March 13, 2018
This article first appeared in Industrial Distribution Magazine. See the original article here.
Even in a healthy, prosperous market, distributors are used to operating on very thin margins across many transactions, for a multitude of customers, with even more product SKUs. Pinpointing areas for improvement in that complicated tangle can be a challenge to even the savviest of companies.
If your process is to rely on simple segmentation or a one-size-fits-all approach to pricing, it’s safe to say you have room for improvement there. But how do you know if you have a real problem? At what point have you lost control of your pricing? Here are 5 common indicators:
Have you lost control? Key questions:
- Does your team spend a large amount of time pulling data from multiple sources and then even more time trying to create the perfect analysis only to realize the results are too old by the time the report is ready and newer, more important issues have since come up?
- Do you set market prices only to find out later multiple discounts have been offered with no correlation to customer size, revenue potential, or a customer’s willingness to pay?
- Do you respond to competitive prices and situations by reducing your price and contributing to the downward pricing pressure and sub-optimal margins?
- Do you understand where you have warranted price variation versus unwarranted price variation?
- When your organization negotiates a better price for a widget are you certain that you are not unnecessarily passing all the savings on to your customers over time?
Challenges in any one of the above areas could be a sign that you have lost control of your pricing. That’s the bad news. The good news is by taking back control, you have significant margin improvement opportunities. To succeed in today’s digital economy, it’s critical you take back control of your pricing processes, use price as a strategic advantage and make price decisions in minutes, not days.
How to Start to Take Back Control
Here are three simple steps you can implement to prevent reactive tendencies and further downward spiral.
- Organize your Data: You have data; leverage all of it across multiple systems for improved visibility into key pricing indicators that enable the organization to make better informed decisions and proactively manage profits.
- Assess Your Data: Develop and deploy price waterfall-based analytics which is a pricing best practice. The price waterfall is specifically designed to provide deep insight into price and profitability and quickly helps organizations identify the root cause of poor performance along with providing a visualization of all pricing levers.
- Leverage Your Data: Use analytics as a guideline for setting initial pricing policies and to discover new pricing opportunities.
Product Revenue Class Assessment
One powerful example of how to conduct these 3 steps is by using a Product Revenue Class Assessment. This type of analysis can quickly point you to opportunities for your slower moving and less visible products which can lead to significant pricing and profit improvements in addition to helping you gain control of your pricing. Specifically:
- Create product revenue classes, for example A, B, C, D & E
- Each class represents 20% of items (i.e. A = top 20% by revenue, B = next 20%, etc.)
- Class A typically represents more volume and competitive pressures
- Class D & E are typically slow moving and less visible with higher average margins and limited price and margin variance
- Utilize a box plot chart (box and whiskers chart) to visually see minimum, maximum, average, lower percentile and upper percentile margin by product revenue class
- Are you capturing higher margins for your slower moving, less visible items in classes C, D & E?
- Is there less price variation in classes D & E (shorter whiskers)?
- Implement a strategy to ensure the proper margin floors and / or premiums are in place based on product revenue class assessment which is represented by green line above.
Gaining control of your pricing doesn’t have to be a complicated process. There are several steps you can take now, for not a lot of money or time that will make a big difference toward improving your margins and boosting your overall bottom line. Take the first step today and you’ll be glad you did.