•     Cognizant 20:20 InsightsHow a Global Manufacturer SuccessfullyEnhanced its Pricing Structure in FourCritical Steps  ...
•   Determine: This is the process of setting up               plex promotion management systems that    the pricing guide...
ness decisions in the future. Figure 2 depicts the       •   Data-reliant pricing: List price was calculatedcomponents of ...
transmission. The use of EDI has addressed          Pricing optimization: In a B2B scenario, pricing    this challenge to ...
Typical Price Management Solution Landscape                                    Market Analytics                          E...
Acronyms & Glossary of TermsB2B: Business-to-businessB2C: Business-to-consumerCD: Compact discCOTS: Commercial off-the-she...
About CognizantCognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process ...
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How a Global Manufacturer Successfully Enhanced its Pricing Structure in Four Critical Steps

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How a Global Manufacturer Successfully Enhanced its Pricing Structure in Four Critical Steps

  1. 1. • Cognizant 20:20 InsightsHow a Global Manufacturer SuccessfullyEnhanced its Pricing Structure in FourCritical Steps Executive Summary drive informed and consistent pricing decisions. Pricing at global manufacturing companies involves This paper highlights the above challenges, as multiple businesses, regions, channels and func- well as solutions, as experienced in a diversified tions, including sales, pricing, finance, operations, manufacturing environment for a large manufac- marketing and executive management. List prices turing/CG client in North America.1 are only the starting point in the pricing execution process. The ongoing marketing and sales activities B2B Pricing Process Demystified of the organization often revolve around discounts, Pricing in the manufacturing industry is a complex promotions, channel discounts, rebates and other marketing function. Operations are spread across ways of motivating stocking and purchase. These the world, with a complex sales channel comprised discounts account for pricing waterfall or leakage. of distributors, end customers and resellers. There are hundreds or thousands of sales people working With all this complexity, the process of setting, op- across business units, providing quotes, contracts, timizing and enforcing pricing policies is usually special bids, etc. to customers. Product offerings unplanned and ill-documented. The result: millions range from standard SKUs, to configure-to-order, of dollars of lost opportunity for organizations. to custom-engineered products. Pricing often varies in a B2B scenario, depending upon the time of the deal, the negotiating power Pricing today is looked upon as a potential stra- of customers, internal political clout of field sales tegic opportunity. To understand pricing, we will staff and management intervention. first examine the pricing process. Pricing execution in diversified manufacturing There is a large volume of literature covering B2B companies poses additional challenges in terms pricing and its complexity. Specific pricing pro- of complex pricing rules. Managing price chang- cesses may vary across businesses, industries and es, price book generation and communication functional areas (e.g., marketing, sales and finance) to clients are among the greatest obstacles. On in large organizations, but the basic pricing process the other hand, effective price management can is the same across industries and selling channels. It improve gross margins, order-to-cash cycle and revolves around establishing the optimal price, com- order-fulfillment processes. municating the price to customers, negotiating, pro- cessing orders, rebate adjustments and promotions The key to effective price management is provid- and analyzing the price opportunity for the next ing a unified process, where business users can pricing cycle. The process breaks down as follows: cognizant 20/20 insights | december 2010
  2. 2. • Determine: This is the process of setting up plex promotion management systems that the pricing guidelines after analyzing the mar- are based on cumulative order volumes, off- ket, based on business-specific policies. In a invoice discount execution, etc. complex B2B setting, the price-setting rules and override processes are spread across • Analyze Price Opportunities: This process involves understanding price leakage, deter- functions, geographies and currencies. Avail- mining the price opportunity and making nec- able technology solutions range from simple essary improvements by adjusting the pricing rule management logic, to robust workflow en- logic. This forms the basis for the next pricing gines for policy management. cycle. Analyzing the waterfall can help improve• Establish: This is the process of setting up the decision making on the discounts offered to list price with key inputs (customer, product customers, as well as align the efforts of sales and price attributes). For a complex manufac- and marketing teams. turing scenario, make-to-order and configure- to-order SKUs require engineering calcula- Understanding Price Waterfall tion-based pricing logic to be executed in the Price waterfall is a technical way of understand- pricing