Deloitte vendavo sept 2010 - outcome based approach

Defining Outcome-Based Success Criteria
for your Pricing Initiative

Presentation by Theo Slaats – Deloitte
© 2010 Deloitte Touche Tohmatsu

An Outcome Based Approach defines the future state as a result of an
improvement initiative to determine success

Shareholder Value

Revenue Growth Operating Margin Asset Efficiency Expectations
(after taxes)

Selling, Cost of Goods Property, Plant
Price General & Receivables Company External
Volume Realization Sold Income Taxes & Equipment Inventory
Administrative (COGS) & Payables Strengths Factors
(SG&A) (PP&E)

Common Pricing Challenges
1% Improvement Impact on Operating Profit
 Downward pressures on prices are decreasing margins
Price 12,3%
 Wrong pricing due to lack of pricing and margin information

 Profit leaking away because sales forces making price Variable
6,7%
Cost
exceptions on a regular basis due to lack of empowerment
and enforcement
Unit
3,6%
 Profit not maximized because prices are not set at a level Volume
granular enough to capture the maximum profit

 Under- or overpricing due to inability to predict customer Fixed Cost 2,6%

response to price changes
Source: Compustat, Deloitte Analysis
 Accelerated price erosion due to lack of visibility into historical Note: Impact estimate is based on the average Fortune 1000 company
pricing of comparable deals

2 © 2010 Deloitte Touche Tohmatsu

Pricing and Profitability Management: Drivers, Benefits and Outcomes

Typical Qualitative Benefits and Outcomes
• Ability to determine profit-maximizing prices for products and/or services
• Identify causes of margin leakage by analyzing historical sales data at the transaction
level
• Design more efficient and effective pricing policies and processes that govern profitable
decision making
• Design and deploy pricing analytics, optimization and execution tools
• Design organizations including roles, responsibilities, reporting relationships, and
compensation schemes to align with profitability goals

Typical Quantitative Benefits and Outcomes
• 1-3% of addressable revenue to the bottom line in the first 6-12 months
– Typical increase in gross margin of 10-15%
– Typical ROI of 200-350% in the first 12 months
• Improved predictability of profit and volume
• Improved decision making through better visibility to pricing and margin information


First, there are six core competencies that must be in place to position
pricing as a sustainable, competitive advantage


Pricing Strategy provides a framework to support business objectives by
understanding and capturing the value of an offering relative to competitive
alternatives and customer demands

Pricing Strategy

Market and Customer and Customer and Price positioning
Multi-channel
competitive product value product and pricing
price management
analysis analysis segmentation structure

Organizations with World-Class Pricing Strategy Capabilities:
 Define a pricing strategy that is consistent with overall business objectives
 Display a consistent understanding of pricing strategy at all layers of the organization
 Use customer value as the primary driver of pricing decisions and transactional behavior
 Establish competitive differentiations in the market
 Link pricing strategy with product portfolio management
 Develop integrated pricing strategies for multi-channel price management


Advanced Analytics & Price Setting: Determining profit-maximizing prices and
strategies for products and/or services through advanced data and modeling
techniques

Advanced Analytics & Price Setting

Data mining and Deep-dive Optimization- Test and control
Transactional Elasticity and
database advanced based price design and results
pricing analytics demand modeling
development analytics setting monitoring

Organizations with World-Class Advanced Analytics & Price Setting Competencies:
 Routinely conduct detailed pricing & profitability analytics on historical data to understand
performance and its drivers at the transaction level
 Rely on advanced statistical and mathematical techniques to generate business insights and
design profit-maximizing pricing, promotional and sales strategies
 Have pricing structures and levels that are consistent with broader business goals and constraints
 Incorporate an understanding of variations in both underlying cost structures and customers’
“willingness to pay” across geographies, products, distribution channels and customer segments
 Predict the impact of price changes on business volume and benchmark actual performance
relative to those predictions
 Use predictive modeling to improve profitability by focusing on key profit levers such as pricing,
customer retention, collections effectiveness, etc. © 2010 Deloitte Touche Tohmatsu

