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Don't shortchange yourself

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Don't shortchange yourself

April 11, 2010 - 16:00

BRUSSELS, April 12, 2010 (RISI) -Although most companies have worked hard to pare costs over the past few years in an effort to improve profitability, seldom do they look at the other side of the equation: pricing and its effect on revenue.

Vendavo, a California-based provider of business-to business (B2B) price management and price optimization solutions helps B2B companies leverage pricing to deliver higher profits.

With strong presence in the chemical industry, the company's pricing software is also designed to help pulp and paper producers.

Jamie Rapperport is founder and executive vice president, marketing and business development at Vendavo, Rapperport explains that Vendavo asks companies to put aside the assumptions of most industries and "dig into the details."

"Many companies assume that the market price is all that matters and tend to only look at a market in its entirety. If you look deeper, you'll see there are many factors that combine to determine a price," he explains. "There is not one monolithic market but many segments, each with its own pressures, so you can be more surgical in what you do and where."

Measure customers by volume versus pocket or net margin

Attack from a new direction

Vendavo is tackling price management from a different direction than most. "We are going at it from the customer view, not just in plant and operations," Rapperport adds. "People who run businesses tend to come out of the production side and want to maximize their production assets, i.e., drive costs lower. We ask companies to look at their customer base as an asset."

Vendavo's goal is to make pricing a core competency and to leverage the power of pricing to improve margins.

In the past, process industry manufacturers have used statistical process control (SPC) to take the variability out of production, but this has yet to be done on the customer side. Rapperport explains further, "Pricing variation can occur because of many reasons. These include different sales reps negotiating differently or companies not having the right policies to enforce discounting guidelines. We want our customers to get rid of unwanted variation in pricing."

Customer profile, the cost to serve them, and the differing valuation they put on a mill's products may all help explain why there is a variation. "Most companies are surprised when we start peeling back the pricing layers to show, despite all their efforts, more often than not, they have a shotgun approach to pricing," says Colin Carroll, vice president, business consulting, who, before joining Vendavo, worked for a major pulp and paper producer.

Once this is made clear, producers can start to focus on the customers that bring the highest value. As noted in thePPIarticle in October 2009 (p. 33), up to 20% of customers can actually destroy value. But, Carroll says, "You don't know which 20% until you ship. We help identify the 20%."

Every pulp and paper producer wants to upgrade its product and customer base if possible. "If you can get to the root of what is causing the negative valuation, then you can prescribe corrective actions," Carroll adds. "Is it freight, rebates or is the price too low? When you can answer that question, the solution is clear."

The Vendavo pricing software is designed to lead companies to a commercially-driven mindset, away from a supply chain driven one. According to the company, mills need to "segment their products and customer base and manage price differentiation according to value deliver for the segment and product attributes."

What about commodities versus specialties? As noted earlier, Vendavo has a number of customers in the chemical industry where the commodity:specialty divide is also prevalent. "Our solutions work for both commodity and specialty, but in different ways," says Carroll. "On the specialty side, the differences in the cost to serve are not very significant. On the commodity side, margins are much lower and the differences in the cost to serve will largely affect profitability."

Why pulp or paper specifically? "We saw an opportunity," adds Carroll. "Our solution is good for industries with a lot of pricing complexity, customer complexity, product complexity and contract complexity (e.g., freight, technical service). We provide a data-driven framework to manage that complexity. We link analytics to the negotiation. Price management techniques have proven very successful in the chemical industry and pulp and paper has all of the chemical industry complexities."

But how does this work in an industry where there are en masse price announcements of, for example, $50/tonne, followed by widespread discounting if the price increase even takes effect, Carroll says that price increase effectiveness drives a lot of projects, but that there is a history of companies not capitalizing on the announced increases. "At Vendavo, we can enable price increase best practices."

A simple and highly-actionable starting point for analyzing pricing is the ABCD type of customer ranking, which measures customers by volume versus pocket or net margin (often expressed as a percent of the sale) and puts them into a two by two matrix.

Basically, it means dividing customers into quartiles with the customers in the top section being the ones bringing the most value to the company and, therefore, receiving the best deals if necessary.

In an industry known for its conservative thinking, how is this view of value being received? Carroll says doors are opening because of Vendavo's work in other process industries. "There is a fear of being the last to adopt our technology," he adds. "They see our work with the chemicals industry and realize the similarities."

He cites one example in which a producer employed a price increase effectiveness (PIE) dashboard to track price increase effectiveness across regions, products, salespeople and customers. "It showed that the more experienced the sales rep, the more likely that deep discounting would take effect. This can be representative of a failure of leadership and/or measurement (industry not being focused on the margins)."

Vendavo has experience with numerous pulp and paper producers worldwide as well. Vendavo provides a step function improvement in price-related analytics. The analytics can then help companies to improve their price and policy setting. Price being list price and policy being cost to serve as well as discount guidelines. Finally, Vendavo will provide a better support mechanism for negotiations with customers. "Occasionally, we recommend that companies walk away from the table, but that's a senior management mindset: to go by profit, not by volume," Carroll explains. "The approach to volume at risk should be driven by segment-specific pricing strategies. This helps to upgrade the customer mix."

In the end, Carroll adds it means using a profitability goal versus a revenue goal. In the past, both Carroll and Rapperport emphasize that the pulp and paper industry had a huge amount of data that it could not access or analyze that would help the pricing end. "We give an analytical visibility that already exists in the production processes."