systems. ing the various pricing levers in a B2B scenario. It involves various elements of pricing that differ• Communicate: This involves communicating from the actual realized price (pocket price) for a prices to customers and distributors through given customer deal. price pages or price books. They contain the pricing information for each SKU, along with The price waterfall highlights the pricing process terms and conditions. They can be sent to cus- and the leakage components that occur, starting tomers either physically or electronically (EDI, with list price. From this price, businesses may ap- CD or Web catalogs). ply a number of “standard” discounts that result in• Deviation Management: This involves nego- the actual invoice price to the customer. After ar- tiating prices through quotes, contracts and riving at the invoice price, there may be additional special bids with individual customers. Any discounts made available to customers that do not deviation from the list price needs to have appear on the customer invoice. These include approval based on business policies. Solution rebates, credit adjustments, product samples and complexities include integration with contract promotional or merchandising allowances. The management systems, override workflows and combination of on-invoice and off-invoice price near-real-time decision-making capabilities. discounts results in the “pocket price” — the actual price realized by the company.• Refunds: This process involves receiving and processing of customer/promotional rebates Analyzing the waterfall will help companies and adjusting payments to channel partners. understand what customers are really paying and Specific solution challenges include com- where leakage is occurring, thus improving busi-Elements of B2B Price Management Determine Price Establish Analyze Price Price Opportunities Refunds Communicate Price Deviate PriceFigure 1 cognizant 20/20 insights 2
  3. 3. ness decisions in the future. Figure 2 depicts the • Data-reliant pricing: List price was calculatedcomponents of a price waterfall. based on product, customer and pricing data maintained in corporate systems.Controlling the elements of the waterfall is crucialto effective price management. The various ele- • Base pricing complexities: Complexities arosements of the waterfall indicate the key levers on from varied selling channels (retailer, distribu-which a B2B organization should flex control. The tor and end customer), product structures andsheer size of the number of SKUs, with complexi- review periods. Volume discount policies wereties around geographies, selling channels and further complicated by assortment rules, prod-SKU variations, adds to the challenges involved in uct attribute rules, etc.administering pricing. • Decentralized policies: Division-specific policy management with varied degrees of sophistica-Pricing in the Real World tion introduced further complexities with re-The following covers some of the key challenges ex- spect to evolving unified rule management.perienced by a current client organization and theimplications for the pricing solution landscape. • Need for deviation management: Price parity decisions involved choosing between maintain-The client is a diversified technology company with ing “global prices” and managing deviations byoperations in about 45 countries, selling thousands means of regional discounts vis-à-vis manag-of products and services. We determined that the ing regional pricing policies that account forfoundational element of price management would different “list processes” across regions. Thebe global price establishment. Some of the key com- decision was usually a tradeoff between show-ponents for this are product data and its hierarchies, casing a single price across the globe to therecommendations from pricing optimization and in- end-customer vs. increased workload on priceputs from pricing strategy. deviation management. Most divisions tended toward uniform global prices that were onlyThe key challenges we observed for accomplish- currency-adjusted across regions.ing global price establishment at the client includ-ed the following: Communicate prices: Depending on divisional policy, both list prices and deviated prices at this• Poorly documented pricing policies: In most client are communicated to customers through cases, across various business units, process price pages. documentation was either missing or present only as best practices. • Nonstandard communication formats across channel systems pose challenges in dataPricing Waterfall Components (As published in List Price the price pages) Volume Discounts (SKU price on Invoice Price customer invoice) Price Deviation Management Rebates Based on Yearly Commits, etc. (Actual price Pocket Price realized by Credit Adjustments for Samples, etc. organization) Diagram not representative of scale.Figure 2 cognizant 20/20 insights 3
