B2B Price Elasticity An Opportunity for Price Improvement
Dick Sobel, Managing DirectorThe Pricing Analytic Groupwww.pricing-analytic.com
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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.
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B2B Price Elasticity An Opportunity for Price Improvement
• Elasticity in the Pricing Process
• How Elasticity impacts B2B pricing
• Client Case History
• Results & Actions
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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
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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”
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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: [email protected]: 330-958-4036
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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: [email protected] Us Today to Learn How We Help
Companies Price More Profitably.
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