Managing Pricing Variations in a Transparent Environment
By the Riverhead Consulting Group
Email: info@riverhead-group.co.uk to arrange for a no commitment discussion

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The transparency of manufacturers’ prices across borders has never been greater than in recent years, exposing variations from one market to another.  Manufacturers are facing increasing pressure on margins as the control of prices passes to the customer who has access to both information and supply from a wide array of sources.  Added to a steeply rising cost to serve and low growth across markets this situation presents many suppliers with significant and complex challenges.

Anti competitive legislation, particularly in the EU, places specific restraint on manufacturers, restricting their trade practices within a very clearly defined set of rules that must be applied with equal measure to all customers right across the ‘common market’.  Consolidation among retailers and trading alliances also adds to the manufacturers’ challenges as the inevitable demand for ‘lowest prices everywhere’ rings out from central buying offices.  Integrated purchasing and customers pursuing all possible supply chain efficiencies adds further to the supplier’s margin pressures.

The downward pressure on prices is not solely customer led.  The value conscious consumer with increasing easy access to pricing information and a will and ability to ‘shop around’ is ensuring that retailers keep their prices sharp or lose out to a competitor.  In many sectors the ‘standardisation’ of goods on efficiency grounds across many markets has worked against the supplier.  The consumer can buy a product at the lowest price knowing it will be identical no matter where it is purchased.

The transfer of goods from a low price market to a high priced one impacts on the business model for both markets.  This inevitably leads to tensions in the trading relationships and undermines the opportunities to pursue real growth.  Customers drive down local net prices and deliver less in return to the supplier thereby adding even further pressure on profitability.  To take on the challenges leading companies are following a 3-phased approach.

The first and initially most difficult phase is ‘knowledge acquisition’. Determining for each key customer and key product in each market the actual net price to the customer.  Terms and conditions and cost to serve vary so much that it can appear almost impossible to unravel.  Putting in place a system to analyse and model many different pricing & profit scenarios is a prerequisite to beginning the mission of suppliers re-establishing management of their pricing strategy.  Implicit with this is ensuring that the system is compatible with existing systems across the enterprise and can collect and exchange information on a single platform.

The second phase is ‘strategy evaluation’.  The price modeling system provides the basis for determining the optimum base prices for each market.  The risk factors associated with cross border trading can be determined and a ‘defensible’ pricing and discount structure implemented.  The discount structure is assembled from several elements, each applied uniformly in every customer and market.  The elements are:

§         Base Business Drivers – Optimised assortment and layout.

§         Incremental Business Drivers – Visibility & display.

§         Promotion – Consumer pricing and co-op advertising.

§         Efficiencies – Supply chain and financial.

A range of strategies can be formulated and tested for different markets and sectors.  An optimum solution can then be determined for each scenario.

Having defined a defensible structure and determined strategies, the third phase is ‘implementation’.  All the information and knowledge collected in the 2 previous phases is harnessed into a consistent customer proposition.  It is in this phase that a suppliers capabilities and effectiveness of managing their account base is crucial to success.  Key Account Manager skills, specifically negotiation and developing strong customer relationships are at a premium as is the ability to leverage the knowledge base.  Decision support tools are vital to support the process, modeling the impact of price, discount, investment, logistics and volume changes on account profitability.  Customer’s convergence towards the new structure may take several stages depending on the start point.

The process outlined above is not a linear end-to-end one.  The changes implemented in phase 3 are fed back into the data collection process and remodeled with the latest data.  The outputs are re-analysed and the sensitivity of each of the elements assessed.  The process becomes a continuous loop, consistently monitoring the status of accounts and markets to avoid drift away from the structure and providing the basis for ongoing management.

Any supplier expecting the process to be a quick fix is failing to understand the complexity and the scale of the challenge.  Trading Terms affect every facet of the trading relationship; many customers will be reluctant to accept change suspecting a hidden supplier agenda and many suppliers will shy away from addressing the challenge fearing adverse trade reaction and the possible negative impact on relationships and business.  However, if the process is managed with the objective of win-win for both, the eventual outcome can be both mutually beneficial and strengthen the trading relationship.

Navigating a way through the minefield that is Trading Terms is a time consuming, confusing and complex process.  Utilising the expertise of external advisors can shorten the process, free up valuable resource and provide a pragmatic perspective to trading realities that may have been ignored or accepted as the norm for so many years their original intention has been lost in the mists of an account file.  External advisors can also contribute to the eventual solution by drawing upon scenarios and options from experiences that have been proven to be successful.

Riverhead Consulting Group would be happy to discuss this issue further in the strictest of confidence with suppliers or retailers who are seeking to improve their management of prices in a transparent environment.

Email: info@riverhead-group.co.uk to arrange for a no commitment discussion

Date article published: 09/05/2003