price Management: High-Tech Manufacturers’ Fastest, Most Effective Route to Higher Margins.
