Strategic Pricing - International CEO Forum 2011

Driving improved profitability and earnings growth

STRATEGIC PRICING

International CEO Forum Presented by:
18th October 2011 Ron Wood, Director of Pricing Insight

CIPSA Conference 2010

Q: Who has negotiated down an account manager by
20-30% but would have paid full price if the sales
manager had defended their value?

© Pricing Insight 2011
2
‘Strategic Pricing’ - International CEO Forum

10 Key margin pressures
6. New business won at low margin /
1. Cost plus pricing culture
below cost

2. Undefined value proposition 7. Channel conflict

3. Inconsistent pricing 8. Price rise stalled

4. Margin squeeze in highly
9. Price overrides
competitive market

5. Belief that lowest price wins the 10. Management misalignment /
business agreement

Margin erosion
4

What procurement said in 2011

Question Group consensus

Do sales demonstrate No.
value?  “Sales do not understand our need state”
 “Sales proposals are often generic and waffle”
Do procurement No.
always want the  “Low ball prices make me sceptical and nervous”
lowest price?  “You cant trust a supplier that tries to win business below
cost”
 “Often higher prices give you better value – sales just cant
articulate that in the negotiation”
What could sales do  “Ask good questions”
better?  “Sales people need to listen more and talk less”
 ‘Understand that price is only one element of value”

Honeymoon phase or trusted partnership?

Death of a salesman?

8

9 steps to sales success.
Steps 3+4 need work

Things you may never hear….

I spoke with the
We left at least 10% customer and since we Our core pricing Sales marketing and
points on the table to did such a good job last strategy is to mark up finance are in total
win that last contract… year they will pays us an 30% on cost… agreement on this one…
extra 5% price rise…

Strategic pricing checklist

Question Response

1 What are our current pricing and revenue optimisation capabilities?

Do we have the right strategies policies procedures and resources to
2 maximise margins + minimise earnings risk?

3 Who within my organisation controls the setting of prices?

4 Are sales marketing and finance aligned to a consistent pricing strategy?

5 Is pricing treated as an annual exercise or a dynamic situation?

What techniques can we employ to generate immediate earnings growth
6 and proof of concept?

7 As the CEO how to do I measure my organisation’s pricing effectiveness?

Determine the potential Size of Prize
Define Net Revenues Evaluate Pricing Map Revenue
Dynamics Adjustments
• Identify / PILOT which • Discounts • Implement and track
areas will be the focus • List prices changes using new
of price and revenue • Rebates pricing plan
optimisation
• Trade terms

Net Revenues ( millions)
$ 50 $ 100 $ 200 $ 300 $ 400 $ 500
0.25% $0.13 $0.25 $0.50 $0.75 $1.00 $ 1.25
Margin Expansion Plan

0.50% $0.25 $0.50 $1.00 $1.50 $2.00 $ 2.50
0.75% $0.38 $0.75 $1.50 $2.25 $3.00 $ 3.75
1.00% $0.50 $1.00 $2.00 $3.00 $4.00 $ 5.00
1.25% $0.63 $1.25 $2.50 $3.75 $5.00 $ 6.25
1.50% $0.75 $1.50 $3.00 $4.50 $6.00 $ 7.50
Most Likely
1.75% $0.88 $1.75 $3.50 $5.25 $7.00 $ 8.75
2.00% $1.00 $2.00 $4.00 $6.00 $8.00 $10.00

If you are using Cost Plus to set prices, there is at least 2% margin (200 basis
points) potential improvement
12

Looking for earnings growth?

Pricing Strategy is the cheapest acquisition of
cash you will make

Pay Back Period

Private Equity firm will pay: 5 X earnings for buyout 5 years

ASX company will pay: 7-10 X earnings for M&A 7-10 years

Fortune 500 company will pay: 8-12 X earnings for M&A 8 -12 years

Pricing Strategy: 0.2-0.4 X earnings 3-5 months

13

General Electric - CEO focus on pricing

“We sweat the details. Our mornings begin
with a review of working capital or pricing.”

“We focused on Customer Value to support
our planned margin expansion of 100 basis
points.”

“Earnings from operations grew by 11.0% to
$20.6 Billion up from $18.6B LY.”

