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Case Study: SPA Strategic Pricing Project for Parker Hannifin Provides $800 Million Impact

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SPA was selected to drive Parker Hannifin’s Strategic Pricing initiative that involved leading them away from an undisciplined, non-strategic “cost-plus” approach to a value-based, strategic architecture with improved internal processes and controls and the impact was estimated at $800 million by Parker’s CEO.

Strategic Pricing Associates led Parker Hannifin’s Strategic Pricing Initiative through its pilot stage from 1999 to 2001, and through the global roll-out from 2001 through 2005.  Encompassing all of Parker’s operations worldwide, roughly 90 manufacturing businesses and 30 trading subsidiaries (company-owned distribution channels), the initiative was a central part of CEO Don Washkewicz’s WIN Strategy, a three-pronged approach to improving profitability in this $10 billion, NYSE company (PH). The initiative involved leading all of Parker’s operations away from an undisciplined, non-strategic “cost-plus” approach to a value-based, strategic architecture with improved internal processes and controls.

The impact was estimated at $800 million by Don Washkewicz, as reported in a front-page Wall Street Journal article (March 27, 2007 ).

“In early 2001, shortly after Donald Washkewicz took over as chief executive of Parker Hannifin Corp., he came to an unnerving conclusion. The big industrial-parts maker’s pricing scheme was crazy. For as long as anyone at the 89-year-old company could recall, Parker used the same simple formula to determine prices of its 800,000 parts — from heat-resistant seals for jet engines to steel valves that hoist buckets on cherry pickers….”

Parker’s share price more than tripled during the period, easily outpacing peer industrial companies’ performance.

Working with operational leaders worldwide, SPA developed pricing strategies that maximize the profitability of each business unit. The project covered virtually every aspect of Parker’s pricing mix including:

  • Competitive strategy and positioning
  • Channel pricing strategy into distribution: list prices, discount tiers, rebates, exception pricing guidelines
  • Value-based economic analysis of customer usage
  • Good/better/best positioning of products
  • New product pricing strategy
  • Direct account pricing strategy: customer/part number pricing recommendation
  • Global pricing agreements
  • Management of freight recovery, EDI incentives, other terms and conditions

The project led to Parker Hannifin’s decision to employ a strategic pricing manager in each division. SPA also helped Parker recruit a VP of Strategic Pricing, Dick Braun, with whom they had worked earlier in his career at GE Lighting.

SPA also helped Parker with training and development to institutionalize the positive impact.  Beginning in 2004, SPA developed the Strategic Pricing Workshop program for Parker’s distribution channel. From a pilot program of six distributors, the program has expanded to over 60 of Parker’s leading distributors, with a majority of the elite distributors in each business segment participating in the program. Over half of the participants have progressed from Generation I to Generation II or beyond, with the original pilot six distributors now in Generation III.  Parker distributors have consistently achieved improvements greater than 2 percent of sales; and many have reached 4 percent of sales.

Click here to read more SPA case studies.

SPA Events

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Follow SPA

To easily keep up with the latest SPA announcements, events and resources you can follow us on LinkedIn or on the following major social media channels and file sharing platforms: Twitter, Google+, Facebook, SlideShare, and YouTube.

We also encourage you to join the Strategic Pricing discussions in our LinkedIn group and to sign up to receive our Strategic Pricing Newsletter by clicking here.

SPA Pricing Cube™ – The Architecture of Optimized Pricing

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The SPA Pricing Cube™ combines your understanding of markets with SPA’s powerful analytics, to identify the optimal pricing architecture for your business, focusing discounts on the most price-sensitive products and customers, where it will have the biggest payoff in competitive positioning; and extracting small premiums on less-sensitive products and customers.

The SPA Pricing Cube™ takes the guesswork out of optimized pricing in complex environments, allowing your sales force to focus on serving the customer and driving value. Our process provides for flexibility and discipline in pricing, to create a balance that works in your business.

Many complex companies have missed fundamental opportunities to manage pricing in two key dimensions.  Often many customers are getting lower prices than they should and low-sensitivity products are not generating price premiums. The combination is typically worth 2 to 4 margin points.

The following describes what the SPA Pricing Cube™ can do for your company.

