Five battles you must win as an OEM to master Pricing & Revenue Management

Munich, October 2023

Five battles you must win as an OEM to master Pricing & Revenue Management Munich, October 2023

T

he transformation of the automotive industry is in full swing, encompassing both upstream and downstream aspects on national and international scales.

To paint a clear picture of this evolution, various aspects of the automotive sector are being reshaped. New strengths are being cultivated, weaknesses are being addressed.

A critical aspect deserving focused attention is “Pricing and Revenue Management.”

Fig 1: Pricing as the Ultimate Profit Lever

Source: Berylls Strategy Advisors

Pricing stands as the most potent lever for increasing profitability within the automotive sector. Consequently, it should take center stage for all Original Equipment Manufacturers (OEMs). However, it’s essential to recognize that Revenue Management extends beyond Pricing. It involves a strategic business practice adopted by companies to maximize their revenue and profitability through the optimization of product or service pricing. This discipline entails the application of diverse pricing strategies, data analysis, and forecasting techniques to make informed decisions about price setting, resource allocation, and capacity management. The primary components are depicted in the chart below. Pricing emerges as the most significant lever for enhancing profitability, making it of utmost importance for top management.

Fig 2: Revenue Management Encompasses Multifaceted Strategies

Source: Berylls Strategy Advisors

With a number of years of experience across various industries, it is evident that the automotive sector can glean valuable insights and techniques in Pricing and Revenue Management from sectors such as Fast-Moving Consumer Goods (FMCG), software, and industrial fields. Currently, many OEMs are still focusing a lot on factory utilization. This can result in cars being sold with higher discounts, because production and demand are not matching good enough. Many changes occurring in the automotive industry mirror transformations witnessed by other industries in recent years:

  • From Product to Product-Service-Software Combinations: The significance of services and software is growing, necessitating different pricing structures, and enabling novel approaches such as “as-a-service.”

  • From Single- to Omnichannel: Vehicles, services, and software will be sold through an expanding array of channels, including direct and indirect, electronic, and physical, and owned or third-party channels. Decisions regarding what to sell through which channel to which customer segment at what price are becoming more intricate and, thus, more strategically crucial.

  • From Product to Customer Focus: OEMs are increasingly striving to better comprehend their customers (their journey, value drivers, willingness to pay, etc.). This understanding provides a solid foundation for more differentiated pricing, better exploitation of specific customer segments’ willingness to pay, and catering to individual demands for products and services.

  • From Gut Feeling to Data-Based: Modern Revenue Management can be approached much more professionally using data and AI-based methods.

     

Considering these ongoing transformations, now is the ideal time to formulate and implement a 3-5-year development plan to fortify the Pricing & Revenue Management capabilities.

Best practices from Other Industries

Before delving into the specific must-win-battles (MWBs) for Pricing & Revenue Management in the automotive sector, let’s explore some best practices from other industries:

  • Marriott International: Renowned for its revenue management strategies in the hospitality industry, Marriott employs sophisticated pricing algorithms and data analytics to dynamically adjust room rates based on demand, seasonality, and other factors. This optimization maximizes revenue and occupancy rates across its global portfolio of hotels.

  • Amazon: As one of the world’s largest e-commerce companies, Amazon excels in revenue management through its advanced pricing strategies. They leverage extensive customer data to dynamically adjust prices on their marketplace, optimizing in real-time while considering factors such as competitor pricing, demand, and customer behavior.

  • Walt Disney Parks and Resorts: Disney meticulously practices revenue management within its theme parks. They employ various pricing strategies, including seasonal pricing, tiered ticketing, and add-on experiences, to optimize revenue and manage crowd levels effectively.

  • Ferrero: With its diverse brands and sales channels, Ferrero has implemented professional Revenue Management on a global scale. Based on a clear governance, well-defined playbooks and extensive data utilization, Ferrero has achieved significant profitability gains.

Initial Conclusions

Considering these examples, let’s draw some initial conclusions:

1. Pricing & Revenue Management serves as the most substantial profit lever.

2. When benchmarked against other industries, there is ample room for improvement in automotive OEMs.

3. The ongoing developments within the automotive industry underscore the rising importance of Pricing & Revenue Management.

Consequently, we strongly advocate a concentrated focus on Pricing & Revenue Management, with particular emphasis on the following 5 must-win-battles (MWBs):

MWB 1 – Establish a Clear Pricing & Revenue Management Strategy

A robust strategy is fundamental to success, and this holds true for Pricing & Revenue Management. Given the complexity of the automotive environment, the strategy must provide detailed answers to critical strategic questions. These include prioritizing revenue over profitability (or vice versa?), setting objectives for each Strategic Business Unit (SBU), defining target customers, understanding their value drivers and willingness to pay, positioning prices, determining channel strategies for different customer segments, and specifying pricing methods.

Developing a Pricing & Revenue Management strategy for an automotive OEM is a comprehensive exercise that necessitates in-depth insights into and transparency about markets, customers, channels, and offerings, both internally and externally. Of course, it must be mentioned that OEMs are not starting from scratch but have already developed elements or even entire Pricing & Revenue Management strategies.