  4. 4. transmission. The use of EDI has addressed Pricing optimization: In a B2B scenario, pricing this challenge to an extent. optimization is still nascent in its practice across the industry:• Errors in updates for divisions having manual upload processes challenge data integrity and add additional audit work (at times manual in • Change management poses a significant chal- lenge, as adoption rates are significantly low. nature). The source of errors in many cases goes untraced, posing potential compliance • Compared with B2C, B2B deals are either a issues. Enforcing price updates exclusively win or a loss. Hence, a normal price elasticity- through rules management has addressed this based approach focused on “customer’s will- challenge to a major extent. ingness to pay” is generally not successful in B2B markets.• Single price response on client quotations is one of the key challenges, especially when multiple • Even though there are many pricing tools in the sales representatives pursue the same end cus- market, most companies still manually price tomer. (At times the points of contact are dif- orders. Due to lack of pricing automation, busi- ferent, as well.) Systematic audits on prices for nesses are experiencing negligible productiv- the same SKUs across quotations has helped ity gains and increased price leakage. remediate a majority of these issues. • Use of pricing analytics and decision-support systems is still in the scoping phase; it will takeManaging price deviations: This is among the more time to evolve as a complete solution.significant challenges manufacturers face inbalancing workload with process efficiency and Complex supply chains: As buyers in the sup-managerial control. ply chain become powerful, businesses may be forced to provide competitive prices. Price-excep-• While tight tolerance rules for approvals en- tion routing and approval processes will become sure less erratic pricing, they also increase the a challenge, as approvers will not have enough workload and further slow down the quotation- information to make the right business decisions to-order lifecycle. due to increased complexity of the supply chains.• Setting up the right thresholds for the floor, Tracing on-invoice pricing errors: When an or- target and list prices is key to ensuring prof- itability is managed in tandem with key sales der is placed by the customer through a CSR, (e.g., excessive deviation approval can be man- there can be an incorrect price quoted to the cus- aged by appropriately setting rules in quota- tomer. If this happens, tracking the error back to tion management). Analysis of forecasts/ the actual source pricing system is a challenge. history is key to setting up optimal threshold There are many cases in which either a price is values. not returned or the wrong price is fetched by the CSR, etc. Powerful pricing systems with proper• Effectively reducing multi-level approvals is ordering system integration are key to avoiding one of the best practices adopted in our cur- such pricing errors. Meeting this challenge suc- rent setup for reducing the quotation-to-order cessfully can reduce the manual effort of pricing lifecycle. products.• Involvement of cross-functional teams (fi- Pricing generic stocks: Generic stocks are those nance, marketing, etc.) in pricing policy formu- lation helps create more rule-based manage- that are priced at the time of the customer or- ment and reduce deviation workloads. der. They are customized and configured based on customer-specific product dimensions and areAdministering off-invoice rebates ranges from normally make-to-order SKUs. Manual pricing ofsimple rule-based discounts, through complex such generic products may lead to pricing errorscontract-based calculations: and may impact price leakage.• Integration into contract management systems Short-lived price cycles: In a competitive market is one of the key complexities observed. environment, price changes can be as frequent as monthly. In such cases, developing price books• Adopting simple breakpoints for rebate admin- and publishing them to customers in a timely istration has helped ease both customer com- fashion can be a challenge. munication and rebate administration. cognizant 20/20 insights 4
  5. 5. Typical Price Management Solution Landscape Market Analytics Enterprise Data Warehouse (Third-Party Data Sources) MDM/Foundational Price Optimization Rebate Operational Data Capabilities Management Management Customer Data (Off Invoice) Invoice/ Payment Management Price Analytics Management Product Data Promotion Management Management Generic Pricing Quotes/SPRs Deviation Mgmt Contract Order Management Global Quotation Management Management Pricing SKU Price Price Pages Rules Mgmt Management Global Price ManagementFigure 3Mapping IT to Price Management As we share this experience, our journey is stillComponents moving forward toward architecting an integratedIT solutions can be designed to manage the pric- price management solution from a mix of COTSing process. One of the most common elements and custom-built components. A prioritized im-of such a solution is legacy systems, according to plementation plan has been charted with three ofresearch on B2B pricing. Because of a lack of pop- the business divisions, in the following order ofular packages, non-standard industry processes business processes:and other issues, most organizations in the 1990schose to build custom components. Available CRM • Pricing Analytics: This provides immediate results to price waterfall health and deliverssolutions have price management capabilities, as insights into low-hanging fruit for improve-well. However, the market leaders are still best-of- ment (usually varies from six to eight