  • Provides a foundation for setting pricing standards in complex environments
  • Strategic Pricing Standards are structured around market segments, customer sizes, and product/service sensitivity
  • Provides a foundation for organizing transaction data for purposes of comparative indexing analysis
  • Analyzes client invoice data looking at customer’s product baskets, order patterns by product, and relative spend by product
  • Analyzes key predictors of price sensitivity including order frequencies, volumes, and repeatability
  • Assigns every customer to a market segment and customer size and/or sensitivity level; every product/service is assigned to a product/service family
  • Profiles every product/service for price sensitivity, at the segment level or at the customer-specific basket level
  • Analyzes distribution of many properties by customer and across groups of customers
  • Result: recommended price premium map to SKUs and vendors by individual customer or customer group

The SPA Pricing Cube™, our proven pricing analytics tool, is available in Silver, Gold, and Platinum levels to provide the right tool to match a company’s current pricing process sophistication and desired impact; we recommend starting with Silver. The following describes the difference in the various levels.

Silver

  • Architecture: Basic
  • Data Services: Basic Sensitivity Ratings
  • Pricing Structure: Basic Type-Size Values; and Constant Slopes and Premiums
  • Impact: Good – Estimated 1.0x (2% Gain)

Gold

  • Architecture: Intermediate
  • Data Services: Dynamic Sensitivity Ratings (more C/D revenue)
  • Pricing Structure: Differential Type-Size Values; and Dynamic Slopes and Premiums
  • Impact: Better – Estimated 1.5x (3% Gain)

Platinum

  • Architecture: Advanced
  • Data Services: Dynamic Sensitivity Ratings, Type- and Customer-Specific
  • Pricing Structure: Dynamic Type-Size Values and Dynamic Slopes and Premiums; Customer-Specific Sensitivity, Behavioral Scoring and Cost-to-Serve
  • Impact: Highest – Estimated 2.0x (4% Gain)

Click here for more information about capturing pricing opportunities and improving your bottom line using our proven processes and tools.

Click here for a quick questionnaire to determine the impact Strategic Pricing can have on your company’s bottom line.

SPA Events

Click here for other SPA Seminar dates and locations and click here for upcoming SPA webcasts.

Follow SPA

To easily keep up with the latest SPA announcements, events and resources you can subscribe to our Strategic Pricing Pays blog or follow us on LinkedIn or on the following major social media channels and file sharing platforms: Twitter, Google+, Facebook, SlideShare, and YouTube.

We also encourage you to join the Strategic Pricing discussions in our LinkedIn group and to sign up to receive our Strategic Pricing Newsletter by clicking here.

You Can’t Cheerlead Your People to Pricing Success

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Read our article about the keys to getting your sales people on board with a proven process to drive your pricing plan forward.

Excerpts of the article follow.

“the deck is stacked against you from the start”

The sad truth is the deck is stacked against you from the start. Customers are constantly pushing backwards against your price. Sometimes this happens because the purchasing guy is classically trained to ask for a better deal. Other times long years of conditioning by our sales team has reinforced the behavior. The customer learns the lesson – ask and you shall receive.

Sales people are encouraged to build tight customer relationships. In the trenches, this translates to conflict avoidance at all costs. They believe it’s their duty to “cave in” to any enquiry about budgets or price with at the very minimum some type of nominal discount. No discussion of the value added by their company, no pushback with the price being fair for both companies, and no knowledge of the true market price is tossed out it’s; ask and you shall receive. They turn their eyes to the ground and say, “Hey let me see if I can come up with something a little better.”

“Flat rate pricing just won’t die”

Flat rate pricing just won’t die. Every company has some comfortable margin. If you don’t really know the real margin – just add some magical percentage. Let’s be specific; if you’re an electrical wholesaler you probably have hundreds of items marked up 20% gross margin every day. Every industry has a magic percentage like this. What makes it worse: only the person pricing the order knows your cost – certainly not the customer. Supply partners lament they can’t give their best distributors a higher gross margin because in a year they give the extra points away. Allowing the margin levels to drift back to very near that magical point.

Delusional thinking kicks in. Distributor salespeople will cross their hearts and swear they know the market. After all they have been in this industry for 10, 15 or 25 years, and their experiences give them some super human ability. We’ll drill into this in just a moment but for now let us propose an easy experiment for you to try. Print out your 50 highest selling items. Then ask your sales team to give you the market price for each. Our experience dictates, even your smartest guy will score a less than passing grade.

“You must have a real process to drive your pricing plan forward”

Your process must have documentation, training, measures and coaching points. Skip one of these and it’s not really a process. Pricing process is no different, except for on major point. The number of pricing permutations is enormous.

