In many organizations in the auto ancillary sector, there is constant pressure from the Chief Marketing Officer (CMO) and the sales team to reduce costs. This pressure often trickles down to the Chief Financial Officer (CFO), who then pushes for cost reductions across various departments and among suppliers.

Race to the Bottom

• Quality Erosion:

  Continuous cost-cutting can lead to compromises in the quality of raw materials, production processes, and final products. As costs are slashed, quality tends to diminish, which can negatively impact the product’s performance and durability.

• Supplier Strain:

  Continuous cost-cutting pressure often forces suppliers to lower their prices, which can lead to reduced quality of materials and strained supplier relationships.

• Value Perception:

  When quality drops, so does the perceived value of the product in the eyes of the customer. Customers are likely to associate the lower quality with a less reliable or inferior product, which can damage the brand’s reputation and lead to decreased sales.

• Customer Satisfaction:

  Reducing costs by cutting corners can result in dissatisfied customers, leading to increased returns, complaints, and a decline in customer loyalty. This, in turn, can result in a loss of market share as customers seek better quality products elsewhere.

To avoid the race to the bottom and support the CMO with effective cost-based marketing actions, the CFO should be equipped with the following cost data:

Detailed Activity Cost Mapping:

Comprehensive data on all activities involved in the production process, including labor, materials, overheads, and administrative costs. This helps identify cost drivers and value-adding versus non-value-adding activities.

Cost Allocation Information:

Precise allocation of costs to each product, service, or customer segment. This includes direct and indirect costs, ensuring a clear understanding of how resources are consumed across the organization.

Cross-Functional Involvement Data:

Insights from involving involvingProduct Development, Sourcing, Manufacturing, marketing and sales teams in the ABC analysis. This ensures that these teams understand the cost structure and can provide input on market positioning and customer preferences.

Cost Driver Monitoring:

Ongoing monitoring of cost drivers and their impact on production costs. This includes tracking changes in raw material prices, labor costs, overheads, and market trends to adapt pricing strategies accordingly.

Supplier Cost Data:

Detailed data on supplier costs and how cost-cutting pressures affect the supply chain. This helps maintain quality and value while managing supplier relationships effectively.

“What-if” Model Scenarios:  Increase in cost of Raw Material or other cost elements affects the Bottom Line. Market inputs like Metal Exchange trends, forex fluctuations, draft proposals of the Government to increase minimum wages etc, will shed a light on the likely impact on costs. Modelling scenarios using “What-if” analysis can help companies to quantify the likely impact on product costs. This enables the development of strategic pricing strategies that reflect the true cost of products based on such cost insights, including break-even analysis, margin analysis, and competitor benchmarking. This involves working with the office of the CMO.

Value Communication Data: Information that equips the marketing team with data to communicate the enhanced value and unique features of the product based on the cost of activities. This includes cost-benefit analysis, customer value propositions, and differentiation factors. This involves working with the office of the CMO.

How Activity-Based Costing (ABC) Can Help the CFO

1. Detailed Cost Breakdown and Transparency

• Insight: ABC provides a detailed breakdown of costs associated with each product, identifying high-cost and low-cost activities.
• Action: This allows the CFO to present a clear picture of where money is being spent and how each activity contributes to the overall cost. By understanding these costs, the CMO can make informed decisions about pricing and product positioning.
• Outcome: Transparency in costing builds a foundation for strategic pricing rather than cost-cutting.

2. Identifying Value-Adding vs. Non-Value-Adding Activities

• Insight: ABC distinguishes between value-adding activities (those that enhance the product’s value to the customer) and non-value-adding activities (those that do not).
• Action: Focus on enhancing value-adding activities and reducing or eliminating non-value-adding ones.
• Outcome: This shift can justify a price increase as the product’s value to the customer is improved.

3. Product Differentiation and Customer Perception

• Insight: By analyzing cost drivers, the CFO can identify opportunities for product differentiation based on unique features or superior quality.
• Action: Use the insights to highlight unique product attributes that are valued by customers but not offered by competitors.
• Outcome: The CMO can then position the product as a premium offering or one that delivers superior value, justifying a higher price point.

