Deloitte vendavo sept 2010 - outcome based approach

© 2010 Deloitte Touche Tohmatsu

Presentation by Theo Slaats – Deloitte

Defining Outcome-Based Success Criteria for your Pricing Initiative


An Outcome Based Approach defines the future state as a result of an

improvement initiative to determine success

2

Shareholder Value

Revenue GrowthOperating Margin

(after taxes)Asset Efficiency Expectations

VolumePrice

Realization

Selling,General &

Administrative(SG&A)

Cost of GoodsSold

(COGS) Income Taxes

Property, Plant& Equipment

(PP&E)Inventory

Receivables& Payables

Company

Strengths

External

Factors

Common Pricing Challenges

Downward pressures on prices are decreasing margins

Wrong pricing due to lack of pricing and margin information

Profit leaking away because sales forces making price

exceptions on a regular basis due to lack of empowerment

and enforcement

Profit not maximized because prices are not set at a level

granular enough to capture the maximum profit

Under- or overpricing due to inability to predict customer

response to price changes

Accelerated price erosion due to lack of visibility into historical

pricing of comparable deals

2,6%

3,6%

6,7%

12,3%

Fixed Cost

Unit Volume

Variable Cost

Price

1% Improvement Impact on Operating Profit

Source: Compustat, Deloitte Analysis

Note: Impact estimate is based on the average Fortune 1000 company


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

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

Organizations with World-Class Pricing Strategy Capabilities:

Pricing Strategy

Market and

competitive

analysis

Customer and

product value

analysis

Multi-channel

price management

Customer and

product

segmentation

Price positioning

and pricing

structure


Advanced Analytics & Price Setting: Determining profit-maximizing prices and

strategies for products and/or services through advanced data and modeling

techniques

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.

Organizations with World-Class Advanced Analytics & Price Setting Competencies:

Advanced Analytics & Price Setting

Transactional

pricing analytics

Deep-dive

advanced

analytics

Optimization-

based price

setting

Elasticity and

demand modeling

Test and control

design and results

monitoring

Data mining and

database

development


Price Execution

Price Execution: Effectively implement defined policies and processes that

govern profitable decision making on a daily operational level

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

Organizations with World-Class Price Execution Capabilities:

End-to-End Pricing Process Framework

Determine price

setting guidelines

and structures

Design and

communicate

pricing programs

and promotions

Manage price

exceptions

Develop sales

deals and

contracts

Measure and

report price

performance

Monitor

competition and

market

environment


Effectively manage the people and cultural dimensions of an organization

so that it can sustain pricing excellence

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

Organizations with World-Class Organizational Alignment and Governance Capabilities:

Cross-Country Cultural Alignment

Organizational Alignment and

Governance

Sales

effectiveness

Leadership

alignment

Change

management

and adoption

Organization

structure and

governance

Performance

management

Organizational Alignment and Governance


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

requirements

definition

Commercial

software selection

System

integration

design

Detailed functional

specification

Data review and

preparation

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

Organizations with World-Class Pricing Technology & Data Management

Competencies:

Software

configuration and

deployment


Tax & Regulatory Effectiveness: Proactively manage tax, regulatory

compliance and governance issues related to pricing decisions

Tax & Regulatory

Effectiveness

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

Organizations with World-Class Tax and Regulatory Capabilities:

Transactional Tax

Leakage Point Analysis

Tax Benefit Regime

Quantitative Analysis

Regulatory & Governance

Compliance

Effective Tax Rate (ETR)

Strategic Analysis


Establishing success criteria is essential…why?

Bolster the Business Case

Growing Pains

The Lost Deal

“Mission Accomplished”

Scope


Criteria are defined through a straightforward gap assessment

ILLUSTRATIVE

Data

Co

mp

lexit

y

High

Low

Pricing Capabilities

Low High

Preemptive

Adaptive

Reactive

Primitive

Airline Industry

ManufacturingIndustry

Car Dealers

1.

Understand the

Pricing

Landscape

2.

Determine where

your organization

should be

3.

Assess where your

organization stands

today

4.

