A leading North American aftermarket automotive manufacturer faced an increasingly competitive retail environment due to shifting consumer behavior. With an extensive portfolio of over 30,000 SKUs across a dozen categories, the company conducted sales through three channels: traditional (distributor, buying groups, those who sell to repair shops), secondary market (primarily retail stores with their own repair shops) and e-tailers (Amazon). Over the past decade, consumer trends had shifted sales away from purchasing domestic cars, where they were inherently stronger, toward foreign cars. Additionally, private labels had sprung up at major retailers who priced private label offerings at a significant discount to the existing branded products. As these changes swept through the market, the 200+ year old manufacturer found that their portfolio and pricing had not kept up with the changing competitive landscape.
The RML Approach
Perform Foundational Analysis
What are the greatest headwinds & tailwinds driving the organization’s performance and how do we leverage these insights? What opportunities and challenges need to be addressed?
Demand Curve & Fair Share Analysis
How do you estimate the size of the market at a granular level without market data? With a proxy market size in place, where are the greatest opportunities for volume growth?
Identify Product Segments
What groupings exist based on functionality, purchase occasion, consumer need state, age, competition, brand recognition and customer perception? How does each product segments characteristics drive pricing strategy?
Set Pricing Strategy
What is the right pricing and discount structure according to channel, product segments & SKU?
Execute, Monitor, Report, Adjust
How do we ensure we can implement changes successfully?
Although the company maintained a strong brand image and healthy distribution, sales continued to decline year over year. The pricing team practiced cost plus pricing which resulted in commodities dictating list prices and customer asks driving the discount strategy. The challenge was to develop an overarching consumer and customer focused price and discount strategy which would enable the company to grow top and bottom line in a sustainable manner.
1. Perform Foundational Analysis
When analyzing internal data, best practice is to run a Rate-Mix analysis to pinpoint the greatest headwinds and tailwinds facing the business. This analysis quickly verified what the team was claiming: volume was the key issue driving losses for the business (Figure 1).
Customer year over year volume declines showed that customers with their own private label offerings were contributing to the entire volume decline (112%) with some new volume in e-tailers compensating for these losses. Delisted SKUs at private label customers accounted for 76% of the decline. The remainder was tied to declining sales on the top 5 SKUs. The hypothesis was that, except for the top SKUs, retailers were active delisting branded SKUs where they had private label offerings. For top SKUs they provided both branded and private label offering to convert price-conscious consumers and ensure brand loyal customers were maintained.
To better understand the impact of retailer and distributor pricing strategy, margin pool analysis was carried out next. Margin pool maps visualize the components of retail price: cost of production, manufacturer margin, distributor margin and retailer margin (see Figure 2). As a result of the manufacturer employing cost-plus list price and retailers’ actively transitioning volume from branded to private label with inflated price increases, manufacturer margin pool had deteriorated. This view by customer highlighted which accounts were of particular concern and needed to be right sized.
2. Demand Curve & Fair Share
A common issue for the aftermarket industry is attaining granular market data. A demand curve model was produced by category and part using the inputs below:
- Number of vehicles in market by type (SUV, pickup, sedan, etc.), make, model and year
- Mapping how the mix changed over time to project impact of trends
- Assumptions based on industry experts on:
- Average replacement rate by year of vehicle
- Expected retirement age for cars (due to accidents or aging)
- Parts used per repair incident
- Identifying “vintage” or “classic” cars
This resulted in a bell-shaped industry demand curve
Based on this curve, market share analysis for the manufacturer was compiled, and fair share opportunities were highlighted by SKU (Figure 4).
The result was 5 distinct products groups (Figure 4). These groups were driven by statistically significant variations across several metrics (highlighted in yellow).
3. Identify Product Segments
To effectively segment the products, each of the 7000+ SKUs were catalogued with a variety of attributes and measures (listed below). This approach ensures a well-rounded segmentation that includes sales performance, financial performance, functional and behavioral attributes. In total, seven attributes and seventeen numerical inputs were used for the segmentation analysis.
Product segments emerged based on the cluster analysis as seen below (Figure 5). The bolded numbers were the most statistically significant variables in defining each segment and were used to explain what were the key characteristics of each segment.
4. Set Pricing Strategy
The relationship between pricing strategy and product life cycle as per below:
- Premium pricing in the introduction stage
- Market based pricing in the maturity stage
- Cost plus pricing in the decline stage. Key here was to take consistent price increases to maintain profitability & maximize value as competition wanes
Each of the product segments were assessed using a pricing scorecard. Each category and product group was assigned an action:
- Invest (decrease list price or increase discounts/trade)
- Hold (maintain price)
- Price (increase list price or increase invoice price by pulling back on discounts/trade)
Once each segment was assigned an action, the list price change by item was modelled. The goal for each price change was to achieve the maximum sustainable revenue and profit.
5. Execute, Monitor, Report, Adjust
Since there were a significant number of pricing actions, it was critical that the communication to the sales team and customers were easy to understand and comprehensive. RML compiled sell-in decks for key customers, trained the entire sales team on objection handling and developed tools to simulate the granular and aggregate impact of these changes from the perspective of the manufacturer, distributor, and retailer.
Volume and elasticity reporting dashboards were reviewed with customers monthly to ensure the price investments passed through as expected to the market and monitor forecast returns.
+ 15% Volume Increase
+ 21% Revenue Increase
+ 18% Profit Increase
After the first 6 months of the price implementation, Revenue Management Labs conducted a post-ROI analysis to assess the sales performance compared to the previous year. Seasonality and changes in distributions were stripped out to ensure apples to apples comparison.