Price Execution: Effectively implement defined policies and processes that
govern profitable decision making on a daily operational level

Price Execution

Monitor Design and
Determine price Develop sales Measure and
competition and communicate Manage price
setting guidelines deals and report price
market pricing programs exceptions
and structures contracts performance
environment and promotions

End-to-End Pricing Process Framework

Organizations with World-Class Price Execution Capabilities:
 Achieve superior financial performance, relative to industry and competitors, that is also
sustainable
 Quickly and accurately communicate pricing information to the field, enabling the sales force to
make profitable deals
 Align the entire organization on profitability-based decisions
 Achieve high compliance to profitability guidelines in deal negotiations
 Efficiently communicate and distribute prices and manage promotions
 Manage price exceptions in a timely and effective manner

Organizational Alignment and Governance

Effectively manage the people and cultural dimensions of an organization
so that it can sustain pricing excellence

Organizational Alignment and
Governance

Organization Change
Sales Leadership Performance
structure and management
effectiveness alignment management
governance and adoption

Cross-Country Cultural Alignment

Organizations with World-Class Organizational Alignment and Governance Capabilities:
 Align incentives and performance metrics with pricing strategy
 Engage leadership to drive pricing excellence and cultural changes
 Clearly define areas of responsibility and accountability for all aspects of pricing
 Focus on processes for continued improvement
 Define career paths for people involved in pricing processes, improving the ability to retain high-
performing talent
 Focus on creating buy-in and ownership for change which will accelerate full optimization of
pricing changes
 Align the vision of the pricing organization with the company’s culture

Design and deploy pricing analytics, optimization and execution tools to
enable effective pricing decisions and to enhance quality and consistency
of pricing processes

Pricing Technology &
Data Management

Business System Software
Commercial Detailed functional Data review and
requirements integration configuration and
software selection specification preparation
definition design deployment

Organizations with World-Class Pricing Technology & Data Management
Competencies:
 Leverage IP/capabilities of commercially available Pricing software
 Develop robust data management and governance policies including agreed to and consistent
cost allocation models
 Enable decision making as close to the customer as possible, but enforce limits
 Maintain high rates of efficiency and accuracy in pricing administration
 Become agile in responding to changing market conditions or business strategy
 Track, manage and regularly report pricing and margin performance buy customer, segment,
geography and product/service

Tax & Regulatory Effectiveness: Proactively manage tax, regulatory
compliance and governance issues related to pricing decisions

Tax & Regulatory
Effectiveness

Effective Tax Rate (ETR) Transactional Tax Tax Benefit Regime Regulatory & Governance
Strategic Analysis Leakage Point Analysis Quantitative Analysis Compliance

Organizations with World-Class Tax and Regulatory Capabilities:
 Adhere to a “tax-aligned” philosophy in assessing all initiatives and opportunities, measuring results
on after-tax metrics
 Achieve and maintain an Effective Tax Rate (ETR) which is a competitive advantage
 Seek to avoid systemic tax leakage arising from transactional taxes
 Leverage detailed pricing data to enhance analyses and calculations supporting tax credits,
deductions and incentives
 Optimize the enterprise’s ability to efficiently and effectively operate within the applicable regulatory
environment by instituting “individual-level” actionable processes, monitoring compliance,
incentivizing adherence, and facilitating rapid remediation

Establishing success criteria is essential…why?

Bolster the Business Case

Scope

Growing Pains

The Lost Deal

“Mission Accomplished”


Criteria are defined through a straightforward gap assessment

2.
Determine where
your organization
should be
1. 4.
Understand the Build your
Pricing capabilities
Landscape (Start your journey)
3.
Assess where your
organization stands
today Phase

Timing Estimate

Advanced
Conduct Analytics

1 Month 1 Month 1 Month

Transactional Profitability Assessment
1 Month
Develop Strategy

1 Month 1 Month
Design Supporting Infrastructure

Implementation of TPA Opportunities (Quick Hits)
1 Month 1 Month 1 Month 1 Month

Implementation of TPA Opportunities (Longer Term)
1 Month N Months

Analytics &
Demand Modelling & List Price & Discount Program & Incentive
Price Setting Optimization Strategy Design Design