monthsbreed solutions, according to research firms. for realization of benefits).Within our current client organization, pricing • Price Management: This reduces the manual ef-management has been analyzed for potential fort involved in handling day-to-day pricing deci-rationalization and application of COTS solution sions and SKU price management (usually variescomponents. Figure 3 depicts a typical blueprint of from three to six months for value realization).a price management solution in a B2B scenario. • Quotation Management: This reduces leadConclusion time in responding to RFQs from customers andWhile today’s manufacturing organizations look ensures uniformity in responses (usually variesfor solutions in the IT space to address B2B pric- from three to six months for value realization).ing issues, a major part of the challenge is still From our experience with B2B price management,within the realm of business process manage- the most challenging and time-consuming part ofment and organizational change management. the solution involves arriving at common processFor global price management, we have chosen blueprints across various business segments. Theleading COTS modules to deploy at our client choice of implementation priority makes a sig-organization. Generic pricing is one area in which nificant difference in proving the success of thewe made a choice to “build” components to pricing transformation program, so that realizedaccommodate variations in pricing logic. value savings from the first phases contribute to the subsequent phases of the program. cognizant 20/20 insights 5
  6. 6. Acronyms & Glossary of TermsB2B: Business-to-businessB2C: Business-to-consumerCD: Compact discCOTS: Commercial off-the-shelfCSR: Customer service representativeContract: A formal agreement between company and customer for specific products and the price forthe product.Deviated pricing: Process of setting up customer-specific pricing.EDI: Electronic Data Interchange, the structured transmission of data between organizations by elec-tronic means.LOOP: Light order online processingOff-invoice rebates: Discounts applied to the invoiced amounts to the customer.Quote: A price at which a company is willing to sell a product under contract conditions.SKU: Stock-keeping unitStandard Pricing: Process of setting up list price.SPR: Special price requestsTerms: Contractual agreement on how payment will be made by the customer or distributor.ReferencesMichael Dunne and Robert P. Desisto, “MarketScope for Price Optimization and Management, 2008,”Gartner, Inc., 2008.John Hagerty and Noha Tohamy, “Pricing and Profitability Management Landscape: Balanced Perfor-mance Improvement is the Name of the Game,” AMR Research, 2007.Michael Marn and Robert Rosellio, “Managing Price, Gaining Profit,” Harvard Business Review, 2002.“Pricing in the New Market Reality,” The Journal of Professional Pricing, 2010.Footnote1 The client referenced is a diversified technology company with operations in about 45 countries, sell-ing thousands of products and services. It operates six key business units: Industrial and Transportation;Consumer Office; Safety and Security Systems; Healthcare; Display and Graphics; and Electronics andCommunication.About the AuthorDeepa Challa is a Cognizant Business Analyst focused on detailed requirements and functional testingfor pricing applications. As a team member, she has implemented pricing applications for food safety,automotive products, window film products and industrial minerals businesses. Deepa holds an engi-neering degree in electronics and telecommunications and has a master’s degree in business adminis-tration in systems and finance. She can be reached at Deepa.Challa@cognizant.com. cognizant 20/20 insights 6
  7. 7. About CognizantCognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out-sourcing services. Cognizant’s single-minded passion is to dedicate our global technology and innovation know-how,our industry expertise and worldwide resources to working together with clients to make their businesses stronger.With over 50 global delivery centers and more than 100,000 employees as of as of December 1, 2010, we combine aunique global delivery model infused with a distinct culture of customer satisfaction. A member of the NASDAQ-100 In-dex and S&P 500 Index, Cognizant is a Forbes Global 2000 company and a member of the Fortune 1000 and is rankedamong the top information technology companies in BusinessWeek’s Hot Growth and Top 50 Performers listings.Visit us online at www.cognizant.com for more information. World Headquarters European Headquarters India Operations Headquarters 500 Frank W. Burr Blvd. Haymarket House #5/535, Old Mahabalipuram Road Teaneck, NJ 07666 USA 28-29 Haymarket Okkiyam Pettai, Thoraipakkam Phone: +1 201 801 0233 London SW1Y 4SP UK Chennai, 600 096 India Fax: +1 201 801 0243 Phone: +44 (0) 20 7321 4888 Phone: +91 (0) 44 4209 6000 Toll Free: +1 888 937 3277 Fax: +44 (0) 20 7321 4890 Fax: +91 (0) 44 4209 6060 Email: inquiry@cognizant.com Email: infouk@cognizant.com Email: inquiryindia@cognizant.com© Copyright 2010, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein issubject to change without notice. All other trademarks mentioned herein are the property of their respective owners.

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