Beruflich Dokumente
Kultur Dokumente
Joel Davis
Boundary Press
Temple Terrace, Florida
www.boundarypress.com
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Death of a Leader
Death of a Leader. Copyright © 2008 by Joel Davis. Manufactured in the United States
of America. All rights reserved. No part of this book may be reproduced in any form or
by any electronic or mechanical means, including information storage and retrieval
systems, without permission, in writing by the publisher, except by a reviewer who may
quote brief passages in a review. This material may not be used in whole or in part for
presentations, training classes or seminars. Although the author and publisher have made
every effort to ensure the accuracy and completeness of information contained in this
book, we assume no responsibility for errors, inaccuracies, omissions or inconsistency
herein. Any slights of people, places or organizations are unintentional. All names have
been changed to ensure confidentiality. Published by Boundary Press, located at 5004 E
Fowler Ave., Unit C-115, Tampa, FL 33617.
Visit our Web site www.deathofaleader.com for additional and up-to-date contact
information.
Davis, Joel
Death of a Leader: Stop the War of Politics and Personalities Versus Principles and
Performance Before It Kills You and Your Company
ISBN: 978-0-9791397-1-0
Edited by Marjorie Bulone.
Cover Design and Book Layout by Toné Mojica.
Production Coordinated by Toné Mojica.
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Death of a Leader
Without a doubt, the best pricing and profitability book I’ve ever read is
The Price Advantage, by Michael Marn, Eric Roegner and Craig Zawada.
I highly recommend this book if you want to go deeper on this very
important topic. Another great resource to check is out the Professional
Pricing Society at www.pricingsociety.com.
First of all, pricing is both a science and an art. While you may be the
CEO or a proven Vice President of Marketing, you probably haven’t spent
years studying, researching and learning all about pricing. So give this
topic some respect and engage a pricing professional early in your pricing-
strategy process.
Here are the main concepts that you need to understand as part of a high-
level review of the exciting world of pricing:
I know some of this is going to appear very basic, but let me assure you,
not everyone understands all of the elements of a pricing model. Most
people are familiar with retail or the manufacturer’s suggested retail price
(MSRP), which is what the maker of the product recommends the
consumer to pay for just one product.
The next layer in the pricing model is the street price. This price is below
the MSRP and is the price that businesses or end users actually pay for the
product. For example, if the MSRP of a product is $100, but for reasons
that you’ll discover later, the average price that a business or consumer
pays is $80, then the street price is $80 (20 percent below the MSRP).
It’s critical to understand the relationship between MSRP and street price.
Some firms leave their MSRP prices high to allow their sales force to
provide large (perceived) discounts, thus making the purchasing agents
look good. A great example of this is Network Appliance, a maker of
network storage and data management solutions. Other firms try to have
the street price float within a range of 5 – 15 percent of their MSRP and
will adjust MSRP or other elements of the pricing model to keep the street
price within that range. A good example of this is Acer, a large Taiwanese
maker of notebook computers, peripherals and components.
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Remember, the MSRP and street price send price signals to the market.
These are often the prices that get compared in competitive bidding
situations. If your product is complex and requires configuration
assistance to get an accurate quote, you can keep MSRP high because
chances are that in competitive bidding situations you’ll be called in to
help. If your product isn’t complex and you keep MSRP high, you can
lose business that you didn’t even know existed because customers will
see your prices, compare them to your competitors and make a decision to
go with their product without ever giving you a call!
If you sell through channels, then the next few steps in the pricing model
are very important to understand. The reseller acquisition cost and the
distribution costs have a large impact on the street price that end users pay
for your products and—on the other end of the model—what you actually
get paid. If you sell via a one-step channel, e.g. directly to resellers who,
in turn, sell to the end user, then the reseller acquisition cost is the price
that the reseller pays for your product on a per-unit basis. If you sell
through a two-step channel, e.g. directly to distributors who, in turn, mark
up your product and then sell it to a reseller who sells to the end user, then
your distributor acquisition cost is the price that the distributor pays for
your product on a per-unit basis.
However, the reseller and distributor acquisition cost is not necessarily the
money that you receive. In most industries, there are a variety of trade
promotions, programs and discounts that can lower the acquisition cost
substantially and—guess what? This will impact your street price as well!
Let’s continue on with our example. The MSRP for your product is $100.
The street price on any given day is $80. The reseller acquisition cost is $60.
The distributor acquisition cost is $55. Now it gets near the end of the
quarter and you find that you’re behind in your sales numbers. The CEO
authorizes you to make some quarter-end deals, using any reasonable
combination of additional discounts, market development funds (MDF)
and payment terms. Since you’re not too far behind in your numbers, you
decide to go to your favorite large distributor and offer them the
following:
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So, for this deal, what’s your true distributor acquisition cost?
