Psl Pricing During Turbulent Times 080514

Pricing During Turbulent TimesMay 14, 2008

Paul Hunt, PresidentPricing Solutions Limited www.pricingsolutions.com1-416-863-0685

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AGENDA

Introduction World Class PricingCommoditiesRecessionFx RateWrap-up

PRICING SOLUTIONS LTD.

Started in 1993Boutique consulting firm specializing in pricing• 20 people• Senior team• Implementation focused• Global representation

Value proposition• To help clients achieve a payback of 10x our fees within

12 months of project completion

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YOUR PRICING TEAMPaul Hunt, MBAPresident

Scott Miller, CMASenior Consultant

Greg Thomas, M.Sc.Partner

Jim Saunders, P. Eng, MBAPartner

Loïc Le Corre, MBAManaging Director France

Fernando VentureiraManaging Director Iberia

Madeline Stein, B.A. EconConsultant

Dr. Vinay Kanetkar PhD.Statistical Consultant

COUNTRIES WE HAVE WORKED IN THIS YEAR & PSL/AGI OFFICES

PRICING solutions Ltd. is associated with The Advantage Group International (AGI)

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SOME OF OUR CLIENTS

PRICING SOLUTIONS LTD.

Pricing Solutions Ltd. is associated with The Advantage Group International (AGI)

“To help companies grow towards World Classcompetency in every aspect of their pricing.”

PricingTraining

PricingResearch

PricingManagement

PricingAdvisory

PricingSoftware

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PRICING SOLUTIONS LTD.TrainingResearch Advisory

Pricing Management - Tools and Processes

• Selling on value not on price

• Price As A Strategic Weapon

• Value-Based Pricing

• Measuring price elasticity

• Price awareness• New product price

optimization• Product line price

optimization

• Developing competitive pricing strategies and tactics

• Managing price wars• Implementing price

increases• Structuring trade channel

pricing

• Transactional analysis/modeling • Cost to Serve Analysis• Pricing Process Standardization• Customer Categorization• Sales force policies & guidelines• Key Performance Indicators• Change Management

Software

• System evaluation and selection

• Systems integration• xxxx

FRAMEWORK

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WORLD CLASS PRICINGProcess Maturity

PROCESSMATURITY

LEVELS

MATUREPROCESS

WORLDCLASS

LEVEL 1

BaselineProcess isIneffective

30% of companies

LEVEL 2

InternalProcessIn Place

Gain Control 40% of companies

LEVEL 4 Optimization

ProcessesIn Place

OptimizationTools <10% of companies

LEVEL 3

ValueProcessesIn Place

Price/ValueAnalysis 20% of companies

LEVEL 5

ExcellenceinExecution

<1% of companies

Pricing Solutions Ltd., 2003©

1. Cost• Exchange• Inflationary

Pressure• Commodity

= THE DRIVING FORCE

2. Customer• Segments• Income

3. Capacity Utilization

• Over capacity• Under capacity

4. Competitor• Competitive

position• Financial

position

DRIVERS OF PRICE STRATEGY

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SALES FORCE EXECUTION

Lack confidenceMust pass “mirror test”• Need fact-based information

What is fair?What is sustainable?

• If not price positioned today, how fast will you get there

COMMODITY COSTS

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CRUNCH TIME

FOOD

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• Primary feed used to produce meat, dairy, egg products in US

FOOD

OIL

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COMMODITIES

Source: National Post, Tuesday Sept 11, 2007.

Source: London Metal Exchange (Cash Buyer Charts)

Copper Price Graph Lead Price Graph

Nickel Price Graph Tin Price Graph

Zinc Price Graph

COMMODITIES

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TARGETED PRICE INCREASES

5% across the board rarely makes sense3 key questions lead to targeted increases:

Which products are most heavily impacted by the commodity price increase?x

What is the margin structure of your product portfolio?x

Which products have the highest elasticity?

= OPTIMAL RESULT

5% PRICE INCREASE ACROSS ALL PRODUCT LINES

SUB BRAND PRICE INDEX % Growth Brand level Units

% Growth Brand level

Margin

Actual Retail margin change

level [fixed retail % margin]

Base Margin per unit

Product Line A 1.05 -5.3% 5.8% $29,594 $1.04

Product Line B 1.05 -10.3% 1.4% $(62,355) $1.35

Product Line C 1.05 -6.8% 3.0% $(8,559) $1.33

Product Line D 1.05 -7.0% 5.2% $4,139 $1.00

Product Line E 1.05 -3.9% 5.1% $16,318 $0.82

Product Line F 1.05 -3.3% 10.7% $58,681 $0.53

Product Line G 1.05 -17.9% -7.9% $(317,792) $1.85

Product Line H 1.05 -5.5% 5.5% $11,142 $1.05

Product Line I 1.05 -6.7% 4.0% $(12,303) $1.21

Product Line J 1.05 -7.0% 4.3% $(13,532) $1.15

Product Line K 1.05 -7.1% 2.4% $(13,586) $1.36

Grow profit by $500kLose 150,000 units

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Grow profit by $1.2MLose 145,000 units

