Strategic Pricing - International CEO Forum 2011

STRATEGIC PRICING

Driving improved profitability and earnings growth

International CEO Forum 18th October 2011

Presented by: Ron Wood, Director of Pricing Insight

Q: Who has negotiated down an account manager by

20-30% but would have paid full price if the sales

manager had defended their value?

CIPSA Conference 2010

© Pricing Insight 2011 ‘Strategic Pricing’ - International CEO Forum

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A. 100%

10 Key margin pressures

Margin erosion

4. Margin squeeze in highly competitive market

5. Belief that lowest price wins the business

1. Cost plus pricing culture

2. Undefined value proposition

3. Inconsistent pricing

9. Price overrides

10. Management misalignment / agreement

6. New business won at low margin / below cost

7. Channel conflict

8. Price rise stalled

4

What procurement said in 2011

Question Group consensus

Do sales demonstrate value?

No. “Sales do not understand our need state” “Sales proposals are often generic and waffle”

Do procurement always want the lowest price?

No. “Low ball prices make me sceptical and nervous” “You cant trust a supplier that tries to win business below

cost” “Often higher prices give you better value – sales just cant

articulate that in the negotiation”

What could sales do better?

“Ask good questions” “Sales people need to listen more and talk less” ‘Understand that price is only one element of value”

Honeymoon phase or trusted partnership?

Business as usual?

Death of a salesman?


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9 steps to sales success. Steps 3+4 need work

Things you may never hear….

We left at least 10% points on the table to win that last contract…

Our core pricing strategy is to mark up 30% on cost…

I spoke with the customer and since we did such a good job last year they will pays us an extra 5% price rise…

Sales marketing and finance are in total agreement on this one…

Strategic pricing checklist

Question Response

1 What are our current pricing and revenue optimisation capabilities?

2 Do we have the right strategies policies procedures and resources to maximise margins + minimise earnings risk?

3 Who within my organisation controls the setting of prices?

4 Are sales marketing and finance aligned to a consistent pricing strategy?

5 Is pricing treated as an annual exercise or a dynamic situation?

6 What techniques can we employ to generate immediate earnings growth and proof of concept?

7 As the CEO how to do I measure my organisation’s pricing effectiveness?

Determine the potential Size of Prize

Net Revenues ( millions)

$ 50 $ 100 $ 200 $ 300 $ 400 $ 500

Mar

gin

Exp

ansi

on

Pla

n

0.25% $0.13 $0.25 $0.50 $0.75 $1.00 $ 1.25

0.50% $0.25 $0.50 $1.00 $1.50 $2.00 $ 2.50

0.75% $0.38 $0.75 $1.50 $2.25 $3.00 $ 3.75

1.00% $0.50 $1.00 $2.00 $3.00 $4.00 $ 5.00

1.25% $0.63 $1.25 $2.50 $3.75 $5.00 $ 6.25

1.50% $0.75 $1.50 $3.00 $4.50 $6.00 $ 7.50

1.75% $0.88 $1.75 $3.50 $5.25 $7.00 $ 8.75

2.00% $1.00 $2.00 $4.00 $6.00 $8.00 $10.00

Most Likely

Define Net Revenues

• Identify / PILOT which areas will be the focus of price and revenue optimisation

Evaluate Pricing Dynamics

• Discounts

• List prices

• Rebates

• Trade terms

Map Revenue Adjustments

• Implement and track changes using new pricing plan

If you are using Cost Plus to set prices, there is at least 2% margin (200 basis points) potential improvement


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Looking for earnings growth?

Pricing Strategy is the cheapest acquisition of cash you will make

Pay Back Period

Private Equity firm will pay: 5 X earnings for buyout 5 years

ASX company will pay: 7-10 X earnings for M&A 7-10 years

Fortune 500 company will pay: 8-12 X earnings for M&A 8 -12 years

Pricing Strategy: 0.2-0.4 X earnings 3-5 months


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General Electric - CEO focus on pricing

“Earnings from operations grew by 11.0% to $20.6 Billion up from $18.6B LY.”

“We focused on Customer Value to support our planned margin expansion of 100 basis

points.”

“We sweat the details. Our mornings begin with a review of working capital or pricing.”


