Friday, August 9, 2013

How to Assess Success in Re-pricing?

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Quick Summary:
  • Tracking the success of re-pricing actions is essential in order to make sure profits are maximized.
  • A rough ‘sales before/sales after’ approach is clearly inefficient and insufficient.
  • Using “success ratios” on a commodity or product line level is a simple yet elegant way to assess the re-pricing success.
  • Dealer, field and customer feedback can also help you assess the success of a re-pricing project.
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So here you are, several months after your highly anticipated re-pricing project – the one on which you spent countless hours and late nights trying to find the optimal price point for thousands of parts. You have segmented your parts based on competitiveness, raised prices where margins were low for less competitive parts and used competitive price analysis to re-price your more competitive parts. You are convinced that your team did a great job, but the Board wants evidence that the company’s resources were well spent. With all the external parameters influencing spare parts sales (general state of the economy, competition, change in units in operation, etc.), this is easier said than done.

In our project work experience, we find that most of the effort is focused on re-pricing; almost none on management by metrics. By not tracking success, companies are leaving value on the table.

Our clients find it hard to measure success in pricing because:
  • They usually simply compare the sum of parts sales before re-pricing to the sum of parts sales after re-pricing. Although it usually gives a rough idea if sales went up or down, the numbers are far too crude to show what really happened – because, essentially, you are comparing apples to oranges.
  • When they find that they can go to an individual part number level to track success, they are reluctant to invest the resources necessary to do so; it would take far too long to evaluate thousands of re-priced parts. Therefore, a more systematic method of measurement is required.
  • An unbiased evaluation of what happened is required. Success tracking is not about good news propaganda; some brutally honest questioning is required. Even if for individual parts or product lines there was a dip in sales, there is value in exploiting this learning to get it right with corrective action.
So, what do you do?

The first step is to define success:
  • For pricing purposes, success can be defined as a long-run, sustainable increase in profit.
  • In some cases this may actually mean selling fewer units at a higher price. In some cases this may mean selling more units at a lower price.
  • The classic example of success is a price increase without a negative impact on unit volumes.
  • Carlisle’s work shows that it is possible to improve margins through pricing and at the same time increase customer satisfaction. And all this can be done without significant drops in volume.
Consider the approach below:
  • Work with deep historical data. The seasonality of motor vehicle parts business means that you need at least two years of data for analysis (one prior and one after re-pricing). More than two years is ideal (if you can afford to wait).
  • Take inflation into account – a price increase is on a ‘real’ basis only if it covers the inflation rate and then some. Anything else is just keeping up with the economy.
  • Segment your analyses. That is, analyze very slow moving parts differently; analyze parts with very low or very high prices differently from the rest of your parts. And, of course, do not analyze competitive and less competitive parts together. They are not all the same animals, and they do not follow the same market rules.
  • Allocate your parts as in the table below – this relatively simple table can take you a long way (for our project work, this table is less simple and features more volume- and price-change buckets):

Ideally, you want to carry out this analysis product line by product line. Once this is done, take a step back and look at the results:

Quadrant 1: GOOD – For these parts, the re-pricing was basically successful: a change in price did not negatively affect the sales. Quadrant 2: BAD – Declining volume for these parts, which might be due to the price increase. Or was it something else? Quadrant 3: SURPRISING – The volume sold of these parts decreased even though their prices also decreased. Investigate why this happened.

Now compute a ‘success ratio’ (usually, Ratio = number of parts in Quadrant 1 / number of parts in Quadrant 2) to see the percentage of parts the program positively affected compared to the parts it negatively affected. If the percentage is higher than 1, chances are you did a good job. Combine this with the confirmation that the sales figures are higher for this entire subset of parts, and you now have solid evidence. The last step is to verify that your actual profit for this subset of parts actually went up.

Of course, the cutoffs for both price and volume changes will vary depending on your business. Increase granularity of the analysis by adding sub-categories (strong volume increase, etc.). In the end, the idea is still: how many parts generated more revenue vs. how many parts generated less revenue? Did it translate to an increase in profits?

Finally, it is worth mentioning that, beyond sales and profit numbers, the success of a re-pricing campaign can be measured through dealer, field and customer feedback. With this aspect in mind, our Carlisle surveys include a dimension of measuring the dealers’ pricing satisfaction.

Bottom Line: Assessing the success of a re-pricing operation is a task in itself. Overall numbers are not enough to explain what really happened. To compute useable “success ratios”, carry out the analysis on smaller subsets of comparable parts.

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