Case Study – Be More Granular

Client Profile:

• $85 million MRO Industrial Distributor
• A wide variety of OEM, General Industrial, Contractor and Institutional customers
• Significant variety of products to support multiple customer industries
• Client had Pricing Manager largely dedicated to system maintenance

Background:

This distributor’s margin had been stable for years. However, overall margin benchmarked at about -1.5 points lower than similar Profit2 clients. Through our Benchmark Pricing analysis we came to the following conclusions:

• 90% of pricing was done by Customer Type/Product Group matrices to simplify system maintenance
• Customer specific pricing was underutilized and mainly used net prices
• Margin was highly compressed with just a 5 point difference between commodity and incidental sales margin
• Customers were primarily segmented by industry (15 industry groups)
• Customer purchasing power had little impact on pricing
• Prices on key items for top customers were sometimes too high, while incidental pricing for small customers left money on the table
• Sales team controlled customer type assignments; most customers received the lowest margin type
• Number of product segments for pricing was inadequate
• Product segmentation was based on supplier recommendations with a common list margin by supplier product group

Plan of Action:

The client’s pricing group had been working on product segmentation over the past year. However, most of their capacity was consumed with maintenance. Together we created a 45 day plan to do the following…

1. Create new customer pricing records to price the most competitive sales. Records were set up on a List Discount basis to minimize maintenance.
2. Segment Customers into 4 basic industry groups. Then further segment into 5 pricing levels as follows:

3. Let Sales Team review assignments with ability to make selective changes.
4. Modify Product Groups by creating subgroups based on item price sensitivity.
5. Where List Price wasn’t mandated by market, created new list pricing to vary margin by item price sensitivity.
6. Set up new Customer Type/Item pricing for the most commoditized items.
7. Develop new Customer Type/Product Subgroup matrices to increase margin differentiation.
8. Establish a quarterly plan to simplify system maintenance.

Results:

This work was completed in 45 days.  Over the next 9 months our client gained 1.9 points. During the second year they gained an additional ½ point.