B2B Price Elasticity An Opportunity for Price Improvement

Dick Sobel, Managing DirectorThe Pricing Analytic Groupwww.pricing-analytic.com

2

Today’s Speaker

Dick SobelManaging Director

The Pricing Analytic Group

With 20 years of direct pricing experience, Dick offers expertise in pricing analytics, optimization, realization and strategy. He has directed Stage-Gate® new-product development programs, value based and conjoint pricing engagements and has developed closed-loop pricing strategies incorporating planning and controlling P&L scenarios.

His distinguished career at Emerson Process Management, a business unit of Emerson, included senior leadership positions in pricing, global marketing, finance and cross-functional teams. He was an early proponent of pricing strategy within the Emerson group of companies, where he developed, presented and implemented three- to five-year pricing plans that achieved significant price realization and profit improvement.

Dick is also Director of Analytics for PricePoint Partners, a leading national pricing consultancy.

3

B2B Price Elasticity An Opportunity for Price Improvement

• Elasticity in the Pricing Process

• How Elasticity impacts B2B pricing

• Client Case History

• Results & Actions

4

Pricing Strategy &

Forecasting

Price Management

Price Elasticity

Contribution Margin

Price Realization

KPI

Dashboard

Financial

StatementPrice

Management

Transactional Discounting

Price Waterfall

Channel Mix

Segmentation

Product Mix

B2B Elasticity in the Pricing Process

DataData

• Price Elasticity measurements contribute to price forecasting & prediction• It is an Integral link to price optimization• Price realization is linked to your financial statements

5

Products

Competition

Segmentation

Customer Willing to Pay

Pricing Elasticity Attributes

• Price Sensitive• Indifferent• Loyal• Share of Wallet• Churning

• Highly Competitive• Moderately Completive• Minimally Competitive• Exclusive

• Commoditized• Moderately Differentiated• Highly Differentiated• Product Life Cycle• Product Alternatives

• Geography• Industries• Buying Patterns• Customer Size

• Choose the attributes that most represent your business• Avoid placing a value on the attributes• Select attributes based on data & science and avoid “gut feel”

6

Price Change Scenarios Impact on Gross Margin Dollars Elasticity

Increased price with decreased unit volume

Gross Margin dollars may increase or decrease depending on unit volume

Intuitive

Decreased price with increased unit volume

Gross Margin dollars may increase or decrease depending on unit volume

Intuitive

Increased price with increased unit volume

Maximum Increase in Gross Margin Counter Intuitive

Decreased price with decreased unit volume

Maximum Decrease in Gross Margin

Counter Intuitive

B2B Price Elasticity Outcomes

7

What is Counter Intuitive Price Elasticity?

• Increased Pricing with Increased Unit Volume

• Market demand is increasing faster than forecasted

• Competitors implementing even higher price increases than you

• Elasticity Attributes are favorable for your products and services

• Competitors exiting the business

• Under Pricing your New Products

• Seasonality, advertising & promotions 

• Price is not causing the unit volume change• Further review of market segments & trends • Opportunities for more aggressive price actions

8

What is Counter Intuitive Price Elasticity?

• Decreased Pricing with Decreased Unit Volume

• Competitors dropped prices even more than you

• Market demand dropping faster than forecasted

• Elasticity attributes unfavorable to your products & services

• Customer Churn

• Seasonality, advertising & promotions 

• Price is not causing the unit volume change• Further review of market segments & trends• Change in price strategy• Prune product line or exit business

9

Customer Case History

Case History

• Distributor with 10,000 SKU's and 1500 customers serving a large North American customer base

• Company employs a cost plus approach to pricing

• Prices are raised to compensate for vendor cost increases, however there is minimal visibility on subsequent unit volume and margin

• The served markets are very competitive with different distributors selling the same products within the same territories and to the same customers

.Desired Outcomes:• Using an elasticity tool to improve price realization• Ensure that predicted gross margin outcome and price realization is favorable• Optimize pricing through effective segmentation with a sustainable strategy

10G

ros

s M

arg

...

Pric

e

Re

ba

te

Ma

teria

l

Vo

lum

e/M

ix

Gro

ss

Ma

rg...

