Today we’re wrapping up our conversation about how price tactics can help OEMs overcome the market challenges of a post-pandemic world by strategically boosting margins and revenue. If you’re just joining us, be sure to catch up on what we’ve already covered in this series, as well as our Back to Basics series:
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Beyond the Basics: Price Tactics
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Back to Basics
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The Fundamentals of Price Optimization
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The Fundamentals of Inventory Optimization
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The Fundamentals of Retail Inventory Management (RIM)
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Now let’s dive back in where we left off from Part One, talking about the net pricing level of the waterfall model.
Promotions: What to consider
Campaigns typically represent short-term price offers for a limited part of the assortment. Promotions or campaigns can be a powerful tool, especially when combined with KPIs such as inventory excess stock, for example, to help OEMs reuse unwanted stock. Nevertheless, campaigns are often used to generate short term sales demand, which in many cases only leads to replacement of standard sales with sales at reduced margins. This is why it’s quite important to track the effectiveness of a promotion with analytics so you can understand whether a campaign resulted in an increase of sales, revenue, and profit over a substantial time period—at least 12 months.
When executed well, campaigns can contribute to your business’s bottom line and overall success. But many companies simply run the same promotions at the same time each year, shifting volume and encouraging customers to stock up at a certain date with a lower price. It becomes expected. The result is an ineffective campaign that hasn’t grown sales and actually reduces profitability.
The final level of the price waterfall is calculating the pocket price level, sometimes known as the net-net price. This includes taking off-invoice adjustments into account, which means any additional net price reduction that’s not listed on the invoice—quarterly or yearly rebates, bonuses, services, training, etc. These adjustments are typically linked to sales or revenue targets either for specific product groups or for the full assortment.
Integrating promotional variety
In addition to running sell-in promotions, where you’re selling dealers or channel partners inventory to stock up, we also recommend running sell-out promotions, where you encourage those partners to push inventory out. You may even want to pay dealers a rebate based on the number of items they sell to end customers through the promotion, which can be an effective way to grow your sales. For global companies, another aspect to consider is coordinating promotions across regions—particularly one such as the Schengen area in Europe. You should plan promotions centrally and execute with regional considerations, putting any necessary guardrails in place to ensure you don’t create a gray market opportunity.
Getting ahead of gray market arbitrage
Price harmonization is a hot topic in regions where price differences, exchange rates, and open borders may cause gray market imports and generate a kind of arbitrage. A price-driven gray market is created when genuine goods that are originally sold in one region or channel are then re-sold in another region or channel at a higher price, eroding the OEM’s margin. For example, someone could purchase an item on promotion in the Netherlands at a cheaper price, take it to Germany and sell it at the normal price, making a profit. These flows occur when the price difference between various regions or channels is greater than the cost of transportation and duties. All global companies deal with some level of gray market activity and it can lead to millions in invisible lost revenue. The more your sales grow globally, the greater your risk.
Manufacturers can combat this a number of ways. One option is to let each market control its own list price. It’s important for each market to input their own competitive data and local product knowledge into the pricing strategy. You want to centrally manage price and give each region control to vary, but also put limits in place for regional prices so that the difference isn’t greater than the cost of transportation and duties.
Other strategies vary by region, including things like publishing list prices to eliminate the opportunity for gray market competition. Some companies, especially in the US, use a minimum advertised price. The first step of the process is to model price differences across regions and the cost of transport, and try to understand how big your market issue might be. From there, you can decide how to address it.
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.