Public List Price Optimisation for Sustainable Profits How Product and Pricing Managers Can Boost Profits in Omni-Channel and Wh

Public List Price Optimisation for Sustainable Profits How Product and Pricing Managers can boost profits in omni-channel and why the CEO should be aware Olivier Dallemagne Cindy Coulier Brochure / report title goes here | Section title goes here

Contents 2 Introduction 4 Challenges from global markets 5 The way forward on PLPO 7 Optimising product list prices 9 Optimising service list prices 11 International price adjustments 12 Channel price adjustments 13

2 Public List Price Optimisation for Sustainable Profits

An optimised public price list can boost profits by up to five percent. This potential increase in profit remains available to those who align their price setting with changes in market demand. There is currently disconnect between trends in demand and the charged items. While demand for services and special product features increases, low inflation rates are putting high pressure on traditional product prices. However, companies continue to increase product prices. This continued focus on product price is accelerating the demand for lower prices from resellers on grey markets and making the task of e-retailers easier. This white paper explores key pricing challenges and details a new systematic approach to tackle those challenges and continue to raise sales and profits.

3 Public List Price Optimisation for Sustainable Profits

Introduction

Public price lists are the bedrock of price setting. They inform customers about prices; good lists describe the most valued products and services attributes. An optimal price list can boost profits by up to five percent. Yet managers have never had as many doubts regarding the setting of their next public price list. The additional profit potential from this exercise will continue to be available for capture if new ambiguities on optimal price setting are resolved.

How do you combine the increased price New market dynamics are shaping the However, companies can adapt their transparency of the digital channel and playing field. Failing to anticipate these methodology and continue to benefit from the public price guidance for traditional market changes can lead to companies Public List Price Optimisation (PLPO) if they “brick and mortar” activities? How do you competing with themselves across borders, are able to align their price setting with handle the visible price gaps in the markets competing with resellers or e-retailers changes in market demand, clearly stating generated by new players like parallel who sell at dumping prices, and ultimately their product value and service attributes traders and internet discounters? How do an increase in customer price sensitivity, and harmonising their public list prices you charge for services that used to be lower customer value perception and in this new international and increasingly implicitly included in the brand premium? severe pressure on pricing. In addition, this transparent environment. Let’s talk about pitfalls, tips and tricks, and creates the risk of being perceived as unfair how analytics can help you to manage the or inconsistent in pricing, with a negative Fortunately, it is possible to resolve the new increased price transparency and prepare impact on sales volumes, which can further market ambiguities through advanced price your next public price list. impact overall profits. analytics, allowing companies to continue optimising product pricing and capture the Despite these disruptions shaping the associated untapped profit potential. market, companies’ list prices are still set according to traditional methodologies. This white paper will explore the key Companies in manufacturing traditionally challenges and a new systematic approach apply a markup on product costs, typically that can be implemented by companies on a country level for “brick & mortar” in order to capture this untapped profit distributors, which in turn pass the list to potential. their own customers or re-shuffle them with their own grid of markups.

4 Public List Price Optimisation for Sustainable Profits

Challenges from global markets Implication for Public List Prices PublicList listprices prices are should too be distant a reliable from yardstick net forprices sales and customers. need to becomeHowever, this yardstick is no longer reliable as recent market developments are creating disconnect plausible yardsticks for sales to guide the customer in making between the public list price and the observed net price. choices

Year 1 Year 2 +3% increase Year 3 +4% increase Year 4 +2,5% increase

List Price Discount NET List Price Discount NET List Price Discount NET List Price Discount NET

List Price Price Price Price Price List Price List Price . . List Price ...... Price real Price real Price real

