David S. Bauders
All Rights Reserved
216.536.2800
www.strategicpricing.com
Overview of Strategic Pricing
Copyright 2013 Strategic Pricing Associates, Inc.
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Copyright 2013 Strategic Pricing Associates, Inc.
Strategic Pricing Associates, Inc. Overview
• SPA Was Founded in 1993
• SPA has Broad, Deep Experience & Success in Pricing
• Led Parker Hannifin CEO’s worldwide pricing initiative over six years across 90
manufacturing units and 30 trading units: CEO attributed impact of over $800m
• Distributor/Dealers: ThermoFisher Scientific; Grainger; Wesco; OneSource;
Industrial Distribution Group; Finning; Boundtree Medical; Famous Supply; Valin
• Over 200 Manufacturers: ExxonMobil, GE, Rockwell Automation, Mitsubishi/
Caterpillar; American Standard, Sherwin Williams; ICI/Glidden; BASF; Pella; Dover;
Tyco; Akron Brass; Atkore
• Over 350 Industrial Distributor Businesses, with Strategic Partnerships
• Industrial; Electrical; Plumbing/HVAC/Building Products; Tools; Paper/Packaging;
Chemicals; Medical; Fluid Power; Equipment Dealers
• Partnerships with Parker Hannifin, ExxonMobil, Mitsubishi/Caterpillar, Rockwell
Automation, Pella, Activant
• Exclusive provider of pricing analytics to Epicor’s ERP platforms, such as Eclipse,
Prophet 21, Prelude; over 4200 distributors
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Pricing Concepts
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Copyright 2013 Strategic Pricing Associates, Inc.
Why Strategic Pricing Management?
• Pricing is the essential discipline of converting
customer value into shareholder value
• Massive investments by manufacturers and their distributors create value for customers
• Strategic Pricing Management maximizes the return on those investments, while recognizing competitive realities in the marketplace
• Every revenue $ results from pricing decisions
• Pricing has disproportionate impact on profitability
• 2% variation = $ 2 million per year per $100 million in revenue
• Flows through directly to the bottom line
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Copyright 2013 Strategic Pricing Associates, Inc.
How Profit Variables Impact a Manufacturer’s Operating Profit
Assumes 10% ROS, 25% Ave GM, 15% Ave Overhead
The Most Powerful Profit Lever Is Pricing
(1) Increase Selling Price by 2%
(2) Increase Volume by 2%
(3) Reduce Operating Expenses by 2%
(4) Reduce Cost of Goods Sold by 2%
20%
2% Increase in Selling Price = 20% Increase in Net Profit
SP 2%
3%
2% OE
2% Decrease in Operating Cost = 3% Increase in Net Profit
2% COGS
2% Decrease in COGS = 15% Increase in Net Profit
15%
2% Volume
2% Increase in Volume = 15% Increase in Net Profit
15%
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Copyright 2013 Strategic Pricing Associates, Inc.
How Profit Variables Impact a Distributor’s Operating Profit
Assumes 4% ROS, 30% Ave GM, 26% Ave SG&A
The Most Powerful Profit Lever Is Pricing
(1) Increase Selling Price by 2%
(2) Increase Volume by 2%
(3) Reduce Operating Expenses by 2%
(4) Reduce Cost of Goods Sold by 2%
15%
V 2%
2% Increase in Volume = 15% Increase in Net Profit
50%
2% Increase in Selling Price = 50% Increase in Net Profit
SP 2%
13%
2% OE
2% Decrease in Operating Cost = 13% Increase in Net Profit
2% COGS
2% Decrease in COGS = 35% Increase in Net Profit
35%
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Pricing Impact
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Copyright 2013 Strategic Pricing Associates, Inc.
Why do companies struggle to maximize price performance?
• Cost-Plus Mentality
• Unstructured discounting
• Complexity • # Customers: thousands
• # SKUs: tens of thousands
• Equals millions of potential pricing permutations
• Difficult to set up and execute an effective pricing architecture
• Various systems issues and data weakness
• Difficult to measure performance, evaluate performance
• Lack of Training, standards
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Copyright 2013 Strategic Pricing Associates, Inc.
Price Indexing: Market Segmentation
• SPA assists clients in establishing market segmentation and customer size structures for purposes of pricing analysis • To reflect common value-in-use and competitive coverage characteristics
• Typically half a dozen key vertical market segments • Examples: Contractor, OEM, User, Industrial, Reseller, Gov’t
• Typically 5 customer sizes per vertical segment • Tiny, Small, Medium, Large, Huge
• Result: each customer is assigned to a peer group based on market segment and customer size • Eg, Small Contractor, Medium User, Small Reseller, Large OEM, etc.
