How to build pricing power and increase long term profitability in wholesale

Transcription

1 How to build pricing power and increase long term profitability in wholesale A practical framework to assess pricing maturity and step-by-step capability improvement Arjen Brasz Robin Chu 1

2 Why assessing and building your pricing capability should be top-of-mind in wholesale In no other part of the value chain does pricing so significantly affect profits as it does in distribution. A price improvement of 0.5% has the potential to boost or destroy a wholesaler s profits. When you factor in the distributors tendency toward high revenues and thin margins, it is clear that pricing is the number one profit lever. However, this profit lever is increasingly put under pressure due to higher price transparency, savvier buyers and a growing number of buying groups and tenders. When you factor in the typical wholesaler tendency toward high revenues and small margins, it is clear that pricing is the number one profit lever In our experience distributors neither have the pricing tools nor the resources available (personnel and time) to develop a professional price management scheme. The result: price erosion and margin losses. Considering a wholesalers broad product portfolio and large customer base, it is crucial to get the optimal price for every type of deal. Instead of using price calculation with the customers willingness to pay in mind, wholesalers still fall back on using mark-up calculations based on the cost price and competition. Unfortunately, by applying such an mark-up approach, opportunities are often overlooked. Typically a price optimization project in a wholesale environment has a long term profitability increase of 1-3 percentage points. There are various ways in which distributors can improve their profit through more professional pricing. The Pricing Capability Maturity Model describes the seven key pricing maturity topics along with their various levels of sophistication (see figure 1). The model can be used to perform a selfassessment and identify profit improvement opportunities. 2

3 Figure 1: Pricing Capability Maturity Model Unconscious Starter Professional Expert Customer segmentation Segmentation on qualitative measures (e.g. customer size: small, medium and large) that are not updated frequently Variables are limited (e.g. net sales and type) if possible, quantitatively measured and updated frequently Variables based on value to the company (e.g. payment behavior), are, if possible, quantitatively measured and updated frequently Customer segmentation based on both value to the company and customer needs are quantitatively measured if possible List prices & product segmentation List prices are completely based on costs and historically grown inconsistencies can be found List prices are based on both costs and competitive price levels and differentiated between core and service assortment List prices are based on some value insights and competitive prices, top, core and service assortment is in place List prices are fully based on added value to customers, products are bundled in value propositions Services & surcharges Limited services, are charged on an ad-hoc basis and pricing is cost based Full services, services are charged with some exceptions and pricing is cost based Full services, services are charged consistently and pricing is value based Full service menu with extra and differentiated services, with a differentiated offering per customer segment Discount matrix and bonuses Discounts are mainly unconditional, not sufficiently differentiated and unstructured Discount build-up is logical and conditional, on a lower level it is not sufficiently differentiated Discounts and bonuses are differentiated over customer segments and product groups, higher level differences still exist Regional discounts and bonuses levels are aligned across countries with low harmonization risk Manual additional discounts Deviations from agreements are part of daily practice, there is no insight in magnitude Extra discounts are still given often, but sales force starts to ask for something in return, an escalation process is in place Extra discounts given is decreasing, the magnitude of additional discounts is known on a high level and steered upon Additional discounts are in line with value delivered and fully conditional, detailed insights in deviations are generated and used Big deal / project pricing Price setting is done based on individual experience and gut feeling of the sales force Central and structural sharing of best practices and common understanding about project definition exists Post mortem analysis of deals is performed on a structural basis and shared within the organization Deal comparison is done on a structural basis including tool based price suggestions per deal Monitoring Basic KPIs (e.g. margin and net sales) are evaluated on a high level and ad-hoc basis, data is of poor quality Basic KPIs are measured on a more detailed level (customer or product group), data is of good quality Advanced KPIs are in place (e.g. profitability waterfall on customer level), but measured on a high level, data is of excellent quality KPIs aligned with strategic goals, sales incentives, on a detailed level, periodically and corrective actions are taken accordingly 3

