Strategic Pricing Associates (SPA) Overview Jan-2014

David S. Bauders

All Rights Reserved

[email protected]

216.536.2800

www.strategicpricing.com

Overview of Strategic Pricing

Copyright 2013 Strategic Pricing Associates, Inc.

strategicpricing.com

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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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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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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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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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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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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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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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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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COMPLEX COMPANIES FAIL TO CAREFULLY MANAGE PRICING

Small Customers Getting Lowest Prices!

1.0 = Average for Customer’s Type!


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9 Companies’ Scatter Plots

Company 1! Company 2! Company 3!




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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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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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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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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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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