The typical distributor sells 10,000 SKU’s to 5,000 customers. Each and every customer – product interaction is a pricing permutation – 50 Million of them. Earlier we made reference to sales folk with super-human strengths; no normal person can keep track of that number in their head. Further, the number doesn’t lend itself to spreadsheets and other home-cooked plans. Nothing against your people, their skillsets or training; the number is just too big.

You need a powerful analytical tool. Something that harnesses the power of advanced proprietary algorithms with powerful hardware. Analytics become a cornerstone of your metrics and measuring points.

Click here to read the complete article.

Follow SPA

To easily keep up with the latest SPA announcements, events and resources you can subscribe to our Strategic Pricing Pays blog or follow us on LinkedIn or on the following major social media channels and file sharing platforms: Twitter, Google+, Facebook, SlideShare, and YouTube.

We also encourage you to join the Strategic Pricing discussions in our LinkedIn group and to sign up to receive our Strategic Pricing Newsletter by clicking here.

Event Recap: SPA Strategic Pricing Conference in Las Vegas, NV May 1, 2014

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The following are highlights of an article authored by Frank E. Hurtte Jr. who has 28 years of distribution industry experience and a lifetime in sales. He led a panel discussion at the last SPA Strategy Seminar and he has compiled a few highlights, comments, and data points shared by distribution and manufacturing leaders as well as industry experts for those of you that were not able to attend this informative event.

As a senior advisor to over 50 distribution companies, the Strategic Pricing Associates (SPA) Strategic Pricing events are eye opening and always give me pause.  Further, the no cost sessions are focused on distribution and manufacturing leaders’ concerns and conducted in a way that encourages networking.  If you haven’t been to one, I encourage you to do so.

Presentation: Market Trends in the Current Economic Environment

The following are some key insights for you to think about that were shared by Tom Gale, President of Gale Media and Publisher of Modern Distribution Management magazine, who shared data from the latest MDM/NetSuite Wholesale Distribution Outlook Report.

2014 appears to be shaping out as a pretty good year for distributors.  According to the survey respondents nearly 66% of the Distributors surveyed are optimistic about the coming year.  And, they are investing in technology.  The investments will rev up your own thoughts on this whole growth thing.

Other data points from the report:

    • 40.7% are investing in Customer Relationship Management (CRM) Systems
    • 40.1% are investing in E-Commerce
    • 29.7% are investing in Mobile Apps for Sales
    • 23.3% are investing in Pricing Process
    • 20.9% are investing in Cloud Computing (SaaS)
    • 15.7% are investing in EDI
    • 15.1% are investing in Demand Planning
    • 13.4% are investing in Warehouse Management Systems
    • 9.3% are investing in Finance/Accounting Software

If your competitors are laying out this kind of money, how will it impact your world?

Presentation: Driving Change that Matters in a Recovery Economy

David Bauders, President and Founder of Strategic Pricing Associates (SPA), made an offhand comment during his presentation that struck a chord with me.  As a matter of fact, it continued to resonate several days later as I was preparing this article and thought it was worthy of including. David went on to explain his comment:

“In pricing, you don’t have to be perfect to win…”

The SPA pricing process impact drives small slivers of gross margin improvement.  These come from products with less visibility in the market.  Sailing under the radar, obscure product categories sold to tiny and small customers can generate additional gross margin.  Many times the gross margin impact is upwards of 5, 6 or 7 points on affected revenues.  Because such products carry a true cost-to-serve that is relatively high (slower inventory turns, obscure vendors, less favorable terms, higher handling costs), it is not only feasible to price them at higher margins, it is necessary.

An effective pricing structure takes you away from the “cost plus” mentality.  Your company’s process begins to take things like hassles with an obscure supplier, time spent locating one time buys and non-stock/special order transaction costs into consideration.

Reports back from long-term SPA clients point to continued gains year over year as the management team continues to tweak and perfect their use of the pricing cube.  The leadership teams of the most successful SPA clients continue to define and reinforce the system year over year.  It’s a process and as the old saying goes, “Process is about progress not perfection.”

Panel Discussion: “Change Management and Sales Culture:  Execution on the Drivers that Matter”

Normally, the catch phrase is, “What happens in Vegas stays in Vegas.”  But this time, we thought we would share a few words of wisdom that were shared during one of the panel discussions at the event.  The panel consisted of executives from four high profile wholesalers representing the Electrical, HVAC, and Plumbing Supply industry.

