Summary
A privately held North American corporation manufactures and distributes high-quality recreational vehicle (RV) parts through three primary channels: direct online sales, distributor networks, and repair shops. Despite significant sales growth, the organization faced a persistent decline in gross margin. In response to the declining profitability, the corporation sought the expertise of Revenue Management Labs to conduct a comprehensive assessment of market pricing opportunities and provide strategic support in the execution of customer-facing initiatives. The overarching goal was to address the existing gaps, particularly by aligning pricing structures with production costs and ensuring a sustainable and profitable business trajectory.
Challenge
Several factors can contribute to a company experiencing declining gross margin despite sales growth. In the case of the RV parts manufacturer, the decline was narrowed to a combination of escalating discounts, stagnant pricing, product mix shift, and an increase in production costs. Other factors typically examined include market competition and overhead costs. Notably, the company also encountered challenges in implementing necessary price adjustments due to difficulties in effectively communicating and justifying these changes to internal stakeholders.
Solution
Revenue Management Labs identified two primary challenges faced by the organization. Distributors (service end retailers or e-retailers) were selling at significantly lower prices than the suppliers’ own online prices, leading to price arbitrage and channel conflict. Additionally, the aggressive pricing from distributors fueled the channel’s growth but negatively impacted both revenue and profitability. To address these issues, the pricing experts at Revenue Management Labs developed a new discount management strategy and identified opportunities to increase list prices on various SKUs. The list price and discount structure changes were integrated into a comprehensive pricing and promotion plan for the sales team. This plan, encompassing changes for sales reps, customers, and consumers, was crucial for transparency and success in the market. Revenue Management Labs also calculated the estimated impact on retail prices and customer margins, ensuring thorough review and discussion with the sales team prior to implementation. The execution phase involved equipping the sales team with essential tools, including a sell deck for customers to understand the market-based pricing adjustments. The sales team received training on handling customer objections, sell-in strategies, and hands-on support for challenging customers. Revenue Management Labs further provided an executive dashboard to monitor implemented price actions, reporting forecasted vs. actual results monthly.
