A significant lever to improve profitability Three pricing levers used to achieve pricing excellence Approach to price realisation 1: Transparency 2: Improvement themes and initiatives 3: Operationalisation
How to increase company value through pricing
Typical comments in relation to making pricing improvements
Our key beliefs on pricing and on making sustainable pricing improvements
"I think there is a potential [for improving prices] … but my Sales Director has assured me that they are on top of the situation" CEO
1
Our prices are already competitive … we maintained our 2007 prices in our 2008 contracts … and we haven't lost a single customer" Head of Sales
2
"We did a very detailed price comparison two years ago, and it confirmed that our prices are where they should be" Marketing Manager
3
"We can't afford to divert the [sales] organisation's attention by running this [pricing] project now … we need every sales person in the field" Sales Manager
4
"We have tried it before, but it didn't work"
5
Head of Sales
"We don't get rewarded for raising prices, so we bear all the risk if we lose a customer from raising prices" Account Manager
6
Pricing is perhaps the most powerful lever in boosting short-/medium-term company profits
Making pricing improvements is more science than art – using proven pricing tools will get you very far
Improvements should go hand-in-hand with capability-building, pricing governance/organisation, systems/policies and sales force incentives
Tools and levers should be adapted to each sales process to make it real for the sales organisation
Piloting is key for testing tools and solutions "live" – subsequent roll-out should be done in waves
"Lead from the line" – sales organisation plays a key role in driving pilots and implementation/roll-out
Average financials for S&P 500 companies Raising price by 1% ...
... increases profit by 9%
101 1
13 1 12
65 100
23
Sales
Source: S&P 500 company financial data, 2006
Fixed costs
Variable costs
Operating profit
Improvement in EBIT margin Per cent
Industry examples
B2B/solution
4-8
B2B2C
2-6
Micro markets
1-4
Tiered distribution
0.5-4
Index pricing
Trading
0.2-2
0.2
Source: Quartz+Co analysis
• Pumps • Specialty chemicals • System providers • Packaged goods • Consumer electronics • Vending machines • Retail fuel • Food franchising • Tyres • Agricultural chemicals
• Base chemicals
• Electricity • Securities • Crude oil
Price realisation Price-setting
Key issues
Timing
Common improvement areas
1. Customer/transaction pricing
How do you decide on the exact price to assign to each customer and customer transaction?
>1 year
• Understand customer profitability at pocket margin level • Actively manage open and hidden discounts • Apply simple rules and tactics in negotiations and agreements • Enhance skills and institutionalise tools within sales force
2. Product/market pricing
Within each market segment, what pricing level/ structure best positions your offering relative to competition?
~1-2 years
• Segment customers based on key buying factors • Understand, quantify and communicate customer value • Enhance skills and institutionalise tools within sales force
3. Industry/pricing strategy
What across-theboard price/capacity strategies and actions will exert positive pressure on industry prices?
Longer term
• Understand drivers of industry conduct and impact of own pricing behaviour • Consciously apply the entire range of strategic pricing options to change/ influence industry conduct
Source: "The Pricing Advantage", Wiley, 2004
Key benefits from working with price realisation Increasing net prices by working with price realisation is an efficient way to increase profitability through …
• … increasing understanding and awareness of trade terms and discount structures • … evaluating current ability to comply with discount guidelines/targets
• … identifying customers with disproportionate discount levels • … highlighting differences in costs-to-serve for different groups of customers (i.e. direct vs indirect customers)
• … evaluating profitability/margin requirements for different types of customers
1
Transparency
Sales at list price Pre- and on-invoice
2
Improvement themes and initiatives
3
Operationalisation
Structural initiatives Initiatives focused on internal processes and skills
discounts Net price Off-invoice discounts Pocket price COGS Net margin
Strategic initiatives Initiatives targeted at segments or groups of customers
Operational initiatives Initiatives targeted towards individual customers
Cost-to-serve
Pocket margin • Develop transparency of customer pricing and profitability • Understand the different segment characteristics and the current set-up for sales governance and process • Prioritise the segments to focus on in the next phases
• Create a gross list of improvement themes • Detail and quantify the improvement themes in order to identify and prioritise the true potential • Create a business case in which targets are quantified and aggregated
• Create segment targets and ambitions • Develop universal tools adapted to market needs • Ensure that the insights and initiatives developed during the project are incorporated into the daily work and the overall sales cycle • Implementation-planning and preparation
CONCEPTUAL
Customer level margin for a group of customers Per cent of sales at list price
Individual customer level margin Sales at list price
100
Pre- and on-invoice discounts
50
Net price
30% required customer level margin to cover fixed costs
Off-invoice discounts
25
Pocket price
25
COGS Net margin Cost-to-serve Pocket margin
Total sales at list price
50
10 15 10 5
CONCEPTUAL
The improvement themes can be addressed at multiple levels …
Example of potential improvement themes
Improvement themes can result in very different initiatives
Structural initiatives
Overall improvement needs in the way we manage pricing and profitability
• Current pricing/discount guidelines are not enforced
Initiatives on the internal processes and skills
Company level
Improvement needs across a distinct group of customers defined by segment, size, etc.
Improvement needs at the individual customer level that require changes regardless of their segment
• A segment does not meet the margin requirement to cover its fair share of fixed costs Customer group level
• The smaller customers do not trade at terms that reflect their importance to the business
• Customers with decreasing volume do not get their discount terms updated to reflect their current volume Customer level
• The product mix of some customers shows great potential for improvement
Strategic initiatives Initiatives targeted at one segment or group of customers
Operational initiatives Initiatives that can be targeted towards individual customers
CONCEPTUAL
Customer segment 1
Customer segment 2 Customer segment 3 Customer segment 4
Identified improvement potential in prioritised segments
Estimated improvement potential in all segments (assuming same level of potential in remaining segments)
215
365
24 28
63 150
39 45
43
24 38 7 41 12
20
63 49
31
43 49
59 59
28 Reduce Reduce Align Optimise Optimise Reduce margin discounts discount/ product total cost-tovariability margin mix value of serve levels offering with volume
215
Total
Four prioritised segments
Other segments
Total potential
CONCEPTUAL
Target customer level pocket margin Per cent Segment
Size brackets
Total segment
Today
10.1 2.6
Very large Target
12.7
2.0 Today
12.0
9.7 1.7
Large Target
11.4
10.0 Today
8.8 1.4
Medium Target
7% overhead ratio
Today
10.2
14.4 2.0
Small Target
Targets should also consider required margin to cover segment overhead
Today Today
Target
16.4
16.5 3.4
Very small Target
19.9
CONCEPTUAL
Success criteria • Buy-in from management group • New concepts integrated in the existing sales and management processes • Management educated/supported in running the implementation • Tools and processes clearly described and easily available and operational for sales people • Concepts are simple and easy to communicate • Clear plan for how follow-up is performed (incentives and KPIs) • Clear implementation plan with responsibilities for each activity and follow-up at management level
Updates and initiatives are closely aligned with the quarterly sales cycle