TARGETED PRICE INCREASE

SUB BRAND PRICE INDEX% Growth

Brand level Units

% Growth Brand level

Margin

Base Margin per unit

Estimated Margin per unit

% Change in Margin per unit

Product Line A 1.06 -5.7% 7.5% $1.04 $1.19 14%

Product Line B 1.00 0.9% 0.9% $1.35 $1.35 0%

Product Line C 1.00 1.2% 1.2% $1.33 $1.33 0%

Product Line D 1.00 -0.1% 0.5% $1.00 $1.00 1%

Product Line E 1.10 -7.0% 10.0% $0.82 $0.98 18%

Product Line F 1.15 -10.2% 28.6% $0.53 $0.76 43%

Product Line G 1.00 1.0% 1.0% $1.85 $1.84 0%

Product Line H 1.06 -6.0% 7.2% $1.05 $1.20 14%

Product Line I 1.00 1.0% 0.9% $1.21 $1.21 0%

Product Line J 1.00 1.1% 1.1% $1.15 $1.15 0%

Product Line K 1.00 1.2% 1.2% $1.36 $1.36 0%

PRICE VOLUME OPTIMIZERDynamic Model – Price Input Screen

PRICE STRATEGY MODEL - RETAIL NATIONALSymptom 1 Price Index Symptom 2 Price Index

CHANNEL PRICE

CHANGE

CompetitiveBRAND

Price Index

SKU A 105% SKU H 105% FOOD Competitor B 100%

SKU B 105% SKU I 105% YES Competitor C 100%

SKU C 105% Symptom 3 Price Index DRUG Competitor D 100%

SKU D 105% SKU J 105% YES Competitor E 100%

SKU E 105% SKU K 105% MASS Competitor F 100%

SKU F 105% SKU L 105% YES Competitor G 100%

SKU G 105% BRAND LINE PRICE CHANGE 105% Competitor H 100%

Dynamic Model – 5% price increase to own SKUs

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PRICE VOLUME OPTIMIZERDynamic Model – Estimate Outcomes of ‘What if’ Scenarios

Change in Gross Profit - SKU Level

$377,812

$62,968$98,721

$400,525

$55,417

$203,461

$10,380 $32,238

-$32,739

$113,081$128,961

$24,165

-$125,000

$-

$125,000

$250,000

$375,000

$500,000

$625,000

Product A Product B Product C Product D Product E Product F Product G Product H Product I Product J Product K Product L

Change in Gross Profit - BRAND Level

$1,474,990

$324,359$208,040

$367,878

$584,783

-$500,000

$-

$500,000

$1,000,000

$1,500,000

$2,000,000

Competitor A Competitor B Competitor C Competitor D Competitor E

Change in Unit Volume - SKU Level

-48,879-31,302

-6,646

-46,323

-15,615 -22,961

-1,539

-71,823

-28,330

-94,939-81,692

-9,212

-125,000

-100,000

-75,000

-50,000

-25,000

-

25,000

50,000

75,000

100,000

Product A Product B Product C Product D Product E Product F Product G Product H Product I Product J Product K Product L

Change in Unit Volume - BRAND Level

-459,261

146,97055,484

147,932 108,875

-650,000

-525,000

-400,000

-275,000

-150,000

-25,000

100,000

225,000

350,000


Dynamic Model – 5% price increase to own SKUs

Dynamic Model – 5% price increase to own SKUs & 2% price increase to competitor SKUs

Change in Gross Profit - BRAND Level

$2,545,782

$516,144$364,242

$809,019

$81,260

-$500,000

$-

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000


Change in Unit Volume - BRAND Level

-100,248

93,387-765

183,390

-175,764

-650,000

-525,000

-400,000

-275,000

-150,000

-25,000

100,000

225,000

350,000


PRICE VOLUME OPTIMIZERDynamic Model – Estimate Outcomes of ‘What if’ Scenarios

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RECESSION

IMPACT OF 1%

If the average Fortune 500 firm lowered price by just 1% and costs and volume remained constant, what would be the impact on profitability?

Answer __________

How about during the 1992 recession?

