Strategic Pricing: The basics
For every product/customer sale combination, there is an optimal price-the highest price a distributor can obtain while retaining the customer's business. This is often different for different product/customer combinations. Strategic Pricing is a pricing architecture based on the principle that there are many small margin opportunities which, in aggregate, can yield 2-4 percent in additional pricing margin points for the distributor.
Recognizing the value that strategic pricing would provide to distributors, Epicor formed an exclusive relationship with Strategic Pricing Associates (SPA) to seamlessly integrate a strategic pricing module into its Eclipse, Prophet 21, and Prelude products. Since all that is needed is sales history, the data already exists in most distributors' systems. Epicor customers can easily export the data for analysis and then load the resulting pricing structures/files into the system.
Achieving incremental margin gains
According to Becker, "I always thought we had additional pricing opportunities and were not using our sales history data effectively to set our pricing. When I heard about Strategic Pricing, it was exactly what we had been trying to do on our own."
TORRCO began implementing Strategic Pricing in July 2009. It was a gradual and incremental process. Explains Becker, "To reap the full advantage of Strategic Pricing takes a good deal of time and thought during the setup phase. It requires a fairly detailed understanding of your customer segments, product segments, and markets, as well as recognition of how your company currently sets pricing policy."
| Percentage of Sales and Lines Priced by SPA Matrix | ||||
| 2008 | 2009 | 2010 | 2011 |
|
| Sales |
0.0% | 10.0% | 29.6% | 30.3% |
| Lines |
0.0% | 16.8% | 49.5% | 52.1% |
| GP% |
0.0% | 28.0% | 27.9% | 27.9% |
| GP% SPA |
0.0% | 35.1% | 32.5% | 32.8% |
| SPA Effect |
0.0% | 7.1% | 4.6% | 4.9% |
| SPA Effect CO |
0.0% | 0.7% | 1.4% | 1.5% |
As indicated by the data above, in 2011, 30 percent of the company's sales and 52 percent of its lines were priced using the SPA matrices. The "SPA effect" is the price difference between how the product is priced with the SPA matrix and how it would have been priced if TORRCO did not have Strategic Pricing (which is recorded for every sale).
"For sales priced using the SPA matrix, we earned an additional 4.6 and 4.9 percent in margin in 2010 and 2011, respectively. These are enormous margin gains with virtually no customer pushback that we never could have achieved without Strategic Pricing," observes Becker. He concludes, "As you can see, the impact of hundreds of thousands of small increases in price adds up to be very significant. For us, Strategic Pricing was the most effective, systematic way to improve our margins."
About Epicor
Epicor Software Corporation is a global leader delivering business software solutions to the manufacturing, distribution, retail, and service industries. With more than 40 years of experience, Epicor has more than 20,000 customers in over 150 countries. Epicor solutions enable companies to drive increased efficiency and improve profitability. With a history of innovation, industry expertise and passion for excellence, Epicor inspires customers to build lasting competitive advantage. Epicor provides the single point of accountability that local, regional, and global businesses demand. For more information, visit www.epicor.com.