14

Today’s session
What

How
Why

Who

When
Pricing # 1 EBIT C-Level Now Value
Strategy Driver Based
Pricing

15

POWER OF PRICING

16

Pricing is your most powerful profit lever

2% =

 Pricing yields of 2% can generate substantial earnings growth
 Assumes an average gross margin of 25% and EBIT of 6%

17

Long tail optimisation and market repositioning
Price Volume Relationship - Actual Theoretical Rate Card - Planned
$60.00
$60.00
$58.00
$58.00 Price
$56.00
$54.00
$56.00 bandwidth
$54.00
$52.00
$52.00 architecture
$50.00 y = 58.564x-0.039
$50.00
$48.00
$48.00
$46.00
$46.00
$44.00 $44.00
$42.00 $42.00
$40.00 $40.00
$38.00 $38.00
$36.00 $36.00
$34.00 $34.00
$32.00 $32.00
$30.00 $30.00
$28.00 $28.00
$26.00 $26.00
$24.00 $24.00
$22.00 $22.00
$20.00 $20.00
1 10 100 1,000 10,000 100,000 1,000,000 10,000,000100,000,000 1 10 100 1,000 10,000 100,000 1,000,000 10,000,000
100,000,000

 $6,000,000 annual EBIT opportunity
 NPV = $15M over 3 years
18

Long tail SKU optimisation
Protect the Head Maximise the Middle Optimise the Tail
$ Margin Improvement Revenue
$12,000,000 $300,000
$250,000
$10,000,000
$200,000
$150,000
$8,000,000
$100,000
$6,000,000 $50,000
$-
$4,000,000
-$50,000
-$100,000
$2,000,000
-$150,000
$- -$200,000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55

Long Tail SKU optimisation - cumulative
$ Margin Improvement
$4,959,408
$3,912,889

$1,046,519

Top 80 Long tail Total

19

Price and volume are not always correlated

 These products command the highest industry price and highest market share
 Do you sell a product or service with a high relative price and market
dominance?
20

Economic 101
More and more revenue does not equal more profit

Demand Curve Price, Revenue, Volume & Gross
6 Margin
5 Price = $4.00 Revenue GM$
Quantity = 10
$45.00
4 $40.00 $40.00

$25.00 $25.00
Price

20
3 15 15

$- 0 0 $-
2
$6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $-

1
-25

0
0 5 10 15 20 25 30
Quantity -60

There is often no natural price elasticity In this example, revenue is maximised at
continuum $3.00 however profit is maximised at $4.00

21

PRICING MANAGEMENT

22

Decision inputs

The
The
Operations
Customer
Manager

The
The Sales
Marketing
Manager
Manager

The Finance
Manager Price The
Management

23

Current pricing capability - individual response
The distribution of 61 staff ratings across all three business divisions

100%
Distribution of staff ratings
90% BPO CCS TMS

80%

70%

60%

50%

40%

30%

20%

10%

0%
TMS
TMS

TMS
TMS

TMS

TMS
TMS

TMS
TMS

TMS

TMS
TMS

TMS
TMS
TMS

TMS

TMS
TMS

TMS
TMS

TMS

TMS

TMS
TMS
TMS
TMS
TMS
TMS

TMS
BPO
BPO

BPO

BPO

BPO
BPO

BPO

BPO

BPO
BPO
BPO
BPO
BPO
BPO

BPO
BPO

BPO
BPO

BPO
CCS
CCS

CCS

CCS
CCS
CCS
CCS

CCS

CCS

CCS

CCS

CCS

CCS

© Pricing Insight 2011 24
Confidential

Price management model

100% 80% 60% 40% 20%
Centralised Centralised Centralised Centralised Centralised

Receivership Power Elite Democracy 3rd World Jungle

25

PRICING STRATEGY

26

COST PLUS PRICING

WALL STREET

Why Cost Plus will cost you $$$
Cost Plus Mark-up Value Pricing Model
GM $ Sell Price Costs GM $ Sell Price Costs

$140 $130 $3,100,000 $140 $130 $130 $130 $4,500,000

$117 $4,000,000
$120 $111 $3,000,000 $120
$100 $100 $3,500,000
$2,900,000
$100 $90 $100 $90
$85 $85 $3,000,000
$2,800,000
$80 $80 $2,500,000
$2,700,000
$60 $60 $2,000,000
$2,600,000
$1,500,000
$40 $40
$2,500,000
$1,000,000
$20 $2,400,000 $20
$500,000
$3,000,000 $2,835,000 $2,550,000 $3,000,000 $3,800,000 $4,050,000
$- $2,300,000 $- $-
Year 1 Year 2 Year 3 Year 1 Year 2 Year 3

