implementing a closed loop pricing system
DESCRIPTION
Companies are facing increasing headwinds when implementing pricing strategies on a global basis. Whether you are using cost plus, competitive or value based pricing strategies, it is imperative to quantify what is happening to your price actions throughout the cash cycle. In this webinar we will track the pricing process from strategy, forecasting, transactional analysis & price realization, to using key performance indicator dashboards and then linking the results to financial and P&L statements. We propose establishing P&L pricing scenarios ahead of time, set the KPI objectives, monitor and measure the results and then make periodic course corrections as required, responding to market & competitive conditions. We will look “under the hood”, using a case history, with the objective of reducing complexity and to improve process understanding. Overall, closing the pricing loop is scalable, spreadsheet tools for smaller companies and powerful analytic pricing software with enabling technology for larger companies, where there are larger numbers of SKU's, locations and shared users.TRANSCRIPT
Implementing A Closed-Loop Pricing System
A Playbook For Planning & Controlling P&L Scenarios
Dial-In Number: +1 (470) 200-0302
Access Code: 479-917-516
Implementing A Closed-Loop Pricing System
A Playbook For Planning & Controlling P&L Scenarios
Dick Sobel, Managing Director
The Pricing Analytic Group
www.pricing-analytic.com
Before We Begin
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Today’s Speaker
Richard Sobel
Managing Director
The Pricing Analytic Group
With 17 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.
Dick’s distinguished career at Emerson Process Management, a business unit of
Emerson, included senior leadership positions in pricing, global marketing, S&OP
facilitation, product marketing, finance and cross-functional efforts. 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.
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Implementing A Closed-Loop Pricing System
A Playbook For Planning & Controlling P&L Scenarios
Starts With Connecting Price Actions To The P&L
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P&L
Financial Statements
KPI
Contribution Margin Price Realization
Material Cost Changes Volume & Mix Changes
Pareto Analysis
Transactions Forecasting
Price Actions
What Is Going On?
• Pricing Strategy in Use
• Price Audit
Making Sense Of The Data • Organize & Quantify
• Segmentation
Data Analysis • Quantitative & Qualitative
• Pricing Tools
Linking Results To Financials • Monitor Performance
• Create & Update Plans
Price Impact On Operating Profit
• Model P&L Scenarios
• Management Information Reporting
P&L Pyramid
And Then Linking Results To How A Company
Financially Accounts For Its Business
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Data Analysis
Key Performance
Indicators
Financial Statements
& P&L
Qurter Ending:
June 2012
Percent Gross
Margin
Percent Discount
from List
Percent Price
Realization
Percent change
in List Price
Price
Realization
Dollars ($000)
Direct
Distributor
Subsidiary
New Products
+0.3%
(2.0%)
($2)
• Transactional Analysis
• Limit Of Authority
• Contribution Margin
• Price Realization
• Financial Statements
• P&L
• Key Performance Dashboard
• P&L Scenarios
• Spreadsheet Tools
• Analytic Pricing Software
That Promotes Planning & Predicting P&L Scenarios
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Planned
Aggregate
Increase
Percent
Realized
Profit
Improvement
($000)
Percent
OP Profit
Gain
2% 1.4 % $1,450 14.5%
3% 1.9% $1,900 19.0%
4% 2.4 % $2,400 24.0%
For each $100MM Sales @ 10% OP
• Ensuring Planned Increases - Get Price Gain
• Linking Key Performance Indicators To Price Plan
• Implementing Mid-Course Corrections As Market &
Competitive Conditions Change
Not All SKU’s Get Increases
And Tying Pricing Strategy To Closed-Loop Control
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P&L Scenarios
What Are The Playbook Objectives?
