Margin Management in Trying Times
- 1. PRICEX Joseph V. Marigliano When The Going Gets Tough, The Tough Get Pricing Margin Management in Trying Times
- 2. The Non-Recession Recession Industrial production falls for the second straight month during April 03 Capacity utilization is at its lowest level since May 1983 at 72.5% Factory order growth remains weak The ISM index indicates a weakening manufacturing sector Capital spending has been slow to recover
- 3. The Pricing Environment Competitors using Pricing as the weapon of choice to maintain market share Customers focusing more explicitly on price and less on value delivery Sales force personnel perceptions of value selling erode, placing more emphasis on one-on-one negotiations Reverse auctions become more prevalent as a price shopping exercise
- 4. General Principles In This Environment Reaffirm the validity of your strategy and stay the course Confusion, indecisiveness, and change-for-change sake will hamper your effectiveness Understand the fundamentals of your customers, costs, and competition Decide what role each plays to your company and develop business plans/principles around that Execute against the plans Identify Key Functional Areas & Responsibilities Develop, outline, and work to maintain a coherent focus
- 5. General Principles In This Environment Determine Appropriate Metrics For Measuring Process Effectiveness Monitor Performance & Provide Feedback Develop Tools & Techniques For Supporting An Effective Margin Management Capability Establish A Meaningful Incentive Program Incorporate “Lessons Learned” To Improve Performance Train to support the program
- 7. First Steps: Back To Basics Reaffirm your strategy and communicate a common vision and language Establish A Working Definition For Price: Price Is The Reward We Earn & Must Collect For Doing The Other Three P’s Of Marketing Well: Product Distribution Promotion `Highlight The Importance Of Pricing’s Leverage To Profitability Communicate the role between Price and Cost Encode the role and working definitions in all your business reporting and incentive systems
- 8. First Steps: Back To Basics Gain and communicate a fundamental understanding of your costs, customers, and competition Provide an integrated view for decision making Decisions are data driven, based on agreed upon business rules Keep to the facts, not the emotions
- 9. First Steps: Back To Basics Begin with the databases: Transactional: Invoice and line item level detail Contains full data set on the customer, product, sales person, shipping carrier, and amounts involved Provides the basis for analysis Market Opportunity / Market Research By appropriate geographical and product vertical Identifies share and total opportunity trends Establishes CVA baselines Profiles major competitive threats Financial Customer level Identifies DSO, receivables profile, current terms and conditions
- 10. First Steps: Back To Basics Segment customers and product : SWOT and Porter Five Forces analysis Clustering algorithms Perceptual mapping Forecasting Linear Regression Objective is to develop actionable segments which can be targeted and measured Examples: Order size, Order frequency DSO, Receivables Growth potential, Share of wallet
- 11. First Steps: Back To Basics Overlay data from financial and market opportunity/market research to gain a coherent picture and profile Determine the profitability and attractiveness of each customer+product segment combination Determine your ability to effectively sell and market to these segments Are you a price taker or price maker Provides guidelines for emphasis on selling price or cost management Highlights differentiation both real and perceived
- 12. Intermediate Steps: Plan and Measure Establish a scenario planning capability to examine the consequences of how you manage interaction with your competitor. Integrate reporting systems, competitive intelligence, & industry knowledge
- 13. Intermediate Steps: Plan and Measure Establish micro-market models which can estimate the financial impacts of different “What-If” scenarios: Pricing actions Market share changes Competitive reactions Use sales/marketing managers to play out competitive reactions
- 14. Intermediate Steps: Plan and Measure Decide on most probable reactions & measure the consequences Estimate associated risk Use as input in your operations plans Above all, get management buy-in Develop communications & training plans around your recommendations
- 15. Review Tie-In To Planning Metro Market Review Pricing Simulator Historical price trends by account, blanket PE, & Job. Include unit,sales, cost, & margin End-of-Year Estimates Next Year Projection Data configured by Customer to Territories Can model differing Margin& volume interactions
- 16. Intermediate Steps: Plan and Measure Use models to look at current, future, and desired customer/product profiles Visual outputs: Pocket Price/Margin Bands Pocket Price Waterfall