 Sell prices follow cost price reductions achieved  Price are set independent of costs and managed
by better procurement and scale sourcing according to customer value segments
 These two procurement options are not available  Price leadership strategy implemented + 5% volume
to competitors declines factored in

28

Value Pricing = 35% Improvement In Earnings (Year 3 vs. Year 1)
VP vs. Cost Plus Method = $1.5M and 59% differential

3 Year Comparison between Cost Plus and Value Pricing
GM $ Sell Price
$135 $4,500,000

$4,000,000
$130 $130 $130
$3,500,000
$125
$3,000,000
$120 $2,500,000

$115 $2,000,000

$1,500,000
$110 $111
$1,000,000
$105
$500,000
$3,000,000 $2,550,000 $4,050,000
$100 $-
Year 1 Year 3Cost Plus
Yea3 Cost Plus Year 3 Value price

29

VALUE PRICING

30

Pricing Strategy Evolution
Pricing
High

capability
score

Value
Value Based Pricing + 80%
Management

Strategic Mark to Market (Relative Benchmarking) + 70%
Profitability

Structured Match Competitors + 60%

Basic Cost Plus Pricing < 50%
Low

Low Engagement level High

 CEO and Board level sponsorship is required to evolve from Cost Plus Pricing to Value Based
Pricing
 It takes approximately 18 - 48 months to implement pricing and value optimisation

31

3 Ideas to Improve Profitability

Margin management

Strategy
Level of sponsorship

CEO Avoid Invest in
Focus Cost Plus Resources

32

About Ron Wood
Experience

 Ron Wood was the first FMCG Strategic Pricing manager appointed in Australia developing pricing
strategy for Arnotts Campbells Soup Company
 Managing a team of 6, Ron centralised all trade spend pricing strategy and management delivering $5M
EBIT improvement in 12 months. Supply chain costs were reduced via increased forecast accuracy which
lowered day’s inventory from 28 down to 15
 Ron has worked with leading business executives from Australian industry including: Peter Bush now CEO
of McDonalds Australia, Bill Wavish Chairman of Myer and ex.CFO of Woolworths, Paul Hitchcock and
Malcolm O’Keefe, CEO and COO respectively of Corporate Express Australia + the leading executives from
many blue chip FMCG and industrial companies within the ASX and Fortune 500. In 2005 Ron joined the
Graeme Hart managed Goodman Fielder group to develop trade spend and pricing strategies, in addition
to being involved in the re float of Goodman Fielder to the Australian Stock Exchange
 Ron Wood’s pricing and margin achievements have been replicated across industries, products and
services, each time generating upwards of 2-5% points of cash margin for the companies involved
 Pricing Insight work with a strictly limited number of clients each year to ensure that commercial
outcomes are realised and our clients become partners and advocates for our work. Our work has been
recommended internationally and employed by senior executives from Mercedes Benz through to Owen
Illinois Glass Company in the USA in addition to our clients as listed below

Corporate Roles Consulting Clients Ron Wood
Director of Pricing Insight
 Arnotts / Campbells Soup  Electrolux  Whirlpool
 David Jones  Cummins Engines  Huon Aquaculture Suite 136, Lifestyle Working Building
 NMHG Material Handling  Australian Air Express  Mercedes Benz 117 Old Pittwater Road
 Capral Aluminium  Hanson  Corporate Express Brookvale NSW 2100
 Carter Holt Harvey  CSR  Salmat D: +61 2 9091 0226
 Goodman Fielder  Big River Timbers  Trained over 700 executives M: +61 4 10 53 4099
 Honeywell in Pricing Masterclass E: ronwood@pricinginsight.com.au

33

Case Studies - Margin Gains
Tim Tam Timber Office Products

Y=Mx^2+bx+c Dynamic airline Optimise long tail of
R^2 =0.90 pricing model 5000 SKUs

$7.0M incremental
$9.0M realised over 2 $15.0M realised over 18
gross margin realised
years months
in 1 year

36

Case Studies - Margin Losses
Transport FMCG

A large national transport Marketer of global brand fails to
provider wins new account with optimise channel pricing relativities and
a price reduction vs. incumbent leverage trade partnerships
of 15%

Customer would have paid 5%
more than previous contract to
find effective solution

Misses out on $3.0M over 3 years Misses out on $4.0M per year

37

Strategic Pricing - International CEO Forum 2011

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