Well, you just gave them an extra 5 percent discount, so that brings it
down to 50 percent off of MSRP. You also gave them 4 percent more
MDF, so you need to count that too, making it 54 percent off of MSRP.
Lastly, you gave them an additional 60 days to pay. If your cost of capital
is .5 percent per month, this equals another 1 percent in cost advantage
that you gave them, so that makes the grand total 55 percent off MSRP or
$45.
But you might say, “Well, this is for just one deal, so there will be some
short-term impact, but nothing more.” That couldn’t be further from the
truth. Here’s why. First, you asked them to order 25 percent more
inventory, and you gave them an additional 10 percent off to do it. So 25
percent of their inventory is 10 percent below the other 75 percent of their
inventory that was already on hand. Distributors and resellers blend the
cost of the inventories to determine an average cost. When they do, they
will have lowered their overall inventory average cost by about 2 percent.
(Here is the math: Before the deal, they had $100 in inventory at 45
percent off. They just bought $25 worth of inventory at 55 percent off,
which is 10 percent more than the regular 45 percent off. This is an
additional $2.50 off in total. So divide $2.50 by $125 and you get an
overall inventory average cost reduction of about 2 percent.)
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effect throughout the entire pricing model and can create an even broader
gap between MSRP and street price. I wish this was not the case, and that
distributors and resellers would pocket this difference and use it to invest
in their own people, and enhance their infrastructure, but 90 percent of the
time it goes to the street!
When you calculate the impact of all of your trade promotions, programs
and discounts into the distributor acquisition cost, you’re actually
calculating the “net price sold for,” which is actually what ultimately
determines your profitability and cash flow.
The most typical type of tier or segmentation used is “A,” “B” and “C,”
with “A” tier products being the fastest selling, “B” tier products the next
fastest selling and so on. Why should they do this? Quite simply, they do
this so they can price each tier of products correctly! Most executives who
don’t understand pricing believe in a one-size-fits-all pricing model—
which is exactly what you don’t want to do!
gross profit. If you had just stopped at revenue segmentation, you would
have focused on selling more of product “X,” to your own detriment.
The next two areas of segmentation are cost and operating profit. Most
firms have a good handle on what their products cost to make or to buy.
This can be derived from the bill of materials in a manufacturing firm or
from the purchase price in a distribution, retail or service business.
However, most firms don’t seem to have a good handle on what the
operating profit (sales—cost of goods—direct and allocated costs of doing
business) of their products are. This requires a costing system that
allocates the other costs of a business across the various product lines in
an appropriate way. Suffice it to say, if you want to gain a competitive
advantage in the market, develop a costing system based on logic, rules
and actual history that enables you to build true income statements for
each of your main product lines. The results can be shocking and can lead
you into very productive and game-changing product strategies and new
product ideas.
Once you understand how your products are segmented from a variety of
dimensions, now it’s time to do some market price benchmarking of
products that meet the 80/20 principle for each revenue tier (A, B, C and
D). Market or competitive price benchmarking is determining what your
competitors are charging for similar (or the same) products in the market.
With the Internet, this has become much easier to do. Customers also may
share this information with you, even though they really shouldn’t. So, for
the 80/20 rule look at products in each tier and compare prices to your top
three competitors. Here are some common examples of what many firms
find when they do this analysis:
Ø Your prices don’t make sense when evaluated within their volume
tier
Ø Your prices don’t make sense when evaluated across volume tiers
Ø Some prices are too high, costing you sales
Ø Some prices are too low, costing you profit
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In high-velocity categories (“A” for sure and “B” sometimes), the market
price is well established and all of your main competitors are within a very
narrow price range around your price. Your customers know these prices
in their heads and, if you try to raise prices on these high-velocity
products, you’ll most likely lose sales.
But here’s the mistake that so many senior executives make: they price
products in tiers “C” and “D” the same way that they price products in
tiers “A” and “B”! Slower-moving products in categories “C” and “D”
don’t have well-established market prices. Customers don’t know these
prices in their heads because they don’t buy them that often. Therefore, a
low-risk option of increasing profitability without jeopardizing the
business is to increase the prices on products in “C” and “D” categories.
Do it slowly over time until you see a decline in sales (and then roll back
to the last price and hold it there). If you’re a product manager pricing out
your new product line, you’ve done a forecast and you have a good idea of
what products fall into which tier. Be smart! Price those slower-selling
items or parts at a higher gross profit than your fastest selling items!
Let’s go to the other end of the segmentation: tiers “A” and “B.” When
many firms do this review, they actually find out that on several products
they are priced lower than the competition. Of course, none of your sales
people have come to you and mentioned this, because all you hear is that
your prices are always higher than the competition. Anyway, when you
understand that you are priced below your competition, even by a few
dollars, you have the opportunity to raise your prices slightly. All things
being equal, this won’t hurt sales. Now, if you have to lower prices
because you can’t ship on time or your credit department sucks, then you
may not be able to do this. But, if you’re equal to your competition in
most of the other areas of the business, then you’ll be able to do this.
