How do you turn a daunting weekly pricing chore into a huge profit gain?
This large regional food products distributor relies on its 450 sales reps to serve over thousands of upscale restaurant customers buying from its catalog of 30,000 food products. Because of the commodity nature of food prices, spot bids for each customer’s regular purchases must be re-priced weekly. An onerous chore, but especially for a business that had grown rapidly for over a decade, had a complex price matrix, and was beginning to buckle under the ever increasing weight of the pricing challenge.
For over two decades, category managers calculated suggested street price ‘brackets’ for their products by using standard markups over cost. But the overwhelming number of price points to be managed in this ever-growing price matrix, combined with normal market volatility, led inevitably to stale prices. In many cases the prices failed to capture the full market value of the products; in other cases, the product was overpriced and customers split their order volumes by simply cherry-picking the items most attractive to them — the ones usually least profitable to this distributor.
Stale Cost-Plus Prices Led To Bad Field Behaviors
Sales people frequently found themselves overriding the suggested price in an attempt to meet customer expectations and keep the orders whole. While well intentioned at the start, the effects of sales-determined pricing on every deal were even more problematic. Without any structure to their discounting practices, the resulting price points were widely scattered and inconsistent across products, categories, geographies and account types. Over time these price exceptions became entitlements in the minds of customers and sales people alike. Margin and revenue performance was similarly inconsistent and unpredictable, and this $1.6B revenue stream experienced margin declines in several major categories. The business leaders could clearly see the under performance but had no systemic way to remedy it.
Taking Subjectivity and Manual Labor Out Of the Process
When the managers stepped back from the situation for a moment, they realized there were two main issues to address if they were ever to see a dramatic improvement in the quality of their prices. First, they must remove the subjectivity that dominated their current price setting methods, whether it came from category managers, sales people, or someone else. And second, they needed an approach that could handle large-scale, weekly price updates in response to ever-changing market conditions — without the need for constant manual review and approval.
This company found exactly what it was looking for in MarginMax – a revolutionary technology with the science of pricing built right in. MarginMax revealed the most important price drivers in the business to form an objective basis for price determination. With its powerful predictive P&L model, MarginMax showed category managers and executives the revenue and margin outcomes for multiple pricing scenarios before they happened, and identified the optimal scenario for achieving the current business objectives. Each week, updated optimized prices were presented to sales in their familiar order-entry tools, minimizing disruption and training.
The Numbers: 10.1% Margin Lift + 40% Efficiency Gain
Eight weeks after introducing optimized prices into the pilot regions, this distributor saw an immediate margin dollar lift of 10.1% while holding order volume steady. Feedback from sales showed convincing evidence that sales people spent far less time haggling over prices each week and more time servicing their customers many other needs. Now that’s a recipe guaranteed to Make Your Numbers.