Products Products Products Products

Illustration: List Prices losing relevance as a trusted yardstick for sales

When senior managers are asked what the Some of the key market aspects that challenge the traditional process for setting list prices are:

main© 2016 challenges Deloitte Belgium they are facing in setting Public List Price Optimization for sustainable profits 1 their next prices, it is often the increasing Increasing globalisation with •• Increasing price transparency in challenge of establishing a list price that more free trade and cross border omni-channel markets: Although the provides reliable guidance on their offering movements: With the emergence of internet still doesn’t offer perfect price across all countries and channels. digital trade, boundaries fade. This shift transparency, customers increasingly goes hand in hand with eased regulation use multiple channels (mobile, online, The public price list is in many cases no on cross-border trade. Added to this, telephone, etc.) to research products longer a trusted yardstick for sales and customers more frequently organise their and attributes, compare prices and customers as several aspects of the procurement on a global or regional level make their purchases. This primarily markets are insufficiently reflected in the changes the playing field for multinational impacts the B2C and B2B2C markets, but list price to reflect reality. The traditional corporations increasingly also B2B. The perception process for setting list prices has become exists, often wrongly, that better •• Decreasing prices of products versus severely inadequate in recent years. deals can be found online and it is in increasing prices in services: companies’ best interests to take optimal There has been negative inflation on advantage of the opportunities offered the product price index over the past via digital sales. few years versus positive inflation on the service price index, both within B2B and B2C1.

5 Public List Price Optimisation for Sustainable Profits

In over 70 recent list price projects, As few as 15% of companies add occasional The observed gap between the traditional we observed similar limitations in the Value Added Services (VAS) to their offers public price list and market reality creates price setting methodologies. This is also and it is rare to see players who use VAS as ambiguities about the value perception of confirmed in a recent review on a sample a true means to differentiate and capture a company’s offerings. Yet the majority of of B2B2C and B2B public list prices. strategic advantages in comparison to companies observed still focus mainly on Companies in manufacturing mainly their competition. The potential on service standard product pricing on a country by continue to apply markups and price pricing is huge and if done correctly, this country level. increases on product prices at national can really help to capture the untapped level with limited coordination between profit potential. Less than 10% truly Companies will need to increase their countries and channels. integrate their product prices across competency level on service pricing, Current usage of Publicchannels List and onlyPrices 15% manage to optimise international harmonisation and channel product prices internationally. management if they want to continue to Product pricing at national level is still thesuccessfully main capture focus, profit opportunities. with few service pricing or international & channel price harmonization

• How do you set Public List Prices?

Current characteristic of Public List Price characteristic Public List Price that can be optimised

Prices expressed in terms of No Yes product’s total cost of ownership

Public List Price includes services No Yes

Geographical scope of Public List National International Prices

Price differentiated per Sales No Yes Channel

Possibility to customise products No Yes

Price includes an ‘environment No surcharge’

0% 20% 40% 60% 80% 100% How do companies set their Public List Prices? Insights from an analysis of major B2BC firms (n=15) in materials & chemicals: Illustration:• 64% of Deloitte sampled Analysis companies of prominent express public their list prices PLPs in in B2B2C function of their product’s total cost of ownership • Only a moderate share of firms offer services relating to their products • Price differentiation per Sales Channel remain low. 86% of List Prices are valid across-channel. • Firms still lag behind in terms of customization possibilities, with only a few companies allowing willing-to-pay customers to order tailor-made products

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The way forward on PLPO

While list prices today are usually set at product and country level, other dimensions will be reviewed throughout this paper: service list pricing, cross-border international price management and channel price management, including the specifics of omni‑channel strategies.

Helping an organisation to set a new price Once the price structure is set, the sales that hundreds or thousands of products list is a multi-step process that begins with and marketing teams will select an anchor can have their price tag set relative to a joint effort from sales and marketers to product that best represents each product the anchor products. Attributes are an design the new product public list price price group and set a price that optimises important cornerstone for successful price structure according to price sensitivity margin and volume levels for a reference differentiation among countries, channels categories. A good structure guides country. An international perspective will and competitors. Service is an increasingly customers smoothly across product already have been taken into account. The important attribute and optimising service groups and various service levels in an next step is to set a price for each visible list prices is a key next step. Finally, product omni-channel and international context. product attribute from the price list so and service prices are adapted by country and channel.