4. Optimizing Pricing Strategies

• Insight: ABC provides detailed cost information, allowing for a more strategic approach to pricing.
• Action: Develop pricing models that reflect the true cost of production, considering the value delivered to the customer. Implement tiered pricing strategies based on different product features and customer segments.
• Outcome: Better pricing strategies lead to improved margins and competitive positioning.

You can read more about the challenges auto ancillary companies face in following old costing methods and how activity-based costing (ABC) can help them overcome them.

What Can Companies Do To Set Appropriate Pricing?

1. Optimize cost to set pricing

Start by assessing how cost management efforts across all departments can impact the pricing. For example, if the quality department reduces costs through process improvements or defect reduction, the natural decision would be to use it within the department. Companies can instead take a more strategic approach of utilizing these optimizations to improve product value. This will help the company deliver high-quality products, justify the premium pricing, and enhance product value and profitability.

2. Use ABC to make informed pricing decisions

Auto ancillary companies often face dilemmas in manufacturing components in-house or outsourcing them to suppliers. This decision is crucial because it influences product pricing. Companies can use ABC analysis for detailed cost understanding to make this decision. This will also help them determine the actual production cost for each option and set competitive prices. For example, if outsourcing can save costs, the company can pass on these savings to customers and gain a competitive edge in the market.

3. Help CFOs identify new pricing opportunities

Along with improving the bottom line by reducing costs, CFOs can use pricing intelligence tools like ABIS Pro to find new pricing opportunities. They can collaborate with the sales team to optimize costs, set correct pricing, and ensure overall business and revenue growth.

4. Foster collaboration between sales and finance teams

The finance and sales teams must develop pricing strategies to increase sales, maximize profits, and drive business growth. That is possible when both teams collaborate, align pricing decisions with costs, and set prices that meet customer and internal stakeholders’ expectations. By achieving pricing harmony and setting a price that both the CFO and sales head agree to, auto ancillary companies can sustain for a long time in the hyper-competitive industry.

5. Use a trusted costing product to set the correct pricing

To set a price, auto ancillary companies need insights into the cost structures and customer profitability. They will have to deep-dive into performance metrics across all customer segments and products and find the ones that are profitable, not profitable, and attract high production costs. Based on these insights, the sales team can plan better pricing strategies. For example, they could charge a high price for customized products or reduce the prices of off-the-shelf products. To receive such granular insights, companies must invest in a tool like ABIS Pro to help them make informed pricing decisions and improve product and customer profitability.

How Can ABIS Pro Help Auto Ancillary Companies Set Prices That Make CFOs And Sales Teams Happy?

Setting prices can be challenging, especially when the CFO and sales head are unable to agree on the same price. They are plagued by questions like the best price to offer the vendor, how design changes or product improvements will impact the product cost, and more.

Example: Implementation Scenario –  Auto Ancillary Product Line

• Challenge: The company produces a range of auto components, facing intense cost pressure and commoditization.
• ABC Analysis: The CFO conducts an ABC analysis and finds that certain features in the components, such as enhanced durability and safety features, cost more and add significant value but are not well-communicated to customers.
• Strategy Development: Using these insights, the marketing team highlights these premium features in their campaigns, repositioning the products as high-quality, safety-focused components.
• Outcome: The company introduces a tiered pricing strategy, offering standard and premium versions. Customers perceive the premium line as delivering greater value, leading to higher sales at increased margins.

As illustrated in the above example, by leveraging ABC, the CFO can transform cost data into strategic insights, empowering the CMO to position the product effectively and achieve a sustainable competitive advantage. This approach not only addresses cost pressures but also aligns the entire organization toward delivering superior value to customers.

ABIS Pro helps auto ancillary companies answer such questions, determine the cost per unit, reduce and control costs, and make accurate pricing decisions to improve product and customer profitability. It will help them reach a consensus on setting prices and gain a competitive advantage over others.

For more information on how ABIS Pro can benefit your auto ancillary company, contact us.