Case Study 3 – Setting Background Pricing
Case Study 3 – Setting Background Pricing
Situation
- In common with many wholesale operations, products were grouped together for the purpose of applying customer discounts against the published Trade Prices. This resulted in 2500 possible product discount groups. Trade prices are openly published and Customers expect to receive a discount by product grouping. Each discount group has a different discount expectation and profit margin opportunity.
- A discount setting tool was developed to guide account owners to set a realistic discounts (see Case Study 4). However, this only applied to accounts selected for review. There were thousands of accounts that had not been reviewed.
- These customers had varying numbers of discounts set and in many cases had none. Where there was no discount set, the prices reverted to the Trade Price. In most cases, the Trade Price was totally unrealistic and therefore required overriding. However, the resulting overrides were often too generous, so giving profit away unnecessarily.
Consequently, for the portion of business that had no discount coverage, the levels of override were high and the gross margin low.
Challenge
- We needed to find a way of managing thousands of accounts with poor discount coverage to achieve realistic – but not too generous background discounts.
Approach
- Customer segmentation identified 3 customer segments that covered the majority of customers, so we concentrated on these. Using the MYD Discount Setting Tool, we derived 3 sets of realistic (but not too generous) background discounts to cover 500 of the most popular discount groupings covering 80% of spend. We solicited buy-in from key Branch managers in the region selected. Some amendments were made, which helped with the buy-in process.
- Having identified the segmented groupings of customers, they were linked in the ERP system and the 3 sets of 500 discounts applied. These were set in background so that they would only kick in where there were no customer specific discounts. These would have previously reverted to Trade Price and would usually have been overridden.
By grouping the 1500 new discounts, it effectively added 1.1 Million Customer / Discount group combinations to the existing 1.5 Million for these customers.
- Once agreed, the new discounts were added within one day.
Results
The results show that there was an instant uplift in Gross margin of 4.4%. This represented a 90% increase in Profit pounds and added £120K per annum profit.
- The adherence by order line to the system held discount increased by 25% which meant that the number of overridden prices at order line level reduced by 67,000 per annum. This reduced the back office workload and gave greater price control and consistency.
- Further analysis can now identify those customer specific discounts that are too high and could therefore generate a further profit opportunity.
- If discounting from a Trade Price is not your business model, then this technique can be applied at a part number and net price level.
The same project was rolled out in 2 further regions with similar results, adding a further £290K per annum profit.
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