Unlocking the power of intelligent pricing technologies and commercial capabilities

Despite macro-economic headwinds, energy services providers are reaping rewards for investing in intelligent pricing. 

Converging macro-economic trends have and will continue to put pressure on profitability. Baringa’s pricing and commercial profitability study has revealed that despite the challenges facing energy services providers, intelligent pricing can offer solutions to quickly drive profitable growth.

Cost pressures are expected to continue to challenge business margins for the sector particularly due to significant specialised labour shortages. While predicted strong demand for energy and heating trades is a positive for the sector, shortages in skill availability are expected to lead to inflationary pressures which risk eroding margins. And while nominal pay rates have been falling for the economy overall (c.0.5% economy wide average), skilled trades people are continuing to benefit from a tight labour market with nominal pay growth of c.10%.

For example, a Commercial Director for an Energy Services business in the UK told us that “the cost of everything has increased, but against the backdrop of a consumer market that has less disposable income due to sudden inflation and a cost-of-living crisis means you can’t just push blanket price increases. You need to be smarter and more targeted - like micro-segment thinking.”

Against this backdrop, Baringa conducted pricing and commercial profitability market research with more than 60 firms that service, install and repair energy services (e.g. HVAC, heat pumps, solar panels and boilers) to assess their experiences of these conflicting trends, how they are adapting, and their anticipated future needs.

We found that:

• Companies that have invested and developed advanced pricing capabilities saw their profit increase twice as much in the past 12 months compared to companies who have only nascent pricing capabilities
• Companies that have already invested in AI pricing technology benefit from a 2% higher profit margin over companies that have not
• Companies that are least capable to define clear net pricing guidance (e.g. inclusive of discounts and rebates) are most likely to increase discounts to customers over the next 12 months, further eroding margin

Section 1: Companies investing in their pricing capabilities generate both more revenue and profit

We evaluated how energy services providers are investing in pricing capabilities, such as clearly defining a pricing strategy or introducing price calculation tools. We found that companies investing in pricing capabilities benefit from increased revenue and profit.

Companies investing in their pricing capabilities have seen their profit increase by double compared to companies with nascent maturity in the last 12 months. They expect their gross margin to increase several fold more than less mature companies over the next 12 months.

Investing in pricing is not just about tools or data; it is about building a capability that drives performance. Firms that we identified as having more advanced pricing maturity are widening the performance gap, investing 4% to 8% points more than nascent pricing maturity competitors.

Call to action: with the performance gap widening for companies that are investing in pricing technologies, can their competitors afford not to invest? Our experience has found that investing in pricing capabilities and getting the best ROI from those investments starts with leadership establishing a culture of commercial mindset throughout teams.

Section 2: While most companies are using cloud-based pricing platforms, they may not be using the platforms to their full potential.

Across all levels of maturity, 80% of energy service providers used cloud-based pricing platforms, representing the necessary foundation for the adoption of AI. While most companies had cloud-based pricing platforms, we identified a considerable proportion still using spreadsheet-based solutions.

Another Energy Services Commercial Director told us that “we have a leading CRM tool, but our pricing within that solution is still cost + margin. I think the momentum is within our leadership shifting towards more nuanced pricing. There is recognition to be a bit more targeted and acknowledge that simple cost + margin won't consider the speed and complexity of market dynamics.”

It is widely accepted that cloud technologies will continue to support business growth and improve bottom line if done right – and it is no different in pricing, with clear use cases in AI and Machine Learning augmenting those capabilities to improve business profitability:

1. More complex pricing models – models can take advantage of more variables to calculate the price you can charge. From the weather, to the traffic, to your website, you can codify the price impacts
2. Increased personalisation – using historic data and machine learning models can identify patterns meaning companies can dynamically change the pricing for different customer micro-segments. This impacts list price, but more importantly it can help make net prices more personalised for even individual customer scenarios.

One-third of organisations surveyed are specifically using AI within pricing, and they observe a 2% higher profit margin. AI remains extremely high on the industry agenda: of the two-thirds of firms that are not using AI, 92% state they are either looking to implement, or are currently piloting it.

Call to action: do you know how to get the best out of your pricing technology? We have observed with the advancements in cloud solutions even the smallest teams and businesses can invest in advanced data science (e.g. ML / AI modelling) and visualisation tools to support pricing and experience payback within 4-6 months (if not sooner).

Section 3: Companies may be focussing too much on list price and not enough on net price

While we know energy services providers often put significant effort into defining a clear pricing strategy, it appears less is done to manage the net price that customers ultimately pay.

Across five categories, respondents on average rated themselves least capable to define clear price guidance in relation to the management of discounts and rebates, risking lower control over net margin. Despite having identified this as a weakness, 67% still plan to increase the value of discounts they offer over the next 12 months, with only 3% planning to reduce it. Therefore, two out of three businesses feel the need to leak more commercial margin through higher discounting. In our experience, this can lead to wider discounting spread due to a culture of loosened commercial discipline with sales teams and managers.

Of the 67% of companies expecting to increase the level of discount, 35% plan to increase this number by over 10%, whilst 49% plan to increase this by 5-10%.

Call to action: does your company manage and govern discounting practices effectively? Applying more disciplined commercial discounting policies are one of the fastest ways we have observed businesses can quickly reduce margin leakage.

Part of overcoming this challenge is more related to internal buy-in than external market factors. Often it is getting broader leadership support. One Energy Services Commercial Director mentioned that “if I had a magic wand then the one change I’d want to help our profitable growth would be getting all my leadership colleagues onto the same page to support more intelligent prices approaches, getting away from our traditional discounting approaches and be willing to experiment with a can-do attitude.”

Laura Higgins the Baringa Commercial Strategy & Pricing Lead commented "Working with our Globally listed, B2B and B2C clients alike we have one consistent reflection; they have been focused on cost saving but have paid little attention to commercial margin leakage. Our clients are finding anywhere from 3-8% EBITDA improvement by simply focusing on these sources of commercial margin leakage enabling short and long-term profitability."

Summary

Our analysis has shown a clear correlation between energy services providers investing in pricing capabilities and driving profitability. Organisations can look to maximise profitability through three actions:

1. Investing in pricing is not just about tools or data; it is about building a capability that drives performance. Our experience has found that investing in pricing capabilities and getting the best ROI from those investments starts with leadership establishing a culture of commercial mindset throughout teams.
2. Explore using intelligent pricing tools with built-in ML / AI capability, if not already in use. Increasingly, we are observing that businesses can get more and more ROI with smaller pricing / commercial management functions with more automation, commercial insight visualisation and reporting
3. Consider more than the list price; improve management of discounts and commercial discipline to reduce revenue leakage. Our experience tells us this is one of the fastest drivers of commercial margin leakage for businesses – often driving 2-4% EBITDA improvement in the first 12 months without a significant CAPEX investment.