Feb 22 2017
This is a guest post by Scott Sanders, Client Partner at Revenue Architects. Scott brings 20 years of experience in consulting on sales management, marketing, and pricing strategy for Fortune 500 and private-equity backed consumer packaged goods companies. We’re also very excited to have Scott join us as a guest expert in our upcoming webinar: The Art of Negotiating Price With Your Buyer, where he’ll talk about pricing in more detail.
Of the four Ps of marketing, price has the most power to transform a company’s revenue and profit. The best way to kickstart a pricing discussion is to visually display price analytics.
Ultimately, these visual tools support portfolio and channel strategy development. Importantly, they help take emotion out of pricing decisions and focus strategic discussions on the heart of the matter.
Among others, these are three powerful tools to visualize prices:
- Price Waterfall
- Discount Curve
Each tool demonstrates a range of insights that can drive strategic thinking.
1. Price Waterfall
The price waterfall shows us where we might have problems with profit leakage. Though the chart is simple, it can be shockingly difficult to calculate some of the costs, especially trade costs, and translate them to costs for an average unit.
Example of an interpretation: Above, much of the manufacturer’s profit is eaten up by discounts, shown as trade spending, which is used here largely to allow the retailer to discount from MSRP (manufacturer’s suggested retail price) to its ASP (average selling price).
The full amount of trade spending isn’t reflected in that discount amount, and we might suggest reducing the amount of trade spending or re-negotiating with the retailer to reflect more of the discount in the price it charges on-shelf.
Candlesticks help us visualize the spread between the different types of prices seen in retail outlets — spanning from MSRP to the promoted price.
Example of an interpretation: You might imagine that the manufacturer wants to move its average price at its Mass channel customer closer to $3.50 but they refuse to do so.
Looking at the candlesticks, we might see some great reasons why: Their Grocery channel competitors are regularly undercutting this Mass retailer, selling as low as $2.39 on promotion and $2.75 on average. Why would the Mass channel customer want to be undercut even more? You could understand their point of view.
We can also see that there is poor price discipline. This company has a suggested price that it rarely, if ever, earns from its consumers. This will lead to high rates of trade spending that might not be necessary.
3. Discount curve
How much do consumers pay on an equivalized basis? Typically, we would look at price per pound, ounce, gallon, dozen, or some other volume measure, for all the items across a portfolio.
We ideally see that consumers receive a consistent value across sizes in the portfolio, with a discount as the volume in each package increases. We would want to see a smooth (or, at least, smooth-ish) line sloping from the high index to the low index.
Example of an interpretation: We can view this two ways. One, the Large package is too expensive on a per-ounce basis, and it should cost less. Or, two, Small, Medium, and Club size packages should be priced to reflect the value that consumers see in the Family Size package.
There is no one right answer, but the goal is to remove kinks in the discount curve. An optimal curve would be relatively smooth, without upward or downward kinks.
4. What else?
Visualizing prices is an important step as part of strategy work. But in most companies, prices sit on a list for price quotes and internal reference. It’s hard to get visibility into what’s happening in the real world.
Freeing pricing information from that piece of paper transforms it into living analysis that drives strategic decisions.
This article was originally posted on Scott Sanders’ blog, Shelf Talk.
If you’d like to hear more on pricing from Scott, join us for our upcoming webinar on Thursday, March 2nd, at 1:30pm ET. Grab your free spot today: The Art of Negotiating Price With Your Buyer.