Pricing and Mix Management
Pricing and mix management is a critical lever of value creation, but few companies feel they do it really well. We see money being left on the table in a discrete handful of areas, which guides our overall approach:
Price Leakage: unrecovered costs (e.g., short runs), uncaptured value add (e.g., support and service), and contracting disciplines (e.g., unearned rebates) all represent areas of typical price leakage. Putting in place the processes, guidelines, and information necessary to mitigate this leakage can be worth 100bp+ in margin improvement to an organization.
Price Discipline: unwarranted pricing variances (e.g., different pricing for same product or service to different customers) is another typical area where companies leave money on the table. Establishing stronger disciplines, guardrails, and incentives will serve to minimize the ‘tail’ and drive higher aggregate margins.
Price Differentiation: the bespoke nature of many companies’ product and service offerings necessitates a typical cost+ model. That is not the issue per se. The issue is when the ‘+’ is not tailored based on differences that a company has in price leverage across products, services or customers. Building and applying the ‘Courage Meter’ is a way to ensure you capture the full margin potential of your market leverage.
Price Strategy: the points above are largely about price setting and execution. But many companies still have a significant untapped opportunity in terms of their overall pricing strategy. Where should I be pricing for share vs. margin, and vice versa. Effectively how do we optimize where we are on the price-demand curve in a way that maximizes realized profitability.
We understand these issues and how to diagnose them quickly. On this basis we design and execute tailored programs that deliver near-in top and bottom line improvement while upgrading the pricing muscle of an organization. Learn more about our work in this area via the slides below.
Power Components Manufacturing Case Study
Company was losing $20M annually in price concessions as large customers had tremendous buying power and competitors were driving down price in a growing commoditized market.
Application of the 'courage meter' as a basis for identifying near-in re-pricing opportunities and informing ongoing price logic and margin targets by region, product, and customer.
Outcome and Impact:
From $20M in annual price concessions historically to a forecast price 'gain' of $5M in 2018 (+$25M).