- 17. Developing Options Based options on the facts and analysis, not the emotions Time pressures Internal politics External politics Credibility and power issues Integrate reporting systems, competitive intelligence, & industry knowledge
- 18. Developing Options Decide on most probable reactions & measure the consequences Estimate associated risk Use as input in your operations plans Above all, get management buy-in Develop communications & training plans around your recommendations
- 19. Developing Options Based options on the facts and analysis, not the emotions Time pressures Internal politics External politics Credibility and power issues Integrate reporting systems, competitive intelligence, & industry knowledge
- 20. Developing Options Decide on most probable reactions & measure the consequences Estimate associated risk Use as input in your operations plans Above all, get management buy-in Develop communications & training plans around your recommendations
- 21. Sample Options Result of competitive actions: Strong pricing counter-response to indicate intent to defend - will the competition back off? Use non-price levers that are to your advantage: Advertising, Distribution, Scale Manage capacity Build key accounts Design cost out of your product/service Look for ways to streamline ordering and fulfillment processes
- 22. Sample Options Result of loss of product differentiation: Adjust attribute profile of the product to match new value paradigm Look at alternative, lower cost methods of servicing the business Invest in new value proposition to compensate Obsolete your product before the competition does Get something in return when you do cut prices Evaluate the impact on your customers’ customers
- 23. Sample Options Result of loss of decline of your customer base: Must find more customers Get something in return if you do cut the price Keep the cuts short-term and focused Manage capacity
- 24. Sample Options Result of loss of decline of your end-use customer demand Make price comparisons difficult Target less sensitive price segments Design cost out of the supply chain to provide flexibility Look at alternative methods for pricing
- 25. Supporting Activities Establish a sales incentive program with an appropriate emphasis on price & volume Implement existing price management training programs Implement existing price management reporting systems Refine competitive price behavior reporting Recognition of price success stories Include “after action review” to determine best practices, i.e. Top jobs approach
- 26. Supporting Activities Track competitive reactions Prepare contingency planning Prepare supporting communications plan Prepare & quantify on-going probable scenarios Refine your plan periodically
- 27. Example: Industry Communication Plan Channels: Customer Communication Written Customer Price Training Industry Trade Journal Targeted To What All Manufacturers Read General Press Wall Street Journal Financial Analysts
- 28. Organization, Management, and Reporting Structures
- 29. Structure Centralize the pricing group if not already done so Establish a pricing czar to provide vision and drive the organization Must have credibility with senior management, especially sales Should have some measure of industry and company experience
- 30. Structure Direct reports should come in two varieties: Systems expertise: Database and ERP literate Statistically and financially literate Workable programming skills to design and perform analysis and build decision support databases Good candidates: Operations Research, Quantitative Business Analysts
- 31. Structure Direct reports should come in two varieties: Field pricing expertise: Industry and customer literate Company culture and practice literate Workable financial skills to utilize the developed decision support systems to interface with the sales & marketing organizations to drive specific actions plans and programs Good candidates: Marketing personnel, “Net margin successful” sales personnel
- 32. Structure Strength comes from the integration of hard skills and practical experience Pricing czar must be willing to get out of the box when necessary Pricing group manages the outliers from developed plans and programs Goal is to optimize the decision made in the field based on the articulated business strategy Results are what count. If it does not work, find something else
- 33. Define Roles & Responsibilities Pricing Department Marketing Controllers Field Sales Customers Pricing Process Management Analysis & Recommendation Training Strategy & Tactics Industry & Competitive Monitoring New Product Development Product Line Logic Strategy Cost Profile Development Incentive Development & Monitoring Margin Budget Implementation Field Pricing Market Intelligence Feedback Customer Satisfaction Market Intelligence Profit
- 34. Establish A Management System Understand Your Historical Context Create Memorable Metrics Know The Big Picture “ It Is Better To Have An Army Of Deer Led By A Lion Than It Is To Have An Army Of Lions Led By A Deer ” - Chabras, 600 B.C.
