What Customers Are Really Paying For Your Products

WHAT CUSTOMERS ARE REALLY PAYING FOR YOUR PRODUCTS Unlock Your Data • Unleash Your Sales WHITE PAPER For Food Companies WHAT CUSTOMERS ARE REALLY PAYINGWHAT CUSTOMERS ARE REALLY PAYING 32 PRICE: A POWERFUL LEVER Price is one of the most powerful levers available for food companies to proactively determine financial performance. Over the past ten years, food manufacturers have given intense focus to the science of their food offerings to boost quality, competitiveness and profitability, but there is another factor that can play a huge role in their long- term success, price. Price affects competitive position, influences the number of units to be sold and is a critical factor in achieving an optimal product and margin mix. Tens of thousands of pricing decisions are executed and these decisions ultimately impact a company’s key financial performance metrics: revenue and profitability. Yet, with so many variables going into pricing, without the right technology in place, It can be difficult, if not impossible to answer the question, “Do you know what customers are paying for your products?” Typically, a food company executives would produce a price list or average price statistics to answer such a question, but is that really what customers are paying? After several years of cutting costs to the bone, many companies are reacting to today’s soaring energy and commodity prices with trepidation: they would like to raise prices to maintain margins, but aren’t sure when — or if — they can successfully pass along increased costs to customers. - Russ Banham CFO Magazine WHAT CUSTOMERS ARE REALLY PAYINGWHAT CUSTOMERS ARE REALLY PAYING 32 AVERAGE PRICE VERSUS NET PRICE There is an old saying that pokes fun at statistics, “When you have one foot in boiling water and the other in ice water, on average you are comfortable.” This aptly describes the value of average price. However, most executives and managers rely on average price—defined as sales revenue divided by units sold—as a measure of what their companies actually charge food service customers for their products. In reality, average price does not come close to telling the whole story and is often far from the reality of what is happening with the business. Why is average price such a misleading number? The first reason is the definition of price. At many food manufacturers, price is generally a pretty fuzzy term. In the end, the number that really matters is net price. Net price is the amount of money your company reaps from a transaction after the dust of rebates, bill-backs, accruals and discounts settles. Unfortunately, “net price” is generally very difficult to compute given that discounts and programs are often negotiated separately from product price decisions, and there is a complex interplay between all of these programs. In addition, the timing of distributor bill-backs and operator rebates that finally settle a transaction can often be quite far apart, making net price calculations a complicated accounting exercise. Even if true “net price” is computed at the transaction level, average price does not tell the whole story. Average price misses variability or consistency of prices. In our experience with our WHAT CUSTOMERS ARE REALLY PAYINGWHAT CUSTOMERS ARE REALLY PAYING 54 For a given product, transaction price across customers may look relatively constant. Each data point above represents the transaction price paid for a quantity of the same product. Average Transaction Price Across Customers1 Average Transaction Price Tr an sa ct io n Pr ic e / U ni t Volume (Units) For the same product, net price across transactions can vary significantly. Each data point above represents the net price paid for a quantity of the same product. Note the range of data points, especially those below average price. Average Net Price Across Customers2 Average Net Price N et P ric e / U ni t Volume (Units) food industry leaders, high levels of price inconsistency are the norm in food manufacturing— not the exception. Across a large number of companies and a broad range of food categories, there is often little consistency in transaction-level net pricing. This inconsistency results in a disturbing situation from a customer management and financial performance perspective. Figures 1 and 2 illustrate how average price and net price for the same products diverge significantly. The impact of such inconsistency is certainly felt in the bottom line of the business. What are the reasons for this inconsistency in pricing? Beyond mistakes, typos, unintended overlaps in deals, unauthorized discounts, grandfathered deals and exceptional prices that were done “just to get the business,” there is one overriding reason choosing the price for a product or mix of products is very complex. While it’s clear that pricing is vital to an organization’s margins, most food manufacturers still determine prices using some combination of ad-hoc analysis, spreadsheets and calculators. WHAT CUSTOMERS ARE REALLY PAYINGWHAT CUSTOMERS ARE REALLY PAYING 54 