Six Steps to Put your Price and Profitability Playbooks to Work
9:30 AM MDT | March 26, 2009 | By PAUL ADAIR, STRATEGIC RELATIONSHIP DIRECTOR AT VENDAVO
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Simply put, pricing is a powerful profit lever. With effective pricing practices, a chemical company can realize profit improvement of 1% or more of sales ($10 million in profits for every $1.0 billion in sales) in just 4 to 6 months. For example, a commodity chemical company with poor control over cost-to-serve and volume compliance with its customers executed on its playbook to capture 0.7% Return on Sales in just four months.
Now you can use the following six steps to act on your Downturn Playbook and turn price management into a key profit driver.
1) Gathering Pricing, Margin and Transaction Data
Data collection sounds simple, but a chemical company needs to be able to slice and dice the data around each product and customer to view all relevant costs associated with each sales transaction. This typically involves dissecting transaction data by product sold and all subsequent cost elements, as well as rebate, discount and cost-to-serve elements like freight and payment terms. This “price waterfall” approach illustrates where the money comes in and goes out for any given transaction.
2) Define and Analyze Segments to Improve Value Capture
Data segmentation allows an organization to capture additional value by understanding and aligning with a customer’s willingness to pay. For example, a medical device company may be willing to pay a higher price for a specific grade of resin if the supplier can guarantee short lead times or ample inventory.
In chemicals, segmentation is typically based on several overall dimensions and can include:
A simple and highly-actionable starting point for analyzing each segment is the ABCD type of customer ranking, which measures customers by volume versus pocket or net margin (often expressed as a percent of the sale) and puts them into a two-by-two matrix.
Margin improvement opportunities often result from inconsistencies in pricing and cost-to-serve recovery. For example, freight is often under-recovered in any given transaction and represents a huge opportunity. Generous discounts and wide price points are other types of defects. Identifying these opportunities requires in-depth and relevant pricing-specific insight. Quantifying the margin impact of each of these opportunities helps assess the relative importance. Also, when analyzing customers and products it helps to review outstanding performance.
4) Create Margin Improvement Action Plans
Building on the ABCD model, chemical companies must consider specific actions around price.
5) Execute Action Plans
In order to execute on careful data analysis, segmentation and action plans, chemical companies need a pricing team to manage the playbook and pricing strategies. For example, a pricing team can monitor each deal negotiation so that no product or market manager acts outside the guidelines of the playbook without proper scrutiny. The intent here is to ensure that pricing decisions are data driven, clearly understood, and actively managed to produce measurable, repeatable results.
6) Measure Success
The final step before repeating the process to ensure sustainability is to measure progress. The pricing organization needs to be accountable for a specific and ongoing set of measurements, such as price increase effectiveness, pricing variance within a segment, and freight recovery. In addition, each account should have a specific set of standard measurements, such as price and margin across product lines as compared to their peers, cost-to-serve impacts as drivers to profitability and overall profitability direction (e.g. trending towards a D or an A customer). This way, an organization can track progress against goals and determine the exact effectiveness of its Downturn Playbook.
Building a repeatable and sustainable work process around margin management is not only smart, but essential for chemical companies that plan to manage successfully through the current downturn. By effectively executing on the Downturn Playbook, companies can set the stage for rapid recovery when the time is right.
Paul Adair is a strategic relationship director at Vendavo. He helps chemical companies and other B2B organizations use price management and optimization solutions and strategies as critical profit levers.