How Manufacturers Can Stop Margin Erosion With Smarter Pricing
In manufacturing, profit margins are under constant pressure. Raw material costs fluctuate, energy and labour costs rise, and customers push for better deals. Yet, many manufacturers hesitate to adjust their pricing, fearing customer backlash or even worse, loss of volume.
The result? Margin erosion, where the gap between costs and selling prices shrinks, slowly eating away at profitability.
Common pricing mistakes that lead to margin erosion:
❌ Absorbing cost increases instead of passing them on through price adjustments
❌ Inconsistent discounting by sales reps, leading to revenue leakage
❌ No structured price list, making it impossible to track lost revenue
❌ Pricing all customers the same, despite differences in value perception and cost to serve
When manufacturers do not proactively manage pricing, they find themselves caught in a cycle of declining profits, without making a single operational change.
But here’s the good news: Smarter pricing strategies, backed by data, can stop margin erosion and recover lost profit.
The Power of Pricing Data: A Bakery Ingredient Example
Let’s take a bakery ingredient manufacturer supplying flour blends, emulsifiers, and enzyme systems to bakeries producing bread, cakes, and pastries.
Like many manufacturers, they had not raised prices in years, even as raw material costs skyrocketed. Sales reps had flexibility to negotiate deals, but there were no clear pricing guidelines.
What We Found When We Analysed Their Pricing Data:
▶️ Raw Material Costs Had Increased by 20-30%
Wheat, dairy powders, and emulsifiers had jumped in price, but their selling prices hadn’t changed.
They were absorbing these costs instead of adjusting pricing.
▶️ Inconsistent Discounts Were Hurting Margins
Some bakeries received 10% discounts, while others got 25%, with no clear logic behind it.
Large industrial bakeries, which were less price-sensitive, were receiving the biggest discounts, giving away margin unnecessarily.
▶️ No Pricing Segmentation Based on Customer Value
Small artisan bakeries, who valued quality and technical support, were paying the same price as industrial bakeries ordering in bulk.
They were undercharging customers who were receiving premium service and were willing to pay more.
The Solution: Smarter, Data-Driven Pricing Adjustments
Instead of continuing with a one-size-fits-all approach, we made three key pricing improvements:
✅ Created a Structured Price List – We established clear pricing tiers based on strategic intent, order size, customer type, and cost-to-serve.
✅ Set Discount Controls – We implemented discount guardrails, ensuring the discount structure aligned with customer segments and purchasing behaviours so that customers were not unnecessarily receiving excessive price breaks.
✅ Adjusted Prices Gradually – Instead of a one-time price hike, we introduced small, strategic price adjustments tied to raw material fluctuations.
The Impact?
✔ Recovered 4% in lost margin, without losing a single customer.
✔ Improved sales confidence, and empowered the GTM team to make profitable pricing decisions as there was now structured pricing guidelines.
✔ Stopped unnecessary discounting, ensuring that price discounts and breaks were given strategically, not randomly.
How to Start Using Data for Smarter Pricing
If you are concerned about margin erosion in your manufacturing business, start by tracking these key metrics:
1️⃣ Raw Material Cost vs. Selling Price Trends – If your input costs have risen significantly, but your prices have not, you are absorbing margin loss.
2️⃣ Discounting Patterns by Sales Rep – Identify which reps are offering excessive discounts and set guidelines.
3️⃣ Customer Profitability by Segment – Are all customers receiving the same price, even though some value your product and service more?
The Bottom Line: Don’t Let Pricing Be an Afterthought
Manufacturers spend time optimising operations, reducing costs, and improving efficiency, but pricing is often overlooked. Yet, pricing has the biggest impact on profitability, and small changes can lead to significant margin improvements.
If your business is facing margin pressure, your pricing strategy is the first place to look.
If margin erosion is a concern in your business, let’s talk. We help manufacturers and distributors build pricing strategies that protect profitability and grow sales.