Four-step approach

• Group products by price sensitivity • Use anchor product pricing 1 Optimising product list prices 1 • Use adjacent product pricing • Attribute volume simulations

• Segment customers’ priorities 2 Optimising service list prices • Identify Value Added Services (VAS) • Define pricing schemes

• Track the markets at risk International price adjustments • Differentiate pricing across trade partners 3 • Adapt pricing to pull end-customers

• Identify products by channel • Adapt price strategy by channel Channel price adjustments 4 • or re-enforce off-line value and consistent base offer pricing across channels

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8 Public List Price Optimisation for Sustainable Profits

Optimising product list prices

In this new world, value pricing is applied and new sensible price attributes and categories are created to adapt to changing customer demand, making full use of anchor products, adjacent products and attribute volume simulations.

Setting product list prices in a smart way Attributes that matter When going online, different public list can help combat price pressure. In addition Four recent criteria are driving the need prices may be published simultaneously, to the techniques described above, for additional price differentiation and new as internet retailers have different price new developments allow us to go even categories to be added for establishing policies, some focusing on discounting further in PLPO. public list price according to Deloitte while others play more on convenience. research: Later in this paper we explain how to deal Grouping products by price sensitivity with these differences in more detail. In order to establish a good understanding 1. Purchasing place: internet or in-store of the flexibility in price setting across 2. Value of the product in a solution price Offering a complete end-to-end solution the full offer, products will need to be 3. Environmental friendliness can decrease the price sensitivity on the categorised according to the impact they 4. Level of customisation individual product price. A manufacturer have on the price perception in the market. of gas regulators was facing important A climate-control device producer recently Each of these aspects can drive important pressure from China on fittings and experienced the lost profit opportunities price differences and give the opportunity security accessories. After having packaged from sub-optimal list pricing: Ventilation to differentiate from the competition. all the materials needed for successful customers were more price-sensitive when installation, thereby offering convenience purchasing commodity pipes than specialty to plumbers, the key distributors decided products. By adjusting the price structure to offer only the complete solutions at to reflect the differences between higher prices commodity and specialty products the procedure achieved a net sales increase Positioning more environmentally friendly of 1.5%. products may be a great opportunity or threat to the traditional offer. A few years ago, major cement players decided to reposition the most commonly used cement in the key North American market. The new price included a pollution surcharge for higher CO2 emissions and “Algorithmic unified price the less polluting limestone cement, with optimisation remains an cheaper production costs, was priced at the level of the most commonly used opportunity for CIOs as cement. This turned out to be a great they prepare for digital success for overall profitability. business.“

Cfr. Industry analyst Robert Hetu of Gartner Inc.

9 Public List Price Optimisation for Sustainable Profits

Last but not least, developments in Anchor product pricing additive manufacturing could dramatically Anchor products are those products that increase the share of customised products can work as a reference point for a large and solutions. Fortunately, product number of other products, often containing market analytics allow a manufacturer similar characteristics or attributes that to accurately identify how customers help to determine the price rationale. will value certain products or product The prices are initially set for the anchor attributes and their likely impact on sales. products using various methods of value assessment, ranging from direct and indirect questioning to expert estimates or even conjoint analysis. In a second step, the relative value of the other products is assessed.

Adjacent product pricing The price sensitivity of adjacent products is often lower than that of core products. Think about renovating your bathroom or your kitchen: you will scrutinise the price of your key elements, such as the shower or the sink, but you have no clue how much “Mass customisation and the piping costs to get everything installed. personalisation of goods However, increasing the pricing on adjacent products in the offer can make a big becomes a reality with difference in overall profitability. 3D printed toys, shoes, Measuring the impact of certain cosmetics and even food attributes on volumes products by 2020.” Based on the utility points obtained for each of the attributes for a product, Deloitte University Press on Additative willingness-to-pay can be calculated and Manufacturing2 estimates of volume impact when adding or removing certain attributes can be analysed. Advanced analytics allow us to model these simulations more fully than ever before and determine your optimal product attribute mix before going to market.