MWB 2 – Implement a Target Operating Model for Pricing & Revenue Management

Determining the organizational structure of Pricing & Revenue Management is crucial. It’s essential to decide whether the team should be centralized, decentralized, or a hybrid model. This decision should align with the overall strategy and objectives of Pricing & Revenue Management. As always, there´s not THE one solution that is always right:

  • Apple and Skype are having centralized pricing teams because they have strong global brands and high price transparency.*

  • Porsche and Michelin use a split responsibility to foster a high degree of standardization on the one hand side. At the same time, local input e.g., to differentiate local willingness to pay must be considered.*

  • At 3M and Celesio, the Pricing teams are largely decentral with responsibility for a BU or region. This makes sense because markets are heterogeneous with different regulatory requirements for example.*

*Please note that this may not correspond to the current status of the companies.

In addition to structure, harmonizing global Pricing & Revenue Management processes is crucial for automation through digitization. Technology and human resources are integral components of the Target Operating Model. As the era of direct sales is coming closer, this of particular importance, as from than on, the final pricing responsibility stays with the OEM.

MWB 3 – Understand Customer Willingness to Pay and Set Prices Accordingly

A central tenet of Pricing & Revenue Management is understanding customers and aligning strategies accordingly. Effective Pricing & Revenue Management involves precise tools and concepts, with price differentiation being a significant component. Many companies successfully charge different prices to different customer segments for the same product or service, based on willingness to pay. Other industries are already successfully doing this as we speak: Just consider the practice that hotels and airlines are applying very successfully since many years. Amazon is changing the price for certain products up to 40 times a day, based on demand, competitor prices etc. Big insurance companies offer their insurance products at differentiated prices to different customers. Automotive has made recent experience with changing willingness to pay during the time of product shortages. Customers that are used to negotiating prices with their dealer where suddenly ready to even pay way above list price as for example visible in the United States. As product shortages are more and more dissolving now, the old pattern of price negotiation is coming back. A lot more examples of price differentiation exist.

To achieve this successfully, OEMs must understand the willingness to pay of their target customer segments, employing various reliable techniques for this purpose. This not only boosts profitability but also enhances revenue. And always remember that a 1% price increase already leads to a 7% increase in profitability.

MWB 4 – Establish Transparency in Pricing & Revenue Management Performance

Effective Performance Management hinges on knowing the right performance metrics, measuring, and reporting them accurately, and having sound performance management processes in place. Performance metrics vary based on business models, and achieving granularity across different business, customer, and product segments is often necessary. When list prices exist and discounts and rebates can be granted, you might want to use “price enforcement” as one top KPI. When you are for example in an online business, where prices are set by an AI-algorithm, a suitable KPI can be “realized price improvement”, measuring the price increase over a certain period. To add even more quality, “realized price improvement” can be measured against a market price index or internal objectives. The price waterfall can be a good input to discuss suitable KPIs. For OEMs on their way to the direct sales mode, managing price enforcement will be one of the key capabilities to be built to ensure profitability targets are met.

Fig 3: Price waterfall as food-for-thoughts about pricing KPIs.

Source: Berylls Strategy Advisors

Performance metrics should align with the pricing strategy and objectives, and data should be made available in suitable reports, despite the challenges of legacy IT systems and data quality.

MWB 5 – Leverage Data and AI to Optimize Pricing & Revenue Management

Data and AI offer tremendous potential for enhancing Pricing & Revenue Management. Using AI, OEMs can optimize various facets of Revenue Management simultaneously, which is challenging with conventional methods. Additionally, understanding customer behavior and preferences from data can guide pricing strategies and offerings. However, successfully scaling AI projects in Pricing & Revenue Management requires investment in relevant data, systems, and expertise, as data quality and system readiness are often limiting factors.

Conclusion

In conclusion, while automotive OEMs may not be considered Pricing & Revenue Management benchmarks compared to other industries, the changing landscape demands attention. We recommend that OEMs assess their current maturity level in Pricing & Revenue Management and chart a strategic roadmap, centered around these 5 must-win-battles outlined in this paper. With the Berylls Pricing Pathfinder we combine our Pricing & Revenue Management expertise with a powerful tool to reveal what Pricing & Revenue Management excellence looks like, and how to get there.

Author
Thorsten Lips

Partner

Thorsten Lips

Thorsten Lips (1972) is a partner at Berylls Strategy Advisors. He began his career as a management consultant at PricewaterhouseCoopers Düsseldorf in 1998. After spending six years at Malik Management Centre in St. Gallen, Switzerland, he took the cross-industry, global responsibility for Pricing, Sales, Service and Marketing as a partner at Horváth. At Berylls, his area of expertise is Pricing & Revenue Management. This encompasses classical topics like new- and used-car pricing, aftersales pricing and the like. In addition, he is an expert in innovative Pricing and Revenue Management approaches for digital products and services as well as in the field of data-driven Pricing.

Industrial engineering and management studies at the Technical University of Ilmenau and the Technical University of Darmstadt.