• Client submits invoice data for pricing analysis
• We then perform comparative price analysis using our proprietary indexing methodology
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Copyright 2013 Strategic Pricing Associates, Inc.
Price Indexing
• Compare each customer’s price on any given product or service to the prices paid by customers in the same peer group • Peer groups reflect competitive coverage and general price
sensitivity
• Indexing can be done at the individual product/service (sku) level or at the customer’s basket level
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Copyright 2013 Strategic Pricing Associates, Inc.
Price Index Methodology
Type/Size Price Index
Price Paid by Customer A for Product 1
Avg. Price Paid by A’s Group for Product 1 Customer’s SKU-Level
Index
0.90
Customer’s Overall Index
= 10% less than Peers
1.10 = 10% more than Peers
Customer’s Actual Sales
What Customer’s Sales would be at Peer Group’s Average Price for
Each SKU
Example: Customer Actually Paid $9,000 for all SKUs
Customer Would Have Paid $10,000 if He Paid Average Price for Each
SKU Customer’s Overall Index = 0.90
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Copyright 2013 Strategic Pricing Associates, Inc.
COMPLEX COMPANIES FAIL TO CAREFULLY MANAGE PRICING
Small Customers Getting Lowest Prices!
1.0 = Average for Customer’s Type!
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Copyright 2013 Strategic Pricing Associates, Inc.
9 Companies’ Scatter Plots
Company 1! Company 2! Company 3!
Company 4! Company 5! Company 6!
Company 7! Company 8! Company 9!
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Copyright 2013 Strategic Pricing Associates, Inc.
Core vs. Non-Core Pricing • Core products are those at the top of each customer’s
market basket • Highest sales $
• High in visibility
• High in incentive to shop for price
• Competitors most willing to quote prices
• Customers buy more frequently
• Non-Core products are those tag-along products at the bottom of each customer’s market basket
• Low in sales $
• Low in visibility
• Low incentive to shop for price
• Competitors overlook
• Customers buy infrequently
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Copyright 2013 Strategic Pricing Associates, Inc.
Pricing Sensitivity (Statistical Model)
Core A
Core B
Non - Core C
Non - Core D
Highest Sensitivity
High Sensitivity
Low Sensitivity
Lowest Sensitivity
Price
adjustments
limited to
bottom 50%
of customer
sales
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Copyright 2013 Strategic Pricing Associates, Inc.
Core Versus Non-Core: Everyday Examples
Environment Core A/B Non-Core C/D
Gas Station Gasoline Lottery Tickets, Beer, Cigarettes, Candy
Hotel Room Rate Mini-bar, restaurant, internet access, faxing, gift shop, room service
Football Game Ticket Price Parking, Beer Price, Souvenirs
Sam’s Club End Caps, Household consumables: light bulbs, batteries, cleaning supplies, major grocery groups like milk, beer, soda; frequently replenished items
Odds & Ends, the rest of the store
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Thoughts About Pricing
• Pricing is a “contact sport”; if your uniform isn’t dirty, you weren’t in the game
• Don’t build your strategy around your exceptions: the best policies will have exceptions; the key is to manage/limit them
• The optimal level of pricing complaints is not 0; otherwise you are not pricing to resistance
• Use data to make decisions
• Price pressure usually indicates a lack of differentiation between you and your competitors: What do you have to do differently to price to value?
• Focus on reducing the price sensitivity of your accounts over time
• You don’t have to be perfect to win
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Next Steps
• Please visit the SPA website: www.strategicpricing.com
• Take A Free Pricing Opportunity Profile : www.strategicpricing.com/offer/profile/
• Upcoming Free Events:
• Webinars held several times per month; check SPA website
• SPA Strategy Seminars • Full-day seminars, held several times per year in cities worldwide; check SPA
website
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Copyright 2013 Strategic Pricing Associates, Inc.
Calculating Pricing Potential in
Your Businesses
• Gross Revenues, less: • Fixed-contract pricing beyond 1 year
• Equals “Net Revenue in Play”
• Times Impact Percentage: • 1 percent: low estimate
• 2 percent: conservative estimate
• 3 percent: good estimate
• 4 percent: excellent performance
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Copyright 2013 Strategic Pricing Associates, Inc.
Summary • The current economy requires urgent action to develop a
pricing architecture and compensating pricing layers
• Strategic pricing is a big opportunity for manufacturers and distributors, generally 2+% of revenue • Can improve a company’s net profitability by 20% or more
• The drivers of the opportunity are clear • Cost plus mentality and sales rep discounting practices • Complexity of product lines, customer base
• To be effective, a pricing program needs to be data-driven, to translate strategy into actionable plans
• Long-term commitment; pricing czar; executive sponsorship; persistence; and channel engagement are keys to success
• Pricing is a specialized discipline where expertise has huge payoff in impact and speed of execution