LEVERAGING THE POWER OF PRICING

Transcription

1 LEVERAGING THE POWER OF PRICING

2 ABOUT PRICE OPTIMIZATION

3 Pricing is The Most Important Profit Lever PROFIT IMPACT 1% Improvement In: Profit Impact 3% Manage Price Well Price 12.3% Cost 8.7% Volume 3.6% 97% Manage Price Fair or Poorly* 94% of companies engaged in pricing initiatives improved profits. AMR Research Survey Finding, SOURCE: PRICE MANAGEMENT: CONVENTIONAL WISDOM IN WRONG, AMR RESEARCH 3

4 Delivering Results Directly to Your Bottom Line PRICING POWER Current Income Statement 2% Gain Future Income Statement Revenue $100 M $102 M Cost of Revenue $50 M $50 M Gross Profit $50 M $52 M Operating Expense $42 M $42 M Operating Income (EBITDA) 25% Gain $ 8 M $ 10 M Assuming 8% EBITDA ABOVE FOR ILLUSTRATIVE PURPOSES. 4

5 Cumulative Profit Dollars Small Net Price Improvement = Significant Cumulative EBITDA Impact INCREMENTAL BENEFITS INSIGHT2PROFIT is the catalyst for incremental profit Targeting 10:1 Return in year 1, with a minimum guarantee of 2x Investment Targeted 2x Investment Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 ABOVE FOR ILLUSTRATIVE PURPOSES. Year 1 Year 2 Year 3 5

6 5% Flat Price Increase Problem of Peanut Butter Approach ONE-SIZE PRICING 9% 8% 7% 6% 5% 4% 3% Will not pay Lose volume Never get it 2% 1% 0% Customer 1 Customer 2 Customer 3 Customer/Product: what % willing to increase ABOVE FOR ILLUSTRATIVE PURPOSES. 6

7 5% Differentiated Price Increase Value of Differentiation DIFFERENTIATING PRICING 9% 8% No Volume Loss Realize Full Increase 7% 6% 8% 5% 4% 3% 5% 2% 1% 0% 2.5% Differentiated Increase Customer 1 Customer 2 Customer 3 ABOVE FOR ILLUSTRATIVE PURPOSES. 7

8 Goals of Value-Based Pricing VALUE PRICING Increased profits vs. traditional Cost+ or undifferentiated pricing Capture more value where customers are willing to pay more Capture more volume where customers are more price sensitive Systematic & repeatable process Efficiency in quotation (speed) Reduced market risk (less variation in customer pricing) Enables continuous improvement Provides a benchmark to measure effectiveness Provides price change levers to quickly implement strategic and tactical changes 8

9 ABOUT INSIGHT2PROFIT

10 ABOUT INSIGHT2PROFIT Combining Expertise & Technology, Delivering 15 to 30% Sustainable Profit Improvement via Active Price Management B2B Industrial Manufacturing & Distribution B2B then B2C Consumer Products B2B Services Productized Service Offering Guaranteed results. We even put our fee on the line. ABOVE ARE SAMPLES OF INSIGHT2PROFIT CLIENTS, REFERENCES AVAILABLE. 10

11 CLIENTS ABOVE ARE SAMPLES OF INSIGHT2PROFIT CLIENTS, REFERENCES AVAILABLE. 11

12 ABOUT INSIGHT2PROFIT 90% CLIENT RENEWAL RATE 10:1 50% YEAR-OVER-YEAR GROWTH 4 YEARS IN A ROW TYPICAL 2006 YEAR FOUNDED RETURN FOR OUR CLIENTS 100% AVERAGE CLIENT NPS (NET PROMOTER SCORE) 12

13 We Find Opportunities, Then Deliver $ s RESULTS $1M $38M Lighting $28M $1.5B Communications $14M $1.0B Automotive Aftermarket $18M $400M Industrial Gases $16M Supply Distribution $9M $300M Specialty Chemicals 3% Rev Lift Medical Distribution $750k $100M Wall Covering ABOVE IS A SAMPLING OF PRICE FOR PROFIT S RESULTS.\ 13