10 Public List Price Optimisation for Sustainable Profits

Optimising service list prices

Manufacturers are increasingly challenged on product price premiums. Products are often seen as equivalent and service levels become an important means of price differentiation.

While it is already a challenge for most understood the value of mixing orders for float glass is produced in continuous flows companies to go beyond mere product small and medium-sized manufacturers. of the same products and are cheaper to pricing and add services to their offering, Fine mixing means that several types ship by full vehicle. The solution was to manufacturing companies need to go of glass, including speciality glass, can differentiate the product price between a beyond the traditional ancillary services like be combined on a single frame on the truck load of the same products and mixed small order surcharge or express delivery if same delivery vehicle. The manufacturer product frames. they want to differentiate. measured a high willingness-to-pay due to the underlying rationale that smaller glass The products and services were further Technology breakthroughs in supply chain producers cannot stock glass and need differentiated by country, similar to managementApplication allow for solutionsExample that truly just-in-time deliveries for the products applying different delivery fees when create value added for industrial clients. they need. For these producers, combining crossing the Alps to deliver in Italy versus Recently,Additional a prominent priceglass manufacturer differentiation different types variables involves an extra allow cost, as to shippingcapture from Belgium the to full the Netherlands. profit potential beyond the typical list price per standard product or per country

Illustration – Glass Products Add new product categories 1 with lower price 3 2 sensitivities e.g. Special sizes Mixed Product with non-linear coefficients Classical Glass Products Frame (customers won’t do the math)

Float 2 mm €1.94 €2.19 2 Add valuable service Float 4 mm €2.88 €3.23 categories for a standard

Float product e.g. “Mixed Product Anti-reflecting 2 mm €4.06 €4.49 Frames” to fit available space

Laminated 2.2.1 €8.00 €8.72 3 Harmonize the tariff for several countries to Laminated 3.3.2 €13.38 €13.94 mitigate the risk of cross- Current List Prices List Current (majority of cases) of (majority Sound border movements & Laminated Control generalize best practices

Float 3 mm €3.10 1 4 Give choice to select a

Float Float 10 mm €10.67 preferred channel & harmonize product & price policy 4 Glass Store E-shop Resellers

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International price adjustments

The public list price cannot be addressed in a vacuum, sales region by sales region. Instead, it should be developed in a way that optimises total sales at international level.

Increasingly, customers adopt centralised The market share of ‘grey markets’, or You can minimise arbitrage and optimise procurement to ensure they get the legal parallel imports, is already close to sales prices across countries by best deal on the international market. 20% and still increasing. Parallel imports anticipating and predicting parallel trade Uncoordinated price levels across borders significantly reduced manufacturing prices, and anchoring at the right level. This is can lead to parallel trade, either directly by 12 to 19 percent3. generally referred to as international price via their own distribution channels or harmonisation. indirectly via resellers. Illegal parallel imports are mostly due to price volatility, the presence of supply Harmonising prices does not mean setting Without international coordination of bottlenecks and geographic concentration. a fixed price across all countries, but rather list prices, the risk is that a number of The industries most impacted are setting upper and lower limits, paying distributors can buy in a low price country therefore Automobile, Materials/Metallurgy, attention to price levels across countries, and resell in a higher price country at a Consumer electronics/ICT, Healthcare, but allowing sufficient wiggle room to lower price than the official trade channels Aerospace/Military and Environment4. still optimally benefit from local market operating under the local trade terms and opportunities. conditions. Consequently, the local trade How do you handle the visible price gaps in partners start doubting the fairness of the the markets generated by new players like price conditions and want to re-negotiate parallel traders or internet discounters? conditions or resign the contract.

Illustration: Product List Price & Distributor Prices of sanitary products

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Channel price adjustments

As online becomes an increasingly important sales channel, price transparency increases. Price pressure can be reduced by either ensuring cross-channel consistency or differentiating.