$50,000

$55,000

$60,000

$65,000

$70,000

$75,000

$80,000

$85,000

$90,000

$95,000

$100,000

$105,000

$82,857

$15,749

$78

$5,216$568

$92,744

Customer Data AnalysisSKU Elasticity from a Price Realization perspective

Year on Year Metrics

Prior Year Units: 6862Current Year Units: 6815Prior Year Sales: $246KPrice increase: 6.4%Current Year Sales: $260KElasticity: (0.11)

%GM From 33.7% to 35.7%

• Low elasticity prompted a more aggressive price action• Price realization exceeded increases in material cost, rebates & mix• Results were measureable and tied to the financial statements

11

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

-10

-8

-5

-3

0

3

5

8

109656

8057

6862

5975

5262

4675

41853771

3415

Units

Percent change in price

Un

its

% Price Change

Customer Data AnalysisSKU Elasticity from a Gross Margin Dollars perspective

Year on Year Metrics

Prior Year Units: 6862Current Year Units: 6815Prior Year Sales: $246KPrice increase: 6.4%Current Year Sales: $260KElasticity: (0.11)

%GM From 33.7% to 35.7%

• Excellent gross margin outcome with low elasticity• Unit volume changes are minimal• Any customer or SKU can be graphically represented as required

Graph depicts units needed to maintain gross margin after a price change without elasticity considerations

12

© 2007 PricePoint Partners. All Rights Reserved. | Contact 330-342-0923 or info@pricepointpartners.com

2012

1% price change =

x % of qty

Percent change in price

Yr to Yr Change

in Quantity

Percent change in quantity Elasticity

SKU Description Units $ Sales %GM

10635 JUNIOR MINTS 501 $6,958 7.1% 0.4% 6.0% -11 -2.1% -0.3710636 SUGAR BABIES 134 $1,884 8.2% 1.4% 5.0% -10 -6.9% -1.4810640 CHUCKLES ASST 268 $4,020 6.7% 1.3% 7.8% -30 -10.1% -1.4110644 NESTLE CRUNCH BAR 1005 $20,741 7.7% 0.4% 4.6% -18 -1.8% -0.4010647 NESTLE 100 GRAND BAR 445 $9,196 7.9% 2.7% 3.4% -44 -9.0% -2.8510757 WET ONES ANTIBACTERIAL 2013 $4,277 19.2% 1.1% 3.2% 69 3.5% 1.1110772 MCORMK RSTD GAR BRD SEA 1320 $20,971 13.0% 9.2% 3.3% 307 30.3% 8.0910784 BIG MAMA SAUSAGE 4047 $37,520 16.4% 0.3% 8.9% 109 2.8% 0.3210800 BABY RUTH 1504 $20,685 7.7% 2.8% 4.0% 151 11.2% 2.6913460 HERSHEY CH CHP KIS DGH 30 $1,452 13.9% 3.9% -6.3% 6 25.0% 3.4013462 HERSHEY REESES PB DGH 38 $1,864 15.1% 6.1% -3.7% 7 22.6% 5.4110689 RICH'S PIZZA DOUGH 7IN 1397 $65,272 12.3% 3.8% -5.2% 227 19.4% 3.3417579 WRIGLY 5 RAIN 5801 $54,164 7.2% 1.7% -0.7% -76 -1.3% -1.7320350 AL ICE SMOOTH LEMONADE 83 $4,273 28.9% 1.6% -5.6% -8 -8.8% -1.5918360 HOT N RD CHEESBRGR 1346 $28,871 14.5% 0.6 -3.1% -27 -2.0% -0.64

Price Sensitivity Bands – SKUs - Customers

Increased Price - Increased Volume

Increased Price – Decreased Volume

Decreased Price – Increased Volume

Decreased Price – Decreased Volume

(1) (2) (3) (4) (5)

SKU - Customers

A

B

C

D

Customer Data Analysis Segmented Price Elasticity Bands

Segmented By:• Customer• Product Family• Total Spend• Market

• Elasticity outcomes are segmented in selected groups• Outputs are used for forward looking price prediction• Counter intuitive changes not direct result of price action• Scalable from spreadsheets to enabling pricing software

Increased Price - Decreased Volume AIncreased Price - Increased Volume BDecreased Price - Increased Volume CDecreased Price -Decreased Volume D