14 Timing Adjusted Based on Project Scope and Approach, Followed by 12 Months of Measurement Month 1 Discovery Assess Current State & Align on Opportunities Kick Off Month 2 Modeling Define & Review Future State Workshops Month 3-4 Implementation Implementation, Training & Change Management Organizational Alignment Access to DRIVE2PROFIT available on a subscription base. HIGH-LEVEL TIMELINE Months 5-17 Measurement Monthly standard measurement analysis & reports Measurement Cadence ABOVE FOR DISCUSSION PURPOSES. Go Live Key Milestone/Report Out Discovery duration may vary depending on timing of receipt of data 14

15 DISCOVERY MODELING IMPLEMENTATION MEASUREMENT APPROACH Designed to Go Live in 3 4 Months, Followed by 12 months of Measurement Business Development handoff Project set-up Conduct kick-off meeting Schedule key meetings Request data Obtain, load & validate data Conduct Discovery interviews Map pricing processes & capture existing policies & controls Understand data Conduct Strategy Session I (Our understanding of data & current state) Tour facilities Create Price Setting model Define & gather Price Setting factors & drivers Conduct Strategy Session II (Price Setting Workshop) Update & analyze price setting model (outliers, etc.) Review and agree on Price Setting model results (Increases) Define how to load & validate new prices (files, file format, etc.) Create Implementation plan Conduct Strategy Session III (Recommendations) Draft DRIVE agreement (if applicable) Configure DRIVE Price Execution Define Communication plan (internal & external) Schedule training Finalize Implementation plan Create, load & validate new price test file Create, load & validate final price file Create training materials Execute training Develop external communication materials (internal & external) Execute external communication plan Define & align on measurement method Go live on new prices Develop & align on roadmap for future opportunities Schedule & conduct project closure meeting Load, validate & analyze monthly results Review monthly results Define & execute monthly results mitigation steps (if applicable) 15

16 CURRENT STATE DISCOVERY Organizational Structure Trends Customer Concentration Product Concentration

17 PRICE WATERFALL Systematically Identify & Quantify Significant Price and Margin Waterfall Elements Discount Freight Payment Terms Common Waterfall Areas Rebate Advertising List Price Invoice Price Pocket Price Pricing Freight Discounting Collections Samples Returns Data Systems ABOVE FOR ILLUSTRATIVE PURPOSES. 17

18 EXAMPLE WATERFALL & LEAK ANALYSIS ABC Company Gave an Additional ~$53M Discounts Above & Beyond the Standard On Invoice: ($41.7M) Off Invoice: ($11.5M) ACTUAL CLIENT EXAMPLE. 18

19 EXAMPLE WATERFALL & LEAK ANALYSIS ABC Company Gave an Additional ~$53M Discounts Above & Beyond the Standard Focus Areas US Terms of Sale (VDP & Freight) US Rebates Europe Freight Custom Product Pricing Additional Increase to Internal List Prices Baseline (April Dec) ($10.2M) Discount ($3.4M) Payout ($0.9M) Discount ~$15M Sales ~$9.5M Sales High Estimate $2.4M $0.3M $0.2M $1.0M (6%) $0.5M (5%) Low Estimate $1.4M $0.3M $0.1M $0.5M (3%) $0.3M (3%) Total - $4.4M $2.6M ACTUAL CLIENT EXAMPLE. 19

20 Ensure you Fully & Consistently Capture Revenue to Which you are Entitled IDENTIFY PRICE LEAKS Negotiated Price Negotiated Price Price Leak Elimination Low Price Invoiced High Low Price Invoiced High Undercharged Customer Overcharged Customer Profit Improvement Reduction in Errors ABOVE FOR ILLUSTRATIVE PURPOSES. 20

21 Cost/lb Cost/lb EXAMPLE ANALYTICS FINDINGS Companies Typically Have Significant More Price Variation than Expected $8.50 $8.00 $7.50 $7.00 $6.50 $6.00 $5.50 $5.00 $4.50 $4.00 $12.00 $11.00 Product A Diameter (in) $10.00 $9.00 $8.00 $7.00 $6.00 $5.00 Product B $ ACTUAL CLIENT EXAMPLE. Diameter (in) 21