- 35. Understand Current & Historical Perspective History Of Pricing At Your Company List Vs Discount Pricing By Product & Customer Identify Selected Pricing Trends Outline Current Competitive Situation Industry Capacity Considerations Competitive Pricing Geography Product Group
- 36. Creating Metrics…….. Margin Is Measured As Gain Against Baseline Measured By Product & Customer Baseline Time Periods May Vary Achievement Aggregated On A Territory, Region, & National Basis Gain Is Expressed As Both A Dollar & Percentage Measure Gain Is Reported Against Monthly Budgets
- 37. Creating Metrics…….. Pricing Process Effectiveness Is Measured By: How Much Volume Flows Below Baseline How Much Volume Flows Against List Vs. Discount Margin Variations When Price Is Discounted Performance Monitored By: Product & Customer, By Time Periods Achievement Aggregated On A Territory, Region, & National Basis
- 38. The Big Picture Understand What Is Happening With The Competition & The Industry Capacity Considerations Export Activity Intentions Current Competitive Pricing Patterns Understand The Relevance Of Your Numbers To Reality
- 39. Competitive Reaction Track competitive reactions Prepare contingency planning Prepare supporting communications plan Prepare & quantify probable scenarios
- 40. Motivating The Field Sales Force Reporting System: Individual Performance Reports Sent To Sales Reps & Management Exception Pricing Activities Tracked & Measured Reports Sent To Sales Management Budget Performance Tracked Monthly Trend Activity Tracked Quarterly Ad-Hoc Analysis On Demand
- 41. Incentive Systems Margin Must Be Included As A Significant Component Must Have Parity With Other Incentive Drivers Must Be Clearly Linked With Incentive Pay-Out Must Be Achievable Reported Monthly May Use Component As A Stand Alone Piece Or As A Weighting Factor
- 42. Pricing Realities No single price is the best . Should vary by customer segment Should allow sales force to capitalize on these differences Reinforce value selling & good customer analysis Should have a range List and tiered minimums Compensation system should reinforce a good price/volume balance, depending on corporate goals
- 44. Percentage Of Volume Against Discount
- 45. Percentage Of Volume By Transaction Type
- 46. Value Position By Customer Segment
- 47. Estimate Competitive Response Map Of Competitive Response Strong Competitive Response Uncertain Competitive Response No Competitive Response
- 48. Hypothetical Industry Competitive Perspective Hopeful Desire To Cooperate Cooperative : Continued Cooperation Opportunistic : Intent To Deceive Retaliator y: Intent To Defend Company X% Increase On A Company X% Increase On Other Competitive Situation Time X Starting Situation Time X High Low High Low Our MarginMove Increasing Opportunity Increasing Opportunism Competitor’s Last Margin Move Before Ours Competitive Y% Increase On A Competitive X% Increase On All Company Recommendation
- 49. Train For Success Training Is Essential To Success If You Put Something On A Pedestal, Light A Fire Under It, & Shine A Spotlight On It, Then People Will Notice It…………… Review Pricing Behavior Of Good & Worst Performers & “Share Lessons Learned”
- 50. Train For Success Training Topics: Pricing Fundamentals & Importance Pricing History & Environment List Management Incentive Plan Review & Pricing Reports Transaction Price Management Customer Pricing Behavior Competitive Pricing Robinson-Patman Issues
- 51. Technologies Which Can Assist Strategic for embedding capability: Price Optimization: Helps you set the “right” price, monitor and conduct experimentation Activity Based Costing: Helps you to establish the “real” profitability of your customers and product Tactical software for decision support: Statistical and modeling development: OLAP for decision support
- 52. Results Significant Increase or Maintenance To Corporate Profitability Can Achieve Significant Change In Sales Force Behavior Field Can Become Better Pricers Accountability Drives Dramatic Decrease In Discount Pricing - More Consistency Is Better Better Pricing Practices Results In Significantly Higher Bonus Pay-Outs Price Can Become An Equal Partner In The Marketing Mix