Pricing concept for COMPANY Xs contra spend optimization

Consider List Price and factors affecting it

Considering PRICING with respect to a typical business cycle (above), the goal for COMPANY X
should be to forecast future price levels, effects of industry economics and the causes and effects
of business uncertainties.
Prices are easily influenced by a variety of factors but it might make more sense to primarily focus
on the correlation between the supply and demand of products/services that affect price. A model
could be designed to help make simple but reasonable assumptions by incorporating maximum
possible pricing variables that can be easily quantified and then using these variables to verify the
initial price estimates. For COMPANY X, the same would need to be designed separately for the
various BUs and the different regions as the variables that would affect each of these industries
would vary. It might even be relevant to go deeper to country level for the larger COMPANY X
markets especially in the APJ and AMS regions (US, India, China, etc.).
The first step should be to look at these factors that influence prices and that would invariably lead
us to take a closer look at how COMPANY X decides its List Price of various products. Based on
this we could estimate which of these factors are dominant and to what extent are they likely to
affect the price (List Price) of COMPANY X products. COMPANY X needs to specify price floors
for each of its PLs in the different regions, below which returns may not be attractive. If required,
these price floors could also be identified for specific countries as mentioned earlier. These price
floors can be used to build scenarios about changing price levels effected by the above mentioned
factors and therefore, changing GM% and the contra spends for each of the PLs/BUs.
Our current approach on the Contra Program is geared to provide visibility into how pricing works
in COMPANY X. Pricing decisions need to be made more transparent and there is a need to
develop insights into this, which would require an integrated database and tools. An opportunity
that comes up right away is to work towards a solution to combine the different data sources that
will help in compiling and integrating the huge amount of disjointed information at a more granular
level. How the various databases are integrated, extracting value out of these data and developing
tools to optimize the use of the same is something that -Analytics could take a lead in.
However, while our current approach may provide insights into product volumes, promotional &
trade spending and compliance issues, we are still overlooking important aspects and data on cost
of products and list prices. Although, addressing discount % and deal size would give us $ savings,
it may not encompass all of the factors that are actually affecting the current pricing
structure/process. Unless we take a look at how List Price is arrived at, we may not be able to get
to the source of the pricing issue. To simply this, List Price would change more frequently than the
pricing process (as in our current approach) and without having a correlation between the two,
our current approach is more or less isolated and may not be as dynamic in nature as would be
required to address the changes in List Price.
Focus on volume products
It would help COMPANY X to develop insights into profitability at a more granular level.
COMPANY X could conduct an exercise to understand the effect of a % change in the prices across
the different BUs/regions on the overall profitability. The hypothesis here is that there is no rule of
thumb and that profits will be affected disproportionately to the change in price. A comparison of
net prices across markets and optimizing profitable price levels would help manage pricing better.
To begin with, COMPANY X could look at the data which focuses on volumes and where products
are more commoditized. As a result, there is a greater chance of larges variations in prices of these
products. One of the reasons for this could also be high touch points in the pricing approval process,
which creates more disturbances in the pricing of similar products. This however, shifts the focus of
our current approach from Enterprise business to (the region could be specified at a later stage
following deeper evaluation). The aim is to reduce these price variations and ascertain its effect on
profitability, besides providing a more standardized approach to pricing. As compared to this
Enterprise business is likely to see smaller variations in prices due to non-consumer sales and the
fact that products are not commoditized.
Establish Core Pricing Processes across BUs
COMPANY X is a complex organisation that functions in silos (BUs) due to its various products and
different customer groups, which leads to duplicating important decision making processes around
pricing. Overcoming this and creating a consistency in the processes for the different BUs has the
potential to lead to:
Leveraging of best practices
Utilise talented workforce more effectively
Present a consistent image to customers
Improved compliance; internal checks and balances on pricing decisions
Achieve pricing competitiveness and differentiation
However, we should not necessarily attempt to try and establish one single pricing process across
all BUs. But it may be prudent to define a set of such standardised processes that are identified as
most important across the different BUs. These Core Pricing Processes will facilitate improved
decision making and establish best practices across the company, besides the benefits mentioned
earlier.
Centralized pricing organisation within COMPANY X
Currently there is no centralized pricing organisation within COMPANY X
All BUs are responsible for their respective pricing related decisions and processes
This might be to reduce the down-time and for quicker response to customer demands
The downside is that this creates varying pricing processes that leads to a larger range of
prices/discounts given for similar products that affects overall profitability
This also results in compliance issues as there is no standardised pricing process being
followed and there is no centralised supervision to checks and balances
The integration of pricing strategy and tactics across all BUs and regions cannot be ensured.
Opportunities within pricing are not identified.


Bhooshan Parikh; July 2010
Source: Profiting from Proliferation: Pricing in
a proliferating world, McKinsey Quarterly