22 LOW Relative Price Score HIGH Bringing Strategic Pricing Excellence and Optimizing Return While Minimizing Risk RISK MITIGATION Each dot represents an individual customer Higher Risk Lower Increase Lower Risk Higher Increase LOW Revenue HIGH ABOVE FOR ILLUSTRATIVE PURPOSES. 22

23 DATA-DRIVEN METHODOLOGY Leveraging Outstanding Technology to Assess Current State & Identify Opportunities PRICE REALIZATION PRICE / COST TREND OVER TIME PRICE SUMMARY PRICE PERFORMANCE PRICE VARIATION PRICE SENSITIVITY ABOVE FOR ILLUSTRATIVE PURPOSES. 23

24 PRICE MODELING Segment, Segment, Segment Market Validation Risk Mitigation Target Price at Customer/Part Level

25 Segment to Properly Identify Price Drivers SEGMENTATION Customer Hierarchy Product Hierarchy Customer Attributes Product Attributes Product Attributes Market Price Level 1 ABC Code Plant Shape Parent Price Level 2 Under Contract Region Size Standard Price Dimensions Material Type Composition Condition Sales Rep Magnetic Temper Customer Price Level 3 Size Complexity Thickness ABOVE FOR ILLUSTRATIVE PURPOSES. 25

26 EXAMPLE PRICING SEGMENTATION Identified Relevant Price Drivers to Refine Customer & Product Segmentation, then Establish Price Targets CUSTOMER Channel Market Size Life Cycle OD/Wall Grade/Quality Competitiveness PRODUCT TARGET PRICE ORDER Order Size Cut to Length Lead Time Packaging ACTUAL CLIENT EXAMPLE. - Strategic Drivers 26

27 - PROFIT + THE PRICE/VOLUME PERCEPTION When considering how much we can change current prices to fit a revised price structure, its important to know that not every Customer/Part Combination is on a Price Elasticity Cliff B C D E A - PRICE + ABOVE FOR ILLUSTRATIVE PURPOSES. 27

28 PRICE MODELING By Modeling Key Product Attributes we can Assess each Part s Pricing Power and Increase Revenue while Mitigating Risk High Score (4-5) High value relative to competition Aggressive increase Middle Score (3) Well priced today Increase with cost inflation Low Score (1-2) Risk of unreasonable pricing Conservative increase Select decreases using overrides 28

29 - PRICE INCREASE % + Approaches: By key feature By customer size By competitive positioning A A PRICE DIFFERENTIATION Varying the Level of Aggressiveness of the Price Increase can Further Differentiate the Product Pricing Aggressive Standard A Conservative C Minimum Increase = PPI (Inflationary Cost) C C VERY LOW PRICE INCREASE VERY HIGH 29

30 PRICE SETTING SUMMARY Market Price Increase along with Pricing Power is used in Determining the New Target Price Increase 1 Assign product to price increase group Product Category Very Low Low Ave High Very High 2 Differentiate the aggressiveness of the increase range Conservative 2.5% 3.0% 4.0% 5.0% 7.5% Standard 2.5% 3.5% 5.0% 7.5% 10.0% Aggressive 3.5% 5.0% 7.5% 10.0% 15.0% 3 Apply override adjustments (if applicable) and business rules to scored increase Minimum Increase Customer Increase Cap Minimum Margin (Floor) Maximum Increase 2.5% 6.0% 30.0% 15.0% 30

31 Margin Percent Margin Percent Margin Percent Differentiated margin percent targets Set target margins for similar groups of customer and products Standard Value Add Premium Value Add Commodity Value Add Volume Volume Volume 31

32 Price Capture Additional Value Through Price Segmentation by Channel & Market List Price= $1.00 $/lb CUSTOMER DRIVES DISCOUNT High 15.8% Discount $ % Discount 7.2% Discount P $0.928 Price Exceptions $1.000 Price Exceptions Price Exceptions $0.766 Price Exceptions Low Price Floor Segment #1 Dietary Segment #2 Indirect: Pharma Segment #3 Direct: Pharma Segment #4 Misc. ABOVE FOR ILLUSTRATIVE PURPOSES. $XX.XX Market Price 32

