As the coronavirus pandemic continues to impact people and businesses around the world, we’re looking at strategies to help manufacturers retain customers and bolster margins. In our five-part Back to Basics series, we talked about the fundamentals of price optimization; inventory optimization – part one and part two; and retail inventory management (RIM), also a two-part series. Now that we’ve covered the basics, it’s time to dig a little deeper and look at how strategic pricing tactics can improve revenue and profits.
Price transparency and the waterfall model
The price waterfall model is an important tool for manufacturers as it helps uncover where you might be missing out on potential margins. The different price levels contained in the waterfall price model reflect a company’s global pricing strategy and execution. It starts with global or base prices on the list-price level, which can then be used to generate regional list prices. The next level includes customer and distribution-channel specific net prices, and can also contain special prices for campaigns, promotions, or quoted prices. And the final step down is to calculate pocket prices or so-called net-net prices, which represents the lowest price for customers.
Visualizing the different pricing levels and adjustments helps manufacturers identify where you might be leaving money on the table. Global companies selling in different regions through various sales channels risk margin leakage at every level. To manage the price waterfall effectively, you need analytics visibility into the discounts and adjustments that can occur at each level.
For instance, some customers may end up with manually-adjusted sticky item prices that haven’t been changed over time to account for increased costs or competitive pricing. Others may have pulled discounts by part number, customer, or channel, with prices that again become sticky and buried. Oftentimes we even see extra spot discounts given by field sales representatives. Without proper analytics in place to monitor these types of changes and discounts, many companies are essentially blind to the revenue adjustments or impacts that are happening right in front of them.
The bottom line is, it’s critical to have a system in place that allows you to program intended discounts for your target net prices, and then ingest actual sales data and be able to monitor the waterfall. Wherever you see levels of variance, you can dig deeper to understand where they’re coming from and ultimately reduce or eliminate that leakage over time.
The value of competitive pricing
In recent years, competitive pricing has become increasingly important. The price transparency that’s come with the growing number of online shops and eCommerce platforms offers competitive insights to anyone with an internet connection. As a result, customers in different stages of the value chain are becoming more price sensitive. End customers tend to check parts pricing before they commission a dealer or repair shop, and dealers themselves even compare their OEM purchase prices for spare parts against independent aftermarket prices from global distributors, simply to optimize their margins. Implementing a sophisticated pricing strategy for commercial items has never been more important.
Getting started: Data coverage and analysis
The first step is to gather competitive data for analysis, such as list prices or competitive prices from different regions. As this is what your entire strategy will be based on, quantity and coverage are crucial. Before you start analyzing, look at how much of your parts basket you’ve been able to cover—which is a good indicator of how effective your study will be. If you’ve tried to gather market prices but only been able to cover 1-2% of your parts or the revenue they represent, you probably don’t have a good base for comparison. But if you’ve covered 30% of parts in a given segment, you’ll be able to execute market-based pricing.
In addition to analyzing how much data has been collected, we also look at coverage as an indicator of how competitive that group of parts is. If you benchmark a specific parts category and find aftermarket matches on 90%, you likely face a lot of competition. But if you don’t find any matches on certain parts or items, aftermarket competition is likely less of a concern.
What’s your position in the market?
Looking at the data also helps you understand how your competitors are playing against you, and even how this varies by region or by channel. This can include OEMs selling like-for-like items or other aftermarket competitors. A key point to determine is whether or not you’re a leader. If you’re leading the market, you can be a little more aggressive with pricing. You don’t want to follow other players because you’ll just create a circular price war. But if you’re following the market, you need to gather competitive data frequently and react quickly as other competitive players make changes.
Where the aftermarket data is coming from also matters—did you screen-scrape or mystery shop? Are the competitive prices or parts true aftermarket competition, or is it just your own items re-circling through another channel? For instance, many times we find that competitive pricing data for out-of-stock parts follows the OEM’s list price exactly. In this case, it’s not true aftermarket competition and therefore not an indication that those parts are competitive. It’s just your own items being re-sold through another channel.
Another aspect to keep in mind here is technical fit. Apart from pure data analysis, many companies will engage their engineering department to evaluate competitive products at either the product or competitor level to determine if there’s a quality difference, for better or worse. This then informs how you price against those players. Finally, it’s important to note that whenever you’re gathering data or analyzing your competitors, you should check local rules and regulations. The laws governing how you can collect and use competitive data differ in each region of the world, so be sure you know what’s allowed in the regions where you operate to avoid any regulatory issues.
Next week we’ll cover analytical strategies for measuring each product lifecycle stage, and how the net pricing strategy is key to segmenting your customers. Until then, if you’re looking to increase your margins and boost profits, check out our new Profit Discovery Program. Want to learn more about Carlisle & Company? Email [email protected] or visit Carlisle & Company’s website.