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1. Building transactional databases and developing price
forecasting models
2. Recognizing and acting upon the factors that determine
average selling price
3. Performing SKU contribution margin analysis for price
realization, cost reduction and changes due to volume & mix
4. Utilizing Key Performance Indicator dashboards to forecast,
measure and monitor profitability drivers
5. Linking the pricing process to the P&L and closing the pricing
loop
Start By Developing A Price Realization Forecast
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• Product SKU
• Sales & Units
• Average Discount From List
• % Gross Margin
• Average Selling Price
History
• % List Price Change
• Proposed Discount From List
• Material Cost Changes Inputs
• $ Price Realization
• % Price Realization
• Cost Reduction
• % Gross Margin
• Volume
Forecast
Building Transactional Databases And Developing Price Forecasting Models
Price Forecasting
Then Maximizing The Average Selling Price
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List Price Management
Transactional Discounting
Waterfall
Limit of Authority
Channel Mix
Market Segmentation
Pricing Tools
Pareto Analysis
Contribution Margin
Price Realization
Average
Selling Price
Recognizing And Acting Upon The Factors That Determine Average Selling Price
Pricing Leaks
Product - Feature
Mix
Price Setting
Average Selling Price
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Limiting Uncontrolled Discounting 0
10%
20%
25%
30%
35%
40%
45
%
50
%
0%
20%
40%
60%
80%
100%
0
5
10
15
20
25
30
35
40
45
Cum
ula
tive
%
% Discount from List
[Average Discount From List]
Recognizing And Acting Upon The Factors That Determine Average Selling Price
Limit of Authority Transactional Discounting
Source: McKinsey & Company
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Ensuring Pricing Leaks Are Plugged
Recognizing And Acting Upon The Factors That Determine Average Selling Price
Transactional Discounting
Waterfall
60
70
80
90
100
110
120
130
Heavy Industry
Light Industry
Academic Projects Government OEM Institutional
Market Segmentation $30M
$20M
$10M
$0M
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Optimizing Market Segments With Pricing Bands
Sales ASP = 100
ASP Price Band
• ASP Varies By Segment
• Versioning To Markets
• Market Segmentation Impacts Margin
• Tightening Price Band
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Case History Industrial Automation Manufacturer Pruning Legacy Products With List
Price Increases Of From 3- 7%
• Segment By Sales Channel
• Consolidate & Tabulate SKUs For A Comparable Time Frame
• Prioritize & Rank
• Check For Price Sensitivity & Elasticity
Case History Continued Contribution Margin Analysis – Product Pruning
Previous ($000) Material Volume - Current
Products Year $GM Price Cost Mix Year $GM
A $705 $141 $1 -$110 $735
B $424 $57 $3 $47 $525
C $315 $55 $24 -$123 $223
D $356 $36 -$14 $36 $442
E $797 $63 $8 -$315 $536
F $463 -$17 $5 -$198 $243
G $510 $49 $6 -$222 $331
H $94 $81 $3 -$50 $123
I $275 $5 $1 -$257 $22
J $26 -$2 $1 $9 $32
Totals $3,966 $468 $39 -$1,184 $3,211
40.2% 43.1%
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• SKU Contribution Margin Analysis Calculates Price Realization
• $468K Price Flows To Financial Statement
40.2%
2.7%
0.6%
43.1%
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39
40
41
42
43
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Percent Gross Profit
-0.4%
Sales
($000) $9,860 $7,454
Gross
Margin
($000)
$3,966 $468 ($1184) $39
$3,211
+ + - =
1% Pt. = $173K
1% Pt. = $98K
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Bridging Changes In Gross Margin
Overall GM % PT
Impact With Sales
Volume Reduction
Case History Continued
Change In Gross
Margin Percentage
Change in Gross
Margin Dollars
Performance v. Objective: Key Performance Indicator Dashboard
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Key Performance Indicator (KPI) Dashboard Stakeholder Measuring, Controlling & Monitoring Pricing Actions
• Results
• Financial Statements
• Forecast
• Data Analysis
Stakeholders
• Ensuring Planned Increases Get Price Gain
• Linking Key Performance Indicators To Price Plan
• Quantitative Improvements Flow To The P&L
• Implementing Course Corrections As Market & Competitive
Conditions Change
Qurter Ending:
June 2012
Percent Gross
Margin
Percent Discount
from List
Percent Price
Realization
Percent change
in List Price
Price
Realization
Dollars ($000)
Direct
Distributor
Subsidiary
New Products
+0.3%
(2.0%)
($2)
Summary: Plan & Control Your Pricing Actions…
20 Linking Pricing Process To The P&L And Closing The Pricing Loop – Plan & Control
P&L Includes A
Price Entry Tied To
Planning Model
Qurter Ending:
June 2012
Percent Gross
Margin
Percent Discount
from List
Percent Price
Realization
Percent change
in List Price
Price
Realization
Dollars ($000)
Direct
Distributor
Subsidiary
New Products
+0.3%
(2.0%)
($2)
Questions And Comments
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The Pricing Analytic Group
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Dick Sobel, Managing Director
The Pricing Analytic Group
The Pricing Analytic Group is led by Dick Sobel, Managing Director.
He is a partner with the Strategic Pricing Management Group (SPMG) and a
consultant for PricePoint Partners, providing pricing analytics, training, strategy,
optimization, and realization consulting 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 principles
• Pricing audits
• Developing effective pricing strategies
Email: [email protected]
Phone: 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]
Contact Us Today to
Learn How We Help
Companies Price More
Profitably.