33 Understand Competitive Positioning MARKET VALIDATION Value-Disadvantaged Area Competitor 3 PERCEIVED PRICE Competitor 1 Competitor 2 Your Company Value-Advantaged Area PERCEIVED BENEFITS SOURCE: Baker, Marn, Zawada, The Price Advantage. ABOVE FOR ILLUSTRATIVE PURPOSES. 33

34 Understand Competitive Positioning MARKET VALIDATION Key Purchasing Criteria Client competitor competitor Smaller Players Customer Service Quality Brand Availability End User Support/Training Breadth of Product Line Innovation Implied Pricing Opportunity 18.1% 26.0% 32.5% ABOVE FOR ILLUSTRATIVE PURPOSES. 34

35 CUSTOMER CHANNEL PRICE LEVERAGE Implement Increase Caps Based on Key Customer Attributes RISK MITIGATION CUSTOMER SIZE Large Medium Small Direct 4% 6% 10% L Distribution 6% 8% 12% Internet 10% 12% 15% H ABOVE FOR ILLUSTRATIVE PURPOSES. 35

36 - PROFIT + Confidence-Building, Risk-Assessed Recommendations OUTPUT B C D E A - PRICE + ABOVE FOR ILLUSTRATIVE PURPOSES. 36

37 PRICE IMPLEMENTATION Communicate to the Field Allow Field to Adjust Targets Train Field on Delivering Value Message Provide Customer Communication Materials

38 -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10.0% Revenue Millions FIELD CONFIDENCE Commercial Teams Find Comfort in Variation Impact % ABOVE FOR ILLUSTRATIVE PURPOSES. 38

39 FIELD CONFIDENCE Improve Price Realization by Empowering and Monitoring Sales to Manage Differentiated Price Changes SOURCE: DRIVE2PROFIT 39

40 Invest in Sales Training the Way you do in Procurement s FIELD TRAINING Purchasing Skills Sales Skills ABOVE FOR ILLUSTRATIVE PURPOSES. 40

41 COMMUNICATION PLAN Arm Sales with Specific Information and Data Toolkit components: Customer Letter & Key talking Points Role Playing Frequently Asked Questions Sales Script to help frame the conversation. Value Communication Tools Calculators Customer-specific report showing impact of pricing actions, ideally by part number. ABOVE FOR ILLUSTRATIVE PURPOSES. 41

42 Train in Managing Customer Reaction FIELD TRAINING NOT RECOMMENDED Approval required CAUTION Proceed with caution RECOMMENDED Recommended approach ABOVE FOR ILLUSTRATIVE PURPOSES. 42

43 Prepare for Backup Strategies in the Event of Resistance FIELD TRAINING Prior to Meeting Determine Communication Method(s) and Materials Formal Letter, , Phone call, In Person Visit. Talking Points, FAQs, reports, etc. Review backup strategies and options. During Meeting Focus conversation on your strengths. Force other side to make tradeoffs for price concessions. Know when to walk away. RECOMMENDED CAUTION NOT RECOMMENDED ABOVE FOR ILLUSTRATIVE PURPOSES. 43

44 ONGOING MEASUREMENT Realization Analysis Trending Peer Analysis Opportunity Identification

45 Increase Date Ensure Effective Implementation & Process Improvement via Tracking Detailed Results MEASUREMENT ASP improved Revenue up 3.3% Price down at all 3 customers Q1 Qty Q1 Revenue Q1 Price Q2 Qty Q2 Revenue Q2 Price Total All 2,150 $200,600 $ ,200 $207,275 $94.22 Distributor A 1,000 $99,000 $ ,150 $112,700 $98.00 Distributor B 850 $73,100 $ $38,475 $85.50 Distributor C 300 $28,500 $ $56,100 $93.50 Pre-Increase BASE Customer A / Item 123 (Qty, Revenue, Price) Post-Increase CURRENT Customer A / Item 123 (Qty, Revenue, Price) Measure true price, volume, and mix change Compare actual vs. baseline vs. plan Review by customer, by product, etc. ABOVE FOR ILLUSTRATIVE PURPOSES. 45

46 MATCH RATE Higher Match Rate = More Precise Measurement Base Revenue Current Revenue Matched Revenue (Customer/Item) Non-Repeat Sales New Sales ABOVE FOR ILLUSTRATIVE PURPOSES. 46

47 THANK YOU!