Constructing a simpler pricing structure
A construction industry company was having trouble pricing its products for small and medium-sized customers. The company decided to launch a price list revamp project with August with two objectives: 1) simplify the price list structure and 2) decrease price variation.
Prices for small and medium-sized customers were not systematically set
As August analyzed the pricing performance of the company, it became clear that the client had no systematic way of setting prices for small and medium-sized customers. The price variation among these customers was significant and even illogical at times. The company needed to segment the customers better and determine clear-cut price setting rules for these different segments. Additionally, the price list structure was very complex. For example, there were several different ways to communicate prices to customers. This needed to be simplified as well.
A simplified pricing structure was needed to systematically differentiate prices
Based on historical pricing data, the client and August carefully defined price points for every product in the company’s portfolio per customer segment. The goal was to make price differences between products and customer segments more consistent. August simplified the pricing structure and created a price simulation tool to verify the impact of different price change scenarios. As a result, the client had a concrete tool for setting product prices and estimating the impacts of the proposed price changes to the company’s topline.
Price changes were adopted fast and led to a 5% topline increase
After the new pricing structure had been introduced to the market, we conducted a thorough analysis of its impact. It was evident that customers had adopted the new simplified pricing structure well and the company had significant volume growth among new customers. The like-for-like price increase, which goes straight to the bottom line, was 5% for the total addressed revenue. And especially for new customers, the realized price increase was even in the double-digits. This impact would not have been possible without the great internal change management work done by the company’s pricing manager and commercial director. Payoff for the consulting investment was 16x in less than 12 months.
From falling demand to rising profit
As hyper-competition drove down demand, a faltering unit of a global process industry company began to believe that the only way forward was to improve its margins. Two quarters after the firm began its collaboration with August, management had made permanent structural changes that boosted EBITDA by two percentage points.
Sales organization needed to become more profit driven
One division of a global process industry company was suffering from insufficient profitability due to declining demand and a highly competitive market. Profitability improvement was also targeted in the sales function; the paradigm had to be changed from volume to profit seeking behavior. Management wanted to understand the profit improvement potential on customer level and realize the potential in the upcoming commercial negotiations.
Analytical customer plans were in the center of commercial strategy
To become more profit driven sales management created a more strategic view on the customer portfolio that emphasized profit improvement potential in different customer segments. The segmentation helped management to set targets for pricing, volume and other key profit improvement levers on customer level. With the support from August, account managers created more analytical and detailed customer plans than before, which ultimately played a key role in helping sales conduct negotiations successfully and pull the right levers to improve profits.
Significant profit improvement from focused growth and pricing
The new – more analytical and profit seeking – approach to customer planning and customer negotiation execution yielded tangible profit improvement in the form of a two percentage point EBITDA increase. Furthermore, permanent changes to the sales management processes and tools were implemented.
GAMifying wholesale pricing
A wholesaler was having trouble managing and developing pricing across a huge number of customers and SKUs. August was able to deliver newfound clarity and actionable insights from an advanced profitability analysis.
Huge price and profitability dispersion were difficult to explain away
As a wholesaler, our client had been forced to contend with huge numbers of customers and SKUs across a range of product categories and locations. It was having difficulties managing and developing pricing with such a huge amount of variety. Pricing and profitability varied greatly across customers and SKUs, but top management didn’t understand, what was creating the differences in profitability. Numerous explanations and excuses were given, but the underlying reason behind the variance had been evading top management. To advance the pricing development agenda, a more structured and holistic approach to profitability and pricing analytics was badly needed.
The vast complexity was tackled with a combination of advanced statistics and business insight
The August team brought its statistics A-game to the project, applying generalized additive models or GAMs to solve the analytics challenge. Flexible multivariable modeling allowed the team to disentangle unexplained deviations in price and profit margin from typical pricing differences explained by the data. This allowed the team to detect underperforming products and customers that needed special attention from sales. Moreover, the modeling approach allowed us to decompose the predictable variation in customer profitability into differences explained by the products purchased on one hand and by different transaction and customer characteristics on the other. The analysis revealed, for example, that discounting was heavily driven by product-specific volumes rather than total purchases, which incentivized cherry-picking rather than the concentration of purchases. This was poorly aligned with the wholesaler’s value proposition.
The approach allowed the company to accurately pinpoint pricing problems
The application of advanced analytics to shed light on product and customer profitability gave our client a better grasp of their pricing performance and produced actionable fact-based insights. This laid a solid foundation for fixing the pricing of poorly performing products and customers and for developing the overall pricing logic.