4 From maturity assessment to pricing improvement roadmap The first step to take is to assess current and desired maturity in pricing capabilities on the seven pivotal points, identifying improvement opportunities and setting the ambition to develop in the upcoming years (See figure 2). The second step is to assess the pricing capabilities in more detail by estimating the potential improvement and implementation horizon. This results in clear priorities of opportunities both on short and long term basis. First step to take is to assess current and desired maturity in pricing capabilities on 7 pivotal points, improvement opportunities are identified and sets the ambition to develop Unconscious Starter Professional Expert Customer segmentation List prices & product segmentation Services & surcharges Discount matrix & bonuses Big deal / project pricing Manual additional discounts Monitoring Current state Desired state Figure 2: High level maturity assessment and desired state How to build long term pricing capabilities, step by step To use an example for this: manual price adjustments are for most wholesalers a huge challenge due to the widely spread responsibilities (up until the sales clerk at the local branch counter) and limited insights into additional discounts given. Typically the first step to take is to start asking for something in return (e.g. higher quantities, up or cross selling) from the customer: "Yes, I can give you additional discount if you buy a full box". 4

5 Additionally, providing clear guidelines when manual discounting is allowed (e.g. no additional discounts under order value of 500 euros) and rules on the discount allowance for every function will provide more guidance. The second step is to create high level insight in how many manual price adjustments are made and start feeding this back to the organization. Obtaining information on the value of this metric is usually not an easy task due to system limitations. However, the effort is worth it as the amounts of margin leakage are surprisingly high in many cases. Building pricing capabilities and implementing margin improvement opportunities in an organization should be seen as a journey not a short term initiative.. In the final step, manual discounting is limited and if adjustments are made, the full sales organization asks for something in return. There is detailed insight (e.g. branch, customer segment or product group and sales rep) and the company used feedback of this information to steer actively toward optimal performance. Finally, taking a step back towards the bigger picture, all capability improvements of the 7 pivotal points are inserted into a pricing program roadmap where the improvements are broken down into steps and placed on the improvement timeline. Crucial is to include enablers such as a clear governance, process, system implementation and sales training. Obviously, developing everything at the same time will not yield the desired result; prioritize rigorously and tackle the big chunks first. Building pricing capabilities and implementing margin improvement opportunities in an organization should be a journey not a short term initiative. 5

6 Authors Arjen Brasz Senior Consultant Arjen Brasz is manager at Simon-Kucher & Partners in Amsterdam. He specializes in top line growth and profit optimization for manufacturing and wholesale clients. Arjen holds a Master s degree in Business Administration (cum laude) at the RSM Erasmus University of Rotterdam. Robin Chu Consultant Robin Chu is consultant at Simon-Kucher & Partners in Amsterdam with specific focus and experience in business model innovation and new product development. Robin holds Master s degrees in Strategic Management and Supply Chain Management from Tilburg University. 6

7 Simon-Kucher & Partners We are a global consulting firm with over 720 employees in 27 offices worldwide. With almost 30 years of experience, we are regarded as the world s leading pricing advisor. Our clients are leading companies from a broad range of industries (e.g. media, transport, automotive, financial services, high tech, pharmaceuticals, telecommunications, utilities, commodities and construction). To find out more, go to Global presence 27 offices worldwide 720 employees 152m revenue in 2013 Americas: Brazil, São Paulo, Canada, Toronto, Chile, Santiago de Chile, USA, Boston, USA, New York, USA, San Francisco, Europe: Austria, Vienna, Belgium, Brussels, Denmark, Copenhagen, France, Paris, Germany, Bonn, Germany, Cologne, Germany, Frankfurt, Germany, Munich, Italy, Milan, Luxembourg, Luxembourg, Poland, Warsaw, Spain, Madrid, Switzerland, Zurich, The Netherlands, Amsterdam, Turkey, Istanbul, United Kingdom, London, Asia/South Pacific/ Middle East: Australia, Sydney, China, Beijing, Japan, Tokyo, Singapore, Singapore, UAE, Dubai, United Kingdom, London 7