Answer __________

-12.5%

-20.0%

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WORLD CLASS PRICINGProcess Maturity

PROCESSMATURITY

LEVELS

MATUREPROCESS

WORLDCLASS

LEVEL 1

BaselineProcess isIneffective

30% of companies

LEVEL 2

InternalProcessIn Place

Gain Control 40% of companies

LEVEL 4 Optimization

ProcessesIn Place

OptimizationTools <10% of companies

LEVEL 3

ValueProcessesIn Place

Price/ValueAnalysis 20% of companies

LEVEL 5

ExcellenceinExecution

<1% of companies

Pricing Solutions Ltd., 2003©

Great roi on pricing….no capital

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WHAT HAPPENS

1. Sales force loses confidence2. Competitive pricing confusion3. Short term changes in pricing policy become long

term burdens4. Prices are cut to maintain volume

1. SALES FORCE LOSES CONFIDENCE

How to maintain confidence• Demonstrate a plan (value prop, segments, price,

competitive position)• Defection analysis…root cause• Keep them competitive

Best practice example:– maximum15% discount– Losing share– Adjusted discount: maximum 25%, average 15%

If downsizing• Opportunity to get rid of price cutters

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2. COMPETITIVE PRICING CONFUSION

CI more critical than ever• Interpret carefully• Stamp out rumors (pricing viruses!)

Intensify thinking about your own signals to market placeThink actions and reactions…two steps ahead!

THE DEVIL IS IN THE DETAILS

IT Consulting industryLarge account has just signed a deal with the competition.Buyer has informed sales rep that the rate is 35% below regular per diem’s (verified by two sources)How do you handle this situation? What are the implications?

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3. PRICING POLICY

Avoid changes in policy• Terms and conditions (Payment terms, Delivery,

Support)• Create a new industry standard

Focus on discrete opportunities• Win/win is the key• Price concession

for a commitmentLinked to an index

EXAMPLE

Industry #1• extended payment terms to 45 days• competitors followed• customers came to expect 45 days• several years after recession still 45 days

Industry #2• extended payment terms in negotiated situations (not

published)• resumed 30 day average very shortly after recession

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4. PRICES ARE CUT TO MAINTAIN VOLUME

Focus on core segmentsGet rid of “nice to have” featuresFocus on short term payback• Change mix

Change price structure• Monthly vs. one-time payments

Plug leaks….fire unprofitable customers

FX RATE

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EURO

CDN

GBR

+17.5%

+11.5%

+11.5%

FX RATES (USD)

CNY

MXN

INR

+14.4%

+5.4%

+12.5%

FX RATES (USD)

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IN THE NEWS…

=High public exposure…

FX RATE FACTS

Canadian $ appreciated 15%• Prices declined by 6.4% relative to US• Some categories slow to respond others fast

Car prices slow to respondGas prices fast– Risen 42% in Canada– Risen 90% in USA

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FX RATE BALANCING ACT

Head Office Pressure Profitability

Brand Image

Competitive Conditions

Grey Market avoidance

Input costs

Market Share

Revenue

THE 5 ANALYSES THAT NEED TO BE DONE

1. End-user analysis• Used to put the focus on channel partner behaviour

2. Cost of doing business vs. Value of doing business locally• Used to justify reasonable price gaps

3. Basket of Goods Analysis• Used to justify reasonable price gaps

4. Account Size Matching Analysis• Used to create apples to apples comparison

5. Customer mix of product lines • Used to avoid averaging of cross-border price differentials

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GREY MARKET

Loss of control over distribution channel• ‘dodgy traders, counterfeiting’ can become your supply channel

Market price instability• End-user & Channel pricing confidence loss• Marketing and rebate program disruption

Customer pricing confidence declines• “Why can I buy this at a cheaper price from X?”

Brand perception degradationLoss of control over customer satisfaction• Loss of defect-returns management

GREY MARKET

$5B cost to IT industry per yearA need to develop a control system to manage Grey market• Sales audit process within channel• Warranty implications (i.e. CDN warranty not covered if

item purchased in U.S.)• Back-end rebates provided only for country specific sku

sales• Possibility of losing “authorized dealer”• Controls don’t always work! (e.g. pharmaceutical

industry)

http://www.news.com/Net-tightens-gray-market-retail-vise/2100-1030_3-5628742.html

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Toshiba manages grey market by having different sku’s available in CDN vs. USe.g.. P200 series in Canada; P205 series in US• Different hardware specs help create a control measure

COMPETITIVE CONSIDERATIONS

Must think strategically• Which market is your core market (Can vs. US vs.

Europe)• Are you willing to accept lower margins in other

markets?• How much of a gap is sustainable between markets?

Tactically• Who is the leader vs. the follower?• Is there goodwill in being the first mover?

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WRAP-UP

Commodities increases• Do targeted price increases

Elasticity x Expandability x Margin = Optimal Changes

Recession• Reduce fear (sales team, competitive pricing)• Avoid long term policy changes• Focus on core segments

FX• Must establish a “Pricing Corridor”

An acceptable gap between countries• Enforcement is essential• Competitive pricing skills important

CONTACT INFORMATION

Paul Hunt, PresidentPricing Solutions Limitedphunt@pricingsolutions.comwww.pricingsolutions.com1-416-863-0685 x.101

Psl Pricing During Turbulent Times 080514

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