Rethinking Pricing Strategies in Commoditized Markets: Network-based Best Alternative Pricing
- VOLUME XIV, ISSUE 13
- Executive Insights
As the construction industry starts its long climb up from the greatest collapse in recent history, companies are looking to repair the damage caused by anxious suppliers who ceded margins in an unsuccessful attempt to maintain volumes. While this dynamic is perhaps most acute in the building materials markets, it is also seen across a wide range of commodity and manufacturing sectors.
L.E.K. Consulting has found that many traditional models designed to optimize pricing have blind spots that prevent companies from maximizing their position in the market. To address this problem, we have developed an approach that merges network supply optimization techniques and game theory to accelerate returns as markets recover.
Our proprietary pricing approach builds on Next Best Alternative (NBA) pricing to also consider cross-market, network impacts. L.E.K.’s Network-based Best Alternative (NBBA) pricing approach simulates multiple sequences of pricing decisions, both yours and your competitors, and analyzes the full system-wide impact of winning and losing each account at various pricing levels.
NBBA is especially relevant if you are in an industry that is capital intensive, has high transportation costs, steep supply curves, and multiple plants that serve multiple markets. Examples include commodity chemicals, aggregates, cement, concrete, asphalt and steel.