Transcript Precision Pricing - Beckett Advisors

A Precision Pricing Program
1. Concentrates on the Values & Benefits you bring to your customers,
and how this compares to your competition.
2.
Determines if and where you have a Competitive Advantage in all the
markets you serve.
3.
Performs an in-depth analysis of a full year of your Customer
Transactions.
4.
Checks your Business Processes and Pricing Management to see if a
new approach to Pricing would be helpful.
5.
Outlines a typical Work-plan (with quick hits paying for the
investment) including:
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Setup
Deployment
Typical Team Make-up
Timelines
Next Steps.
2006
Price: The Discipline of Profitability
Pricing is a Profit Lever with huge upside potential.
AVERAGE P&L STRUCTURE - FORTUNE 1000 COMPANY
101.0%
12.6%
100.0%
Gross
Sales
11.6%
Increasing
PRICE
by 1.0%
68.1%
Variable
Cost
Operating
Profit
Increases
Operating
PROFIT
by 8.6%
20.3%
Fixed Cost
Source: Compustat
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Three Levels of Pricing Management
Companies that excel at Pricing address pricing issues,
threats and opportunities at three distinct but related levels.
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Supply & Demand
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Market Strategy
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PRECISION
PRICING
Transactions
2006
Sources of Profit Opportunities
EXAMPLES OF PRICING ENGAGEMENTS – EMPHASIS AND RESULTS
Influence
Light
Moderate
Heavy
Supply/Demand
Industrial Hydraulics
Business Forms
Computers
Office Furniture
Industry
Electric Lamps
Market Strategy
Transaction
Analysis
Improvement in Return-on-Sales realized
for a 1% increase in Price (within 1 year):
2.7%
3.0%
3.5%
3.3%
3.5%
Specialty Chemicals
Electrical Controls
4.9%
3.4%
Fasteners
Vinyl Flooring
6.0%
3.9%
Pesticides/Herbicides
Tires
6.9%
5.2%
Source: McKinsey
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Mapping Price vs. Benefit
The Value Map illuminates the Price vs. Benefit trade-off.
Stable Market Shares
Where are YOU?
Five companies with similar products.
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E
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D
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Price
Price
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B
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A
Value Equity Line
Perceived Benefits
Perceived Benefits
Customer Value = Perceived Benefits compared to the Price Paid.
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Mapping Relative Market Position
Market Shares change when competitors are positioned away
from the Value Equity Line.
VALUE DISADVANTAGED
Value Equity Line
Price
Share
Gainer
Share
Loser
VALUE ADVANTAGED
Perceived Benefits
Customer Value = Perceived Benefits compared to the Price Paid.
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Pocket Margin Waterfall
POCKET MARGIN WATERFALL
1 Year’s Transactions of a Typical OEM Manufacturer
Percent of Book Price
Calculate for each major product line and
customer.
17%
100%
4%
Volume
2%
Discounts Competitive
Discounts Contract
Discounts
3%
Commissions
1%
A/R
Costs
16%
77%
Direct
Materials
73%
8%
Direct
Labor
20%
Overhead
11%
Defective
Products
Book
Price
Invoice
Price
Pocket
Price
17%
Pocket
Margin
Source: Company Financial Records
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Pocket Margin Band
The components of the Pocket Margin Waterfall often varies across
customers and jobs, resulting in a very wide pocket margin band.
POCKET MARGIN BAND AS A PERCENT OF SALES
< -15% -15% -10% -5%
Pocket Margin Percent
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0%
5%
10%
15%
20%
25%
30%
35%
40% 45% 50% 55% > 55%
Wide Band, Great opportunities.
2006
Precision Pricing
Pricing Improvements usually come from
three key areas:
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Business Processes – Set clear rules for price setting,
with internal & external feedback mechanisms.
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Accurate Pricing Data – Aggregate and then
disseminate key pricing data to decision-makers.
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Organization – Decide “ Who Decides,” establish
authority levels, provide real incentives.
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Timeline to Deliver Precision Pricing
TYPICAL BUSINESS UNIT PRICING STUDY TIMELINE
Weeks
Activity
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Preparation
• Identify target product lines
• Identify team members
• Conduct kick-off session
Market-level
• Create internal value maps
• Develop interview guide, conduct
customer interviews and refine
internal value maps
Transaction-level
• Set up transactional database
• Build detailed Pocket Price / Pocket
Margin bands and Scatter Graphs
Identify, evaluate, and size quick
hits
Design new pricing approach
Implement recommendations, and
initiate system/staffing changes
Create monitoring/feedback
systems
Thereafter: Review every 6 months
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Typical Project Organization
Steering Committee
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C.E.O
V.P. Marketing
V.P. Sales
V.P. Finance
Working Team
Internal
Resources
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I.T. Dept.
Pricing Management
Accounting
Marketing Management
Sales (Management
and/or Field)
Company
• Team Leader
• Team Member (Product Line 1)
• Team Member (Product Line 2)
• etc, depending on no. of major product lines
External
Resources
• Beckett Pricing Expert
+ Pivot Table assistance
+ Power Point Preparation
+ Database creation
+ = can be provided by
Beckett Advisors if needed
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2006