Pricing and Prof itability Management Core Capabilities
VOC and Conjoint Value Proposition Monitor Price Positioning
Pricing Analysis Determination and Price Structure

Strategy Market & Channel
Customer & Market
Competitive Profitability
Segmentation
Assessment Analysis

Price As-Is Process & To-Be Process and KPI and Reporting Measure and Control Pricing Performance
Execution Policy Analysis Policy Analysis Identification
High ILLUSTRATIVE Preemptive

Airline Organizational Assess Organizational
Gaps and Needs
Change Management
Planning
Training

Industry Alignment & Leadership Alignment Stakeholder
Governance Organizational Design and Profitability Management
& Stakeholder Engagement &
Performance Alignment Capabilities Development
Assessment Alignment

Pricing
Requirements Gathering
Technology &
Data Identify Potential Select
Implement Pricing and Profitability Technologies
Management Solutions Solution

Adaptive
Data Complexity

Effective Tax Rate
Tax & (ETR) Analysis
Regulatory
Regulatory and
Effectiveness Compliance Analysis
Regulatory and
Compliance Design
Reactive
Project Set up Project
Execute Project Management
Management Management

Manufacturing
Industry

Primitive

Car Dealers

Low

Pricing
Low High
Capabilities


The future starts with a vision –
focused through the lens of the six box model

2.
Determine where • Enable profitability-based decisions
your organization • Enforce pricing policies
should be

• Clear instructions to the • Boundaries
business with business plan
• Incentives
impact
• Scenario planning

• Transaction-based • Data collected to support
other functions
profitability analysis
• Enterprise systems v. ad-
• Price setting using
hoc spreadsheets
demand and elasticity
modeling

• Enhance quoting to support sourcing based on tax
rules
• SOX and FTC compliance


Price analysis, issues identification, and process mapping are the
tools to establish your baseline

3.
Assess where your
organization stands
today


Vendavo provides a platform to address pricing capabilities end-to-end.

Deal Manager

Price Execution

Deal Manager
Profit Analyzer, Organizational Alignment & (workflow, security,
Price Manager Pricing Strategy
Governance policies)
(analytics, policies)

Pricing Technology & Data Vendavo
Profit Analyzer Advanced Analytics & Price Setting
Management Platform

Tax & Regulatory Effectiveness Deal Manager,
Price Manager
(policies and price
calculations)


Example success criteria

Competency Success Criteria Definition Target Status
Strategy Business Plan Pricing directives are clear No unforeseen scenarios
achievement to the operating units Business plan met +/- 5%
Price Execution Business process Improves existing Price change approval/entry elapsed
impact business processes time
Fewer price exceptions / pricing claims
Hours saved – 90 (120 hr baseline)
Pricing Analytics Opportunities Analytics is providing new 3 actionable opportunities discovered
discovered insights into the business per month
Pricing Data quality The system provides Within 3% of P&L:
Technology accurate data to support Revenues & Volume
margin calculations – BU Freight
to sign-off on accuracy Material costs
Material master list
Customer master list
Pricing Application Quick response time, 98% availability;
Technology Quality System is reliable and
bug-free; Page refresh response time <10s (LAN
connection)

<20 functional defects post-go live
Initiative Value for cost Can support and deliver +/- 10% of original budget;
the benefits within the Anecdotal user valuation
estimated costs
Initiative Implementation Good vendor support; no Implementation <12 weeks
Effort extraordinary problems
setting up the software


Example – the CFO was very happy…but…

Price Execution /
Technical Strategy, Modeling
Organizational
Support Simulation
Alignment


For more information please contact:

Theo Slaats Deloitte Consulting BV
Partner Laan van Kronenburg 2
CRM, Pricing, Cloud Computing 1183 AS Amstelveen
The Netherlands

Tel: +31 88 2886660
Mobile: +31 6 52672525
tslaats@deloitte.nl

Member of
Deloitte Touche Tohmatsu


Disclaimer:
Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member
firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about
for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms.


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