Digital retailing is quickly morphing into their customers to look at previous hires, something so different that it requires check safety information and consult the a new name: omni-channel retailing. inventory to reserve items online. This The name reflects the fact that retailers allowed the company to have a more interact with customers through countless complete view on customers’ purchasing channels—websites, stores, direct mail patterns, increase retention and achieve and catalogues, call centres, social more cross- and upselling. media, mobile devices, gaming consoles, televisions and more. When using online as an extension of the offline channel, customers should From Deloitte’s ‘The Connected Consumer’ never feel that the price they paid was study, we know that 86% of consumers not fair. This might be challenging when go online to research, check inventories, resellers discount on the list price, creating search for discounts or buy. We also know significant distortions to the price guidance that if online is done properly, 95% of set in the market via recommended retail online sales are incremental to offline sales; prices. In this case, different tactics can be so embracing omni-channel offers a world advisable. of opportunity. Differentiate strongly to play online Two possible tactics have been identified The online world operates in a different way that can support the successful adjusting from offline, with more flexible discount of list prices to this new omni-channel strategies and new business models. environment: Cross-subsidising products, add-supported business models, freemium or exchanging Use online to reinforce offline value gifts for ‘likes’ and ‘sharing’ are just some of of products and services by remaining the options that are used online. consistent in list prices This also offers the opportunity to apply a Online can be used to boost awareness, different business model online to offline. ensuring that the brand is at the top of In addition, the offer itself can also be their minds when customers Google strongly differentiated. This way, online relevant products. With similar prices is not in direct competition to offline and online and offline, customers who are retailers can make full use of the different seeking advice and services are then techniques applied online, such as more directed towards the offline channel. behavioural pricing and more flexible discounts, to capture the full omni-channel Online can offer added value, even in a potential. B2B environment. An equipment rental company successfully implemented a centralised dashboard onine enabling

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Contact

Olivier Dallemagne is a Director in the Brussels office of Monitor Deloitte [email protected] +32 493 900 481

He has over 10 years of management consulting experience. His consulting activities focus on the design and implementation of “hands on” pricing and commercial strategies. Prior to consulting, Olivier spent 13 years in various marketing and sales management positions within Alcatel-Lucent, a Fortune 500 Company, and Tarkett a medium-sized champion in flooring.

Olivier has been initiating and carrying out many projects in Belgium, Europe, North America, Africa and Asia, in various B2B & B2B2C industries. He studied commercial sciences at the University of Louvain (UCL), the University of British Columbia (UBC, Canada), and the KU Leuven where he received his master’s degree.

Cindy Coulier is a Manager in the Brussels office of Monitor Deloitte [email protected]

She has 7 years of consulting experience and prior to Monitor Deloitte, she worked in pricing at Thomas Cook Belgium.

She has a wide range of project experience within the field of pricing and marketing strategy. Some examples include projects concerning new product introductions, pricing strategy definition and price optimisation, price governance, price modelling and analytics, value selling and key account planning, business and marketing plan creation and innovation and growth strategies.

She combines this with a strong track record in project management and change management, demonstrated on multiple strategy transformation projects. She studied Applied Economics at the KULeuven and is a certified ScrumMaster®.

Marc Abels is a Partner in the Brussels office of Monitor Deloitte [email protected] + 32 2 749 57 80

Marc is a Partner with almost 15 years of experience in sales & marketing with deep expertise in key account management, sales strategy, value & solution selling and pricing. He has deep pricing experience and managed several projects which all resulted in a measured bottom line impact. During these projects, he combined market insight and strategic skills to formulate and implement an optimal pricing model and processes.

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References 1 Measured according to the percentage change in consumer and business prices from the same period of the previous year, as measured by the Harmonised Index of Consumer Prices (HICP): goods vs. services and the PPI (Producer Price Index) for B2B services and goods – Based on data from Bureau of Labour statistics, Eurostat, ECB, The Economist, The Wall Street Journal 2 http://government-2020.dupress.com/driver/additive-manufacturing/ 3 Source: Parallel Imports and the Pricing of Pharmaceutical Products: Evidence from the European Union – M. Ganslandt and K. Maskus 4 Source: Trade in commodities, obstacles to trade and illegal trade – Policy department European Parliament

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