lesson 5.2 part 2 apr 20 2019.pptx MAXED CHARACTERs

Business

1. Customer Profitability Management – Pricing and Incentives Lesson 5.2 Part 2 Updated April 21, 2019

2. Pricing Small concessions offered by different organizational units may accumulate into large revenue leaks Pricing Waterfall charts list the multiple revenue leaks from the list price caused by special allowances and discounts granted to the customer

3. The Pricing Waterfall 3 Source: http://download.mckinseyquarterly.com/popr03.pdf

4. How Does Price Erosion Happen? Firms record these discounts in different systems and they are not traced back to orders or customers. For example, prompt payment discount is recorded in aggregate account (sales deductions ) freight costs are recorded as transportation expenses and not traced to orders/customers. A yearly volume discount is refunded to the customer only once and not linked back to the individual orders So, no manager sees the complete picture for individual orders and consequently no one realizes how much revenue loss occurs with individual orders. 4

5. How to R emedy P rice Erosion U se activity-based costing systems to trace revenue deductions promotional costs and allowances to individual orders and customers in order to calculate realized profit or loss by order/customer . Using this information to calculate an profit statement for every customer. 5

6. The Motivation to Control Price The 1% Mindset Price is the most powerful lever to improve profitability 1% Price improvement can drive an 8% improvement in operating profit 6

7. Salesperson Incentives S alespersons are motivated to offer discounts and allowances to entice customers to buy products Especially if reward/bonus is based on sales volume or revenue C ompensation plans must be designed to encourage salespersons to pay attention to pocket profit, not just achieving sales rewards based on pocket profit or gross margin can motivate the right behavior

8. Recap Managers can increase customer profitability through Analysis and management of revenue leaks The pricing waterfall Sales discounts and incentives Designing better salesperson incentives