SPA’s David Bauders posed a question to the group; here are comments in response to the following question:

What was pricing like in the days before SPA? 

“Conversations with a number of SPA clients in our industry completely dispelled nearly everything I believed about how pricing works.  One of the jokes in our market went like this:  If you need three quotes on a project, just call us three times.  Sadly, the joke was on us because it was mostly true.”

“During 2004 through 2006, pricing for us was just like the “wild west” with everybody doing their own thing and very little management involvement.  But, it was the good wild west because business was robust.  In 2008, we fell off a cliff and it really put the “hurt” on us.  When we started studying SPA it opened our eyes to what pricing could be.”

We left out the names of the companies in this article, but at the strategy seminar each of these panelists shared the wealth of their own experiences with the group as a whole and in a number of individual sidebars.  Once more going back to the panel discussion, here are comments in response to the following question:

How much real customer pushback did you encounter?

“We really can’t report any significant customer pushback, but we are constantly pushing our sales group.  We feel it is our job to support our sales effort.  The reasons we hear from our sales team comes from the heart and not from the head.  They have anecdotal what if stories, we provide them with real data and metrics.  They are coming along but the whole thing is a process with continual improvement from sales.”

“Our pushback was 100 to 1 from the internal folks…  The only times we have ever heard any issues from real customers was well into the system when managers became too aggressive in order to meet departmental goals.”

Click here to read the full article

SPA Events

Click here for other SPA Seminar dates and locations and click here for upcoming SPA webcasts.

Follow SPA

To easily keep up with the latest SPA announcements, events and resources you can follow us on LinkedIn or on the following major social media channels and file sharing platforms: Twitter, Google+, Facebook, SlideShare, and YouTube.

We also encourage you to join the Strategic Pricing discussions in our LinkedIn group and to sign up to receive our Strategic Pricing Newsletter by clicking here.

 

SPA Featured in The Distributor Channel “Product Training, Sales Training, Price Training?” Article

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SPA was featured in the latest article on The Distributor Channel blog – “Product Training, Sales Training, Price Training?“. It describes how the way distributors view training is skewed.

Excerpts of the article authored by Frank E. Hurtte Jr. who has 28 years of distribution industry experience and a lifetime in sales follow.

“Here’s my unscientific rundown of content:”

After observing hundreds of confabs carrying the “Distributor Sales Meeting” moniker, I would characterize the content as product-centric community bulletin boards with an occasional dash of something else. Here’s my unscientific rundown of content:

– 49% New Product Introductions

– 20% Existing Product Re-Launches

– 15% Delivery/Logistics Issues

– 10% Company Policy, Quotas, Performance

– 5% Sales Training

– 1% Pricing

“What should be covered in a sales meeting?”

One major point is why a customer would benefit from the use of your product. This benefit question must be tied to value drivers. Labor savings, lower cost maintenance, better energy usage, increases in uptime, and improved operational efficiency must be studied in detail. Whenever possible, it makes sense to tie these to monetary values. For example, our product saves the customer $105 dollars during the installation procedure.

Distributors also add value via the services they provide. Just in time delivery, emergency back-up stock, parts kitting and application support join valuable yet mundane tasks such as locating and serving as a source for some obscure manufacturer.

A real sales meeting would stress the importance of the value the distributor provides to each and every customer. A real sales meeting would cover the questions needed to bring out customer-centric information which would allow for better solutions.

“But what about Price Training?“

Would it make sense that some distributor solutions are scarcer than others? With this in mind, the distributor is entitled to charge more. The problem is, most distributor salespeople don’t fully understand the cost of handling the products. This could be part of price training.

A few of the products we sell are truly commodity-like. When commodities are sold, quantity and types of logistics required impact the price. Would it make sense to talk about precisely what makes a “quantity order?” Is it 10 pieces, 10 cartons or 10 pallet loads? Are the people in customer service aware of the price breakdowns? Are they measured by the way they adhere to management’s directive?

The sales team must continually review (and occasionally improve on) the following topics:

1. How was the system price derived?

2. What are the natural customer segments and how do they impact price?

3. What product types deserve a higher margin? And why?

4. How do we handle pricing exceptions?

5. How are market prices impacted by competitors?

6. The importance of understanding customer-based negotiations?

“Price Training starts with a Pricing Process.”

Developing a real pricing process is central to price training. The Strