In dictionary terms, a conversion of an asset or service through sale into cash is called price realization or actualization. Price realization is also a metric to analyse the variance between the actual price that has been achieved and the expected price. Hence, it is a very important parameter when it comes to the evaluation of price performance when a horizontal analysis is performed. Thus, price realization analysis is a sort of variance analysis, whereby the actuals are compared against the budgeted, which in turn helps an organization deliver a better price performance going forward.
Moreover, there is a need for the corporations to keep a close eye on the difference between actual and targeted prices to closely monitor sales teams and their selling tactics, understand how customers respond to pricing changes & to leverage discounts strategically.
For example, company XYZ had sales revenue of $2.50 Mn & sold 10000 tonnes of cement for the 1Q 2019. Hence the price per tonne derived shall be $2.50 Mn/ 10000 tonnes, i.e. $250 per tonne. Hence the price realized for a 50 kg cement bag sold should have been $12.50.
There are various ways in which an organization can achieve a profitable price realization. A successful price realization is when you can match the actual prices with the budgeted or target prices.
Few strategies in which it can be achieved are as follows:
- To control price leakage: often a seller is not able to realize the prices which are listed upon the assets on account of the bargaining power of the customers, sales pressures, macroeconomic environments prevailing in the markets. Hence, it is needed that the businesses should make the discounts strategic. The businesses need to establish a benchmark to monitor the maximum difference to be allowed between the actual & target prices.
- Align the prices with inherent value: In order to have a profitable price realization of an asset, the prices should be in line with the value that an asset command. Hence the value of an asset should be slashed by the reduction of the value-added features, in case the buyer is not willing to pay such kind of prices for the asset or the services provided. Therefore, it is very much needed to provide segmentation of the value additions for a better price realization.
- Price segmentation: this means the customization of prices for every deal being entered. Different geographical markets, customers, channels, and products require different strategies in terms of the pricing; however, the same is a difficult and time taking process. It is required to build a list of unique prices for each product and service for each specific group. This might take a great deal of time, but this template will help earn the greatest profits on most transactions.
- Price Rise: This strategy helps the company to have a high margin on its product and services; however, the price rise needs to be reasonable and realistic enough. The rise should be such that the customers can be easily convinced to pay for the rise. These rises can drastically help the bottom line of the company.
In the modern times, a good data analytics application can help the company analyse the pricing trends and do an exhaustive customer segmentation which is need of the hour.
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