How to Improve Your Forecasting Accuracy and Your Pricing Strategy
When you’re planning a mass price change, the basic process starts as a top-down, high-level pricing strategy. In planning your increase, you might look at a variety of global factors, such as commodities and industry-wide trends, and compare them against your product offerings, market presence and profit trends. A price change might be a way to capture increased commodities costs, for example. Starting at this high level ultimately helps you forecast the impact of the mass price change.
But for companies with more mature pricing strategies and software, your segmentation doesn’t have to be this blunt.
More Targeted, Precise Calculations
To improve your forecasting, include an analysis of your market, customer behavior, company objectives and contract terms and conditions. Companies that are midway between immature and fully mature tend to employ one, two or three of these techniques, but not all four.
These factors improve the accuracy of forecasting because they take your high-level estimate and refine it in whatever dimensions make sense for your business. Companies may want to use all those factors to make precise estimates, but lack the necessary technology, data and overall sophistication. They may have a great idea for forecasting, but don’t have the capacity to bring all of those factors into consideration.
With a mass price change, a macro forecast that estimates a three percent increase across the board probably isn’t realistic. To get a more realistic, precise and granular estimate, you apply all the information you have about the market, contracts, internal company goals and customer behavior. These techniques allow you to estimate the impact of the change on actual price, volume and mix. Combining these estimates gives you a better predictive forecast.
If you’re at the low end of the maturity scale, you’re less likely to hit the targets that you set. When measuring the effectiveness of forecasting, you’re comparing baseline, expected and actual revenue, and measuring the delta.
Maturity also plays a role in your ability to quickly correct course. Everyone’s forecasting is off sometimes, but mature companies know when, why and how to fix it. Less mature companies are effectively averaging, and the impact of averaging all those results to do your assessments means that it’s very hard to tease apart what the root cause of any deviation from forecast. Having more granular analysis is important because it allows you to find deviations from your forecast and react more quickly.
Bringing your Own Company’s Needs into the Forecast
At the highest level of maturity, your forecasting takes into consideration your own company’s needs, as well as the market conditions, contract terms and conditions, future growth potential or limiting factors. Your organization’s maturity is the sum of where you are across all of those different areas.
While technology is one of the key elements, forecasting maturity means a balance of the right people and processes, tools and strategy. If you put in a price optimization tool without the supporting elements, it’s just a wasted investment.
On the personnel front, you need strategic people capable of defining and setting strategies, as well as pricing analysts capable of building models and leveraging tools and data to get results and make any necessary course corrections. You also need a collaborative mindset in your organization (especially from the sales team) capable of taking direction from the pricing team to execute in the marketplace, and provide meaningful input on the results.
To understand your company’s needs and build them into a mass price change, you need internal negotiations between pricing and sales. These two teams should review individual accounts as part of planning the pricing strategy, determining what increases to announce and how they apply to each region, as well as identifying any contracts that would prevent you from applying the changes.
To learn more about using pricing optimization to manage price changes in days rather than months, download our complimentary e-book, “Forecasting The Impact Of Mass Price Changes On Profits.”