Build your

capabilities

(Start your journey)

Execute Project ManagementSet up Project

Management

Advanced

Analytics &

Price Setting

Pricing

Strategy

Price

Execution

Organizational

Alignment &

Governance

Pricing

Technology &

Data

Management

Tax &

Regulatory

Effectiveness

Pricin

g a

nd

Pro

fita

bility M

anag

em

ent C

ore

Cap

ab

ilitie

s

Phase

Demand Modelling &

Optimization

Transactional Profitability Assessment

1 Month 1 Month 1 Month 1 Month 1 Month 1 Month 1 Month 1 Month 1 Month 1 Month 1 Month N Months

VOC and Conjoint

Analysis

Market &

Competitive

Assessment

As-Is Process &

Policy Analysis

Assess Organizational

Gaps and Needs

Leadership Alignment

& Stakeholder

Assessment

Requirements Gathering

Effective Tax Rate

(ETR) Analysis

Conduct Analytics Develop Strategy Design Supporting Infrastructure

List Price & Discount

Strategy Design

Program & Incentive

Design

Value Proposition

Determination

Customer & Market

Segmentation

To-Be Process and

Policy Analysis

Change Management

Planning

Stakeholder

Engagement &

Alignment

Identify Potential

Solutions

Select

Solution

Regulatory and Compliance Analysis

Measure and Control Pricing Performance

Monitor Price Positioning

and Price Structure

KPI and Reporting

Identification

Profitability Management

Capabilities Development

Organizational Design and

Performance Alignment

Implement Pricing and Profitability Technologies

Implementation of TPA Opportunities (Quick Hits) Implementation of TPA Opportunities (Longer Term)

Training

Project

Management

Channel

Profitability

Analysis

Timing Estimate

Regulatory and Compliance Design


The future starts with a vision –

focused through the lens of the six box model

• Enhance quoting to support sourcing based on tax

rules

• SOX and FTC compliance

• Transaction-based

profitability analysis

• Price setting using

demand and elasticity

modeling

• Clear instructions to the

business with business plan

impact

• Scenario planning

• Data collected to support

other functions

• Enterprise systems v. ad-

hoc spreadsheets

• Enable profitability-based decisions

• Enforce pricing policies

• Boundaries

• Incentives

2.

Determine where

your organization

should be


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.

Pricing Strategy

Pricing Technology & Data

Management

Organizational Alignment &

Governance

Advanced Analytics & Price Setting

Tax & Regulatory Effectiveness

Price Execution

Profit Analyzer,

Price Manager(analytics, policies)

Deal Manager

Deal Manager(workflow, security,

policies)

Profit Analyzer

Deal Manager,

Price Manager(policies and price

calculations)

Vendavo

Platform


Example success criteria

Competency Success Criteria Definition Target Status

Strategy Business Plan

achievement

Pricing directives are clear

to the operating units

No unforeseen scenarios

Business plan met +/- 5%

Price Execution Business process

impact

Improves existing

business processes

Price change approval/entry elapsed

time

Fewer price exceptions / pricing claims

Hours saved – 90 (120 hr baseline)

Pricing Analytics Opportunities

discovered

Analytics is providing new

insights into the business

3 actionable opportunities discovered

per month

Pricing

Technology

Data quality The system provides

accurate data to support

margin calculations – BU

to sign-off on accuracy

Within 3% of P&L:

Revenues & Volume

Freight

Material costs

Material master list

Customer master list

Pricing

Technology

Application

Quality

Quick response time,

System is reliable and

bug-free;

98% availability;

Page refresh response time <10s (LAN

connection)

<20 functional defects post-go live

Initiative Value for cost Can support and deliver

the benefits within the

estimated costs

+/- 10% of original budget;

Anecdotal user valuation

Initiative Implementation

Effort

Good vendor support; no

extraordinary problems

setting up the software

Implementation <12 weeks


Example – the CFO was very happy…but…

Price Execution /

Organizational

Alignment

Technical

Support

Strategy, Modeling

Simulation


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 [email protected]

Member ofDeloitte Touche Tohmatsu

For more information please contact:

mailto:[email protected]




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Deloitte vendavo sept 2010 - outcome based approach

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