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Today’s session


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Wh

at

Pricing Strategy

Wh

y

# 1 EBIT Driver

Wh

o

C-Level

Wh

en

Ho

w

Now Value Based Pricing

POWER OF PRICING


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Pricing is your most powerful profit lever

Pricing yields of 2% can generate substantial earnings growth

Assumes an average gross margin of 25% and EBIT of 6%

2% =


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Long tail optimisation and market repositioning

y = 58.564x-0.039

$20.00 $22.00 $24.00 $26.00 $28.00 $30.00 $32.00 $34.00 $36.00 $38.00 $40.00 $42.00 $44.00 $46.00 $48.00 $50.00 $52.00 $54.00 $56.00 $58.00 $60.00

1 10 100 1,000 10,000 100,000 1,000,000 10,000,000 100,000,000

Price Volume Relationship - Actual

$20.00 $22.00 $24.00 $26.00 $28.00 $30.00 $32.00 $34.00 $36.00 $38.00 $40.00 $42.00 $44.00 $46.00 $48.00 $50.00 $52.00 $54.00 $56.00 $58.00 $60.00

1 10 100 1,000 10,000 100,000 1,000,000 10,000,000 100,000,000

Theoretical Rate Card - Planned

Price bandwidth architecture

$6,000,000 annual EBIT opportunity

NPV = $15M over 3 years


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Protect the Head Maximise the Middle Optimise the Tail

Long tail SKU optimisation

-$200,000

-$150,000

-$100,000

-$50,000

$-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$-

$2,000,000

$4,000,000

$6,000,000

$8,000,000

$10,000,000

$12,000,000

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55

$ Margin Improvement Revenue

$1,046,519

$3,912,889 $4,959,408

Top 80 Long tail Total

Long Tail SKU optimisation - cumulative

$ Margin Improvement


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Price and volume are not always correlated

These products command the highest industry price and highest market share

Do you sell a product or service with a high relative price and market dominance?


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Economic 101

$-

$25.00

$40.00 $45.00

$40.00

$25.00

$- 0

15 20

15

0

-25

-60

$6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $-

Price, Revenue, Volume & Gross Margin

Revenue GM$

More and more revenue does not equal more profit

In this example, revenue is maximised at $3.00 however profit is maximised at $4.00

There is often no natural price elasticity continuum


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0

1

2

3

4

5

6

0 5 10 15 20 25 30

Pri

ce

Quantity

Demand Curve

Price = $4.00 Quantity = 10

PRICING MANAGEMENT


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Decision inputs

Price The Finance Manager

The Sales Manager

The Customer

The Operations Manager

The Marketing Manager

The Management


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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CC

SC

CS

TMS

TMS

CC

STM

STM

SC

CS

CC

SC

CS

CC

STM

SC

CS

TMS

TMS

BP

OB

PO

TMS

TMS

CC

SB

PO

CC

STM

SC

CS

TMS

TMS

BP

OC

CS

TMS

TMS

TMS

BP

OB

PO

CC

STM

SB

PO

TMS

TMS

BP

OTM

STM

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BP

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OTM

SB

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BP

OTM

SB

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BP

OTM

STM

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STM

SB

PO

TMS

Distribution of staff ratings

Current pricing capability - individual response The distribution of 61 staff ratings across all three business divisions

BPO CCS TMS

24 © Pricing Insight 2011 Confidential

Price management model

100% Centralised

80% Centralised

60% Centralised

40% Centralised

20% Centralised

Receivership Power Elite Democracy 3rd World Jungle


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PRICING STRATEGY


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COST PLUS PRICING

WALL STREET

$3,000,000 $2,835,000 $2,550,000

$130

$117 $111

$100

$90 $85

$2,300,000

$2,400,000

$2,500,000

$2,600,000

$2,700,000

$2,800,000

$2,900,000

$3,000,000

$3,100,000

$-

$20

$40

$60

$80

$100

$120

$140

Year 1 Year 2 Year 3

Cost Plus Mark-up

GM $ Sell Price Costs

$3,000,000 $3,800,000 $4,050,000

$130 $130 $130

$100

$90 $85

$-

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

$4,500,000

$-

$20

$40

$60

$80

$100

$120

$140

Year 1 Year 2 Year 3

Value Pricing Model

GM $ Sell Price Costs

Why Cost Plus will cost you $$$

Sell prices follow cost price reductions achieved by better procurement and scale sourcing

