A privately held North American corporation specializes in the manufacturing and supply of high-quality RV parts through three channels: direct sales online, distributors and repair shops. Despite significant sales growth, the organization was experiencing a steady decline in gross margin. The decline was driven by escalating discounts, lack of pricing and production cost increases. The lack of price adjustments was driven by an inability to “sell-in” price increases. To help close these gaps, Revenue Management Labs (RML) was engaged to assess market pricing opportunities and support in customer execution.
The RML Approach
Perform Foundational Analysis
What are the greatest headwinds & tailwinds driving the organization’s performance and how do we leverage these insights?
Identify Product Segments
Which products serve a similar market, customer, and financial need? How do the characteristics of each segment shape its unique price and discount strategy?
What is the consumer’s perception of each product’s inherent value? Where is there pricing leverage relative to competition?
Structure Discount Terms
& Optimize List Price
Establish granular price and promotion plans by channel, customer & SKU.
Execute, Monitor, Report, Adjust
How do we ensure we implement changes successfully?
RML determined that there were two main issues that the organization faced:
a) Distributors (service end retailers or e-retailers) were selling at significantly lower prices than the suppliers’ own online prices (price arbitrage and channel conflict)
b) The aggressive pricing from the distributors fueled the channel’s growth and drove negative mix on both revenue and profitability.
1. Perform Foundational Analysis
RML ran a variety of analyses to ensure the company, customer and consumer landscape were fully understood.
The top analyses and key objectives as they pertain to this project are listed below.
Price Volume Mix
One of the analyses listed above is the Price Volume Mix (sometimes called a sales bridge). This analysis was used to tease out the dollar impact of each action: price (rate or discount) and volume or mix (channel, customer, and item). This analysis uncovered the following insights (Figure 1):
Despite growing volume by $5.6M year over year, the company only realized $1.7M in total. Nearly 70% of the volume gains were eroded by increased discounts, unfavorable channel & product mix.
- -$1.5M in Discounts: due to competitive pressures, top products were discounted by an additional 6 to 15% at select distributors.
- -$1.7M Channel mix: volume shifted from the profitable online channel into heavily discounted distributor channel. This was driven by the top two customers undercutting online channel pricing during peak sales season.
- -$0.9M Product mix: consumer preferences continued to shift mix of sales from premium to value items.
2. Identify Product Segments
Convert qualitative attributes to quantitative: By using natural language processing and sentiment analysis, RML defined value-adding attributes—such as ‘quality’ or ‘ease of installation’—along with other positive and negative comments provided by online consumers and converted them into a sentiment index.
Cluster Analysis: Attributes and numerical data were used to perform cluster analysis (Figure 3). This approach ensures a well-rounded segmentation that includes sales performance, financial performance, functional and behavioral attributes. In total, ten attributes and eighteen numerical inputs were used for the segmentation analysis.
The result was 5 distinct products groups (Figure 4). These groups were driven by statistically significant variations across several metrics (highlighted in yellow).
3. Value Quantification
An in-depth value mapping session was undertaken with in-house experts. RML mapped top products from each product group against relevant competitors. Through the exercise of value mapping relative price and relative value of each offering, two groups emerged (Figure 5):
- Value-advantaged: products that deliver greater value relative to the next best alternative. Since consumers have a greater willingness to pay, these products have the ability to take price with minimal impact to volume.
- Value-disadvantaged: these products are priced at a premium relative to customer’s willingness to pay. As they do not deliver enough value relative to their price, they are underserving the market and have no pricing leverage. An appropriate response could be increased use of promotions or a price decrease.
4. Structure Discount Terms & Optimize List Price
Based on the product segmentation and value mapping activities, a new discount playbook was developed, based on customer and product (Figure 6).
Elasticity and value map outputs were used to determine opportunities for a list price increase (Figure 7). Price increases on the different SKUs were established through financial modelling on the desired retail price points, as well as the estimated distributor and retailer margin.
The list price and discount structure changes were layered onto each account and product offering to develop a comprehensive pricing and promotion plan for the sales team. This plan showed the changes that the sales rep, customer and consumer would all experience. RML also calculated the estimated impact on retail prices and customer margins to ensure that any significant changes were reviewed and discussed with the sales team beforehand. This step was critical to ensuring success when the changes were implemented in-market.
5. Execute, Monitor, Report, Adjust
Once the price list and discount changes were aligned and set up for execution, the sales team was equipped with a few important tools.
- Sell deck: Each customer received a sell deck to help them better understand why and how we implemented a market-based price increase/discount reduction. Sales team was provided with:
- One-pager on handling customer objections
- Sell-in training, including mock customer presentations and hands-on sell-in support for large scale and challenging customers.
RML developed an executive dashboard to monitor each of the price actions implemented in market. The forecasted vs. actual results were reported monthly so the sales and analytics team could highlight any significant variances. This helped the executive and execution team to identify when customers were not implementing the changes and ensure customer level volumes were performing in line with forecast.
+ 31% Revenue Increase
+ 34% Profit Increase
The impact of pricing initiatives was assessed six months post-implementation (compared to the same period in the previous year). Even after adjusting for seasonality, new points of distribution and new product introductions, revenue was up by 31% and profit by 34%.