-0.5%

-0.3%

0.0%

0.3%

0.5%

0.8%

1.0%

1.3%

1.5%

1.8%

1,000

750

500

250

0

250

500

750

1,000

1,250

1,500

1,750

-401

120

-720

1446

-480

-0.4%

0.6%

0.9%

0.7%

1.6%

% P

rice

Ch

ang

e

Small Small

Unit Change

Medium Medium Large

Segmented by Customer Total Spend

Customer Data Analysis – Unique SKU Previous Year Performance by Customer total spend

3A1 D

2B

4BIncreased Price - Decreased Volume AIncreased Price - Increased Volume BDecreased Price - Increased Volume CDecreased Price -Decreased Volume D

5A

-3.0%

-2.8%

-2.5%

-2.3%

-2.0%

-1.8%

-1.5%

-1.3%

-1.0%

-0.8%

-0.5%

-0.3%

0.0%

0.3%

0.5%

0.8%

1.0%

1.3%

1.5%

(1,250)

(1,000)

(750)

(500)

(250)

0

250

500

750

1,000

1,250

1,500

1,750

-279

1400

-959

960

-559

0.0%

-2.6%

1.1%

0.0%0.0%

% P

rice

Ch

ang

e

Small Small Medium Medium Large

2C

3A1

4

5

Customer Data Analysis – Unique SKUCurrent Year Performance by Customer total spend

Increased Price - Decreased Volume AIncreased Price - Increased Volume BDecreased Price - Increased Volume CDecreased Price -Decreased Volume D

Segmented by Customer Total Spend

15

Customer Data AnalysisYear on Year Comparisons – Unique SKU

2012/11 Yr/Yr

2013/12 Yr/Yr

1: Counter Intuitive decreasing

2: Counter Intuitive increasing

3: Intuitive

4: Counter Intuitive increasing

5: Intuitive

1: No price change – continued unit decline

2: Intuitive, increased % gross margin

3: Pricing error

4: Attributes favored caution, gross margin

5: Price sensitive customer1D

Medium Medium Large

2B

3A

4B

5A

Increased Price - Decreased Volume AIncreased Price - Increased Volume BDecreased Price - Increased Volume CDecreased Price -Decreased Volume D

16

Case History Results & Actions

• The distributor is achieving a 1.5% annualized price improvement (>$1MM) on affected sales where price sensitivity-elasticity is included in their price improvement process

• Client price forecasting and prediction is combined with measurement, monitoring and KPI dashboards linking results to financial statements

• Additional market segments and products will be added to the program going forward

• Price Optimization software can automate the real time analysis and price setting process in a scalable way

17

Final Thoughts

• Price elasticity measurements are integral to price forecasting & prediction

• Counter intuitive elasticity measurements should prompt market, customer & segment analysis but price is not responsible for unit volume changes

• Price elasticity attributes impact pricing actions

• Expect price realization & gross margin improvement

• Process is scalable, from spreadsheets to enabling pricing software

18

The Pricing Analytic Group

Dick Sobel, Managing DirectorThe Pricing Analytic Group

The Pricing Analytic Group is led by Dick Sobel, Managing Director.

He is also Director of Analytics for PricePoint Partners, a national pricing consultancy providing pricing analytics, training, strategy and price optimization services to B2B clients achieving profitable growth.

Our pricing consultants provide analytic tools and evaluate price momentum throughout the cash cycle.

We improve pricing for incumbent and new products with:• Value based pricing & selling programs• Pricing Analytics• Developing effective pricing strategies

Email: info@pricing-analytic.comPhone: 330-958-4036

19

Zilliant provides B2B companies with data-driven guidance, enabling smarter pricing and sales decisions to help businesses make their numbers. The Zilliant optimization platform uses advanced science in its price optimization applications to enable companies to overcome the massive complexity in their businesses. Our flexible SaaS model allows customers to quickly and confidently improve their financial performance by integrating into existing systems and processes.

Learn more about how Zilliant helps companies price more profitably and sell more effectively at www.zilliant.com.

Phone: 512.531.8503

Email: _mdr@zilliant.comContact Us Today to Learn How We Help

Companies Price More Profitably.