These two procurement options are not available to competitors

Price are set independent of costs and managed

according to customer value segments Price leadership strategy implemented + 5% volume

declines factored in


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Value Pricing = 35% Improvement In Earnings (Year 3 vs. Year 1) VP vs. Cost Plus Method = $1.5M and 59% differential

$3,000,000 $2,550,000 $4,050,000

$130

$111

$130

$-

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

$4,500,000

$100

$105

$110

$115

$120

$125

$130

$135

Year 1 Yea3 Cost Plus Year 3 Value price

3 Year Comparison between Cost Plus and Value Pricing

GM $ Sell Price


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Year 3 Cost Plus

VALUE PRICING


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Pricing Strategy Evolution

Cost Plus Pricing Basic

Match Competitors Structured

Mark to Market (Relative Benchmarking)

Strategic

Value Based Pricing Value

Management + 80%

+ 70%

+ 60%

< 50%

High Engagement level

Pricing capability

score

Pro

fita

bili

ty

Hig

h

CEO and Board level sponsorship is required to evolve from Cost Plus Pricing to Value Based Pricing

It takes approximately 18 - 48 months to implement pricing and value optimisation

Low

Low


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3 Ideas to Improve Profitability Le

vel o

f sp

on

sors

hip

CEO Focus

Mar

gin

man

agem

ent

Avoid Cost Plus St

rate

gy

Invest in Resources


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About Ron Wood


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Experience

Ron Wood was the first FMCG Strategic Pricing manager appointed in Australia developing pricing strategy for Arnotts Campbells Soup Company

Managing a team of 6, Ron centralised all trade spend pricing strategy and management delivering $5M EBIT improvement in 12 months. Supply chain costs were reduced via increased forecast accuracy which lowered day’s inventory from 28 down to 15

Ron has worked with leading business executives from Australian industry including: Peter Bush now CEO of McDonalds Australia, Bill Wavish Chairman of Myer and ex.CFO of Woolworths, Paul Hitchcock and Malcolm O’Keefe, CEO and COO respectively of Corporate Express Australia + the leading executives from many blue chip FMCG and industrial companies within the ASX and Fortune 500. In 2005 Ron joined the Graeme Hart managed Goodman Fielder group to develop trade spend and pricing strategies, in addition to being involved in the re float of Goodman Fielder to the Australian Stock Exchange

Ron Wood’s pricing and margin achievements have been replicated across industries, products and services, each time generating upwards of 2-5% points of cash margin for the companies involved

Pricing Insight work with a strictly limited number of clients each year to ensure that commercial outcomes are realised and our clients become partners and advocates for our work. Our work has been recommended internationally and employed by senior executives from Mercedes Benz through to Owen Illinois Glass Company in the USA in addition to our clients as listed below

Corporate Roles Consulting Clients Ron Wood Director of Pricing Insight Suite 136, Lifestyle Working Building 117 Old Pittwater Road Brookvale NSW 2100 D: +61 2 9091 0226 M: +61 4 10 53 4099 E: [email protected]

Arnotts / Campbells Soup David Jones NMHG Material Handling Capral Aluminium Carter Holt Harvey Goodman Fielder

Electrolux Cummins Engines Australian Air Express Hanson CSR Big River Timbers Honeywell

Whirlpool Huon Aquaculture Mercedes Benz Corporate Express Salmat Trained over 700 executives

in Pricing Masterclass

CASE STUDIES

Tim Tam Timber Office Products

Y=Mx^2+bx+c

R^2 =0.90

Dynamic airline

pricing model

Optimise long tail of

5000 SKUs

$7.0M incremental

gross margin realised

in 1 year

$9.0M realised over 2

years

$15.0M realised over 18

months

Case Studies - Margin Gains


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Case Studies - Margin Losses

Transport FMCG

A large national transport

provider wins new account with

a price reduction vs. incumbent

of 15%

Customer would have paid 5%

more than previous contract to

find effective solution

Marketer of global brand fails to

optimise channel pricing relativities and

leverage trade partnerships

Misses out on $3.0M over 3 years Misses out on $4.0M per year


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Strategic Pricing - International CEO Forum 2011

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Transcript of Strategic Pricing - International CEO Forum 2011