DETERMINING THE RIGHT PRICES So what are the “right” prices? The criteria for evaluating the “rightness” of prices are pretty clear: • Are profit targets being met? • Are prices responsive to changing competitive conditions for a company’s products? • Are all food manufacturing assets being optimally utilized? • Are manufacturing assets generating the highest profit available per unit of capacity? • In the end, is the business generating a reasonable return on capital employed? Getting to the right prices is a more complex matter. The factors that need to be considered from a food manufacturers standpoint include: past prices, market/competitive prices, customer willingness-to-pay, product costs, expected changes to product costs due to volatile commodity ingredients, target margins, and manufacturing capabilities/constraints. Rarely are all these factors considered simultaneously in pricing decisions today. Without a comprehensive means of determining and evaluating prices in a way that takes into account all of these complexities, pricing will be inefficient and margins will suffer. $ WHAT CUSTOMERS ARE REALLY PAYINGWHAT CUSTOMERS ARE REALLY PAYING 76 PRICING AS A COMPETITIVE ADVANTAGE With the competitive bar being raised ever higher in these challenging times, the winning companies will be those that apply all of the tools available to them to make pricing decisions. At the end of the year, financial performance is achieved one transaction at a time. Leading food companies who learn to evaluate each and every transaction with company profitability squarely in mind will see gains in year-end corporate performance. PRICE AND MARGIN OPTIMIZATION FOR FOOD COMPANIES Well-documented research and numerous studies point to the significant improvements possible when companies make better pricing decisions. One of these, leading analyst Gartner, Inc. indicated that, “ By 2015, best-in-industry enterprises will increase revenue by up to 3% and profits by up to 15%, due to improvements made using price optimization technologies”. For food manufacturers where margins are razor thin, even a small improvement is important when it comes to the bottom line. Price and margin optimization software enables food companies to make smarter pricing decisions. Using patented, comprehensive mathematical models to process thousands of variables, this technology allows customers to use price as a lever. With a pricing strategy, food companies are able to better make critical margin decisions every day. Price and margin optimization software allows food companies to easily: • Understand what customers really pay for products. • Improve margins even with volatile input costs. • Determine optimal deal prices. • Develop plans for best product mix and capacity utilization. • Increase sales and trade spend effectiveness. WHAT CUSTOMERS ARE REALLY PAYINGWHAT CUSTOMERS ARE REALLY PAYING 76 Copyright © 2014, PROS Inc. All rights reserved. This document is provided for information purposes only and the contents hereof are subject to change without notice. This document is not warranted to be error -free, nor subject to any other warranties or conditions, whether expressed orally or implied in law, including implied warranties and conditions of merchantability or fitness for a particular purpose. We specifically disclaim any liability with respect to this document and no contractual obligations are formed either directly or indirectly by this document. This document may not be reproduced or transmitted in any form or by any means, electronic or mechanical, for any purpose, without our prior written permission. About PROS PROS.com Copyright © 2015, PROS Inc. All rights reserved. This document is provided for information purposes only and the contents hereof are subject to change without notice. This document is not warranted to be error -free, nor subject to any other warranties r conditions, whether expresse orally or implied in l w, including implied arranties and conditions of merchantability or fitness for a particular purpose. We specifically disclaim any liability with respect to this document and o contractual obligations are formed either irectly or indirectly y this document. This document may not be reproduced or transmitted in any form or by any means, lectronic or mechanical, for any purpose, without our prior written permission. PROS Holdings, Inc. (NYSE: PRO) is a big data software company that helps customers outperform in their markets by using big data to sell more effectively. We apply 30 years of data science experience to unlock buying patterns and preferences within transaction data to reveal which opportunities are most likely to close, which offers are most likely to sell and which prices are most likely to win. PROS offers cloud solutions to optimize sales, pricing, quoting, rebates and revenue management across more than 40 industries. PROS has completed over 800 implementations of its solutions in more than 55 countries. The PROS team comprises approximately 1,000 professionals around the world. To learn more, visit pros.com.