Dealing with Rising Commodity Prices
March 23, 2011
Copyright © 2011 by LeveragePoint Innovations Inc. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means — electronic, mechanical, photocopying, recording, or otherwise — without the permission of LeveragePoint Innovations Inc. This document provides an outline of a presentation and is incomplete without the accompanying oral commentary and discussion.
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Copyright © 2011 LeveragePoint Innovations Inc. Copyright © 2011 LeveragePoint Innovations Inc.
Our Presenters Today
Dr. Tom Nagle Senior Partner, Monitor Group
Jay Manson VP Sales, LeveragePoint
Lead author of the top-selling book on pricing for two decades, The Strategy and Tactics of Pricing, 5th edition 2010.
Value-based marketing, pricing and sales expert. Formerly at Vendavo and the Strategic Pricing Group.
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Copyright © 2011 LeveragePoint Innovations Inc. Copyright © 2011 LeveragePoint Innovations Inc.
Dealing with Rising Commodity Prices Rising commodity prices is not a short-term phenomenon. CRB Index of 17 essential commodities has been rising steadily all decade. Given recent monetary policy, the trend is more likely to accelerate than abate.
How will your company’s margins and capital requirements be affected? 33
Copyright © 2011 LeveragePoint Innovations Inc. Copyright © 2011 LeveragePoint Innovations Inc.
We Need to Get Ahead of Rising Material Costs
Supply Chain Efficiency We are victims of our supply chain optimization success
Hedging Customer building up inventories will increase demand instability and the appearance of price sensitivity We feel rising material costs sooner We want need to avoid sales dips and revenue lag
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Communication Our customers know it’s coming, but are more comfortable delaying as long as possible
So how do we overcome their resistance and accelerate the process?
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Understand and Manage Customers’ Fears and Expectations
Causes of Resistance
Ways to Manage
Belief that they can’t pass along any increase quickly enough to avoid near term hit to profit
Perception of “unfairness” (we are struggling too and you are not being a good partner)
Fear of becoming competitively disadvantaged (or hope of short term advantage)
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Don’t sneak up on them! Warn of anticipated commodity cost increases and relationship to product or service cost If necessary to give adequate advance notice, hedge a few months in advance If must increase without warning, give customers who agree immediately & contractually to maintain volume and accept increases the ability to take in steps; “spot” customers take all at once Copyright © 2011 LeveragePoint Innovations Inc. Copyright © 2011 LeveragePoint Innovations Inc.
Understand and Manage Customers’ Fears and Expectations
Causes of Resistance
Belief that they can’t pass along any increase quickly enough to avoid near term hit to profit
Perception of “unfairness” (we are struggling too and you are not being a good partner)
Ways to Manage
Announce full price increase, but then give sales reps ability to make pre-authorized tradeoffs between increase and customer’s acceptance of costreducing behaviors – Less frequent deliveries of larger orders – Lower guaranteed product specs that could still meet need – Electronic orders, info sharing for demand planning
Fear of becoming competitively disadvantaged (or hope of short term advantage)
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Be transparent about impact on costs. Make increase a variable surcharge tied to objective index Copyright © 2011 LeveragePoint Innovations Inc. Copyright © 2011 LeveragePoint Innovations Inc.
Understand and Manage Customers’ Fears and Expectations
Causes of Resistance
Ways to Manage
Belief that they can’t pass along any increase quickly enough to avoid near term hit to profit
Perception of “unfairness” (we are struggling too and you are not being a good partner)
Fear of becoming competitively disadvantaged (or hope of short term competitive advantage)
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NEVER negotiate away the ultimate increase, just the terms for getting there Give large customers “mostfavored nation” commitments relative to direct competitors Only as a last resort to save a “must have” customer, agree to delay timing of increase until equal quality competitors match the increase
Copyright © 2011 LeveragePoint Innovations Inc. Copyright © 2011 LeveragePoint Innovations Inc.
What Keeps Us From Raising Price No competitor wants to go first, even while none wants to be left behind
What can you do, within the law, to ease the transition to a price level that still re-establishes competitive margins? 99
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Understand and Influence Industry Competitive Dynamics
Causes of Delay
Ways to Manage
Fear of losing sales to competitors that delay following increase Sales force unprepared to explain increase to customers—easier to say just following industry
Industry market leader (the others use as their price reference) must lead! – Describe need but delay implementing until other industry leaders have expressed similar perceptions and intentions – Roll back if necessary to demonstrate that won’t happen if other large share firms not prepared to follow
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Copyright © 2011 LeveragePoint Innovations Inc. Copyright © 2011 LeveragePoint Innovations Inc.
LeveragePoint Value Management Improves Price Realization LeveragePoint provides sales with the language to capture price in the field. Price Increase Strategy is Created
Sales and Customer Pricing Conversation is Captured
Finance
Price Increase Package Passed to Sales
Sales
Customer
How effectively are we capturing the price increase? Where are we experiencing resistance? Why? How do we do it better in the future? 11 11
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Time Is of The Essence
Pricing for sustainable growth requires: Value-based, not cost-based Profit-driven, not share-driven Proactive, not reactive
Pricing technology enables growth
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Thanks for watching!
www.leveragepoint.com
[email protected] Jay Manson (781) 727 – 5977
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Copyright © 2011 LeveragePoint Innovations Inc. Copyright © 2011 LeveragePoint Innovations Inc.