Price-Setting Process
Repeat after me: Price setting is a process, not an event. Price setting is a
process, not an event. Price setting is a process, not an event!
be left to chance. You need to have a process that refreshes your pricing
on some sort of periodic basis that’s appropriate for your business.
So, should you set the price based on the maximum price that the market
will accept, the price that your competition is selling it for, the price that
gives you your target gross margin based on the cost to make or buy the
product, or some other model? Does the answer to these questions change
based on your market-entry strategy or stage in the product life cycle? The
answer to all of these questions is “yes.” Let me explain.
Once you’ve done this, go to the other extreme and determine your price
based on the cost to make or buy the product. I’m not advocating that you
price products based on your costs because, if you have poor raw materials
acquisition, high operating costs and high capital costs then your pricing
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Now that you have completed the product profitability segmentation, it’s
time to move to the customer side of the equation and follow the same
process.
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Death of a Leader
After you’ve done the sales, gross-profit dollar, OPEX and EBIT
modeling, look deeper and see if you can see within each tier additional
business similarities. For example, do your largest customers all operate
using the same business model, e.g. are they all major retailers or are they
all heavy manufacturers or large insurance firms? The reason this is
important is that when we begin to build customer income statements,
you’ll see the cost to serve your various customer segments will need to
vary in order for you to maximize profitability in each segment. You’ll
also find that by grouping customers together based on the business model
you can tailor unique programs for each segment that reflect the way that
segment wants to do business with you. You’ll be able to migrate from a
“one-size-fits-all” customer approach, to one that makes each customer
segment feel special and believe that you really understand their business.
So, segment your customers first by sales volume and then by gross profit
dollars. Your customer segmentation will most likely change as you run
these models, but you’ll learn a lot about your business in the process and,
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For example, you’ll often find that your largest volume accounts have the
lowest gross profit percentage and your smallest volume accounts have a
higher gross profit percentage. However, within each segment—say the
strategic/national accounts segment—you can actually find pretty dramatic
differences in gross margin percentage due to a variety of factors. For
example, even though the corporation might have specific pricing policies
based on order size, your sales rep, manager or even president might have
done a handshake deal years ago that allows that customer to buy at a
predetermined price regardless of order size.
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When you’re done with this analysis, you’ll probably find that some
customers are priced too high, some are priced too low, some accounts
that you weren’t paying much attention to are actually your most
profitable and high-growth accounts, and some accounts are just flat out
costing you a fortune! Which leads us to the final step in this customer
profitability review: what is the cost to serve?
Cost to Serve
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Death of a Leader
Now step back and take a big picture view of your customer base. You can
see where the revenues are coming from, where the gross-profit dollars are
being generated and what it costs to earn those gross-profit dollars. You
can see where you would like to sell more and where you probably need to
start selling less. You can now make fully informed choices on where you
want to invest, where you want to maintain and where you want to divest
yourself of the business. If you have to make some tough trade-off
decisions, you at least can do it with real customers, real sales and real
profitability numbers to model. You’re a long way ahead of 90 percent of
the firms in business today!
The next step is to tier or segment the sales reps by revenue, gross-profit
percentage and gross-profit dollars. Since they’re most likely tied to
customers, and you’ve done this at the customer level already, this process
should be very straightforward. You’ll find the answers to the following
questions:
Ø Look at the sales reps above and below the average and segment
down further in 10 percent ranges. How many are above/below by
10 percent, 20 percent, 30 percent, etc.
Finding the answers to these questions will enable you to determine which
sales reps are good at fighting for every available gross-profit dollar for
the company and which ones aren’t (just like the outliers in the previous
sections). Work with the good sales reps to identify their best practices so
you can help the weaker sales reps improve their skills. Make sure HR
integrates these skills into their recruiting and hiring processes.
If the sales reps make a lot of pricing decisions, make sure you have built
the systems, processes and tools to support them in this endeavor. Don’t
waste their selling time by asking them to do it themselves—because they
won’t. Give them the tools they need to make sound pricing decisions.
Train them on these tools extensively. Incorporate this training into your
new hire/on-boarding process. Reward them for using these tools.
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Once a week, review the most profitable and the least profitable orders
or invoices with the sales team so they learn and understand the impact of
their decisions. Again, celebrate their wins. Have the president host the most
profitable sales reps for lunch. Ring the bell that you hopefully installed on
the sales floor for big orders that go out the door at the target gross margin
or higher! Discuss pricing and profitability at every sales management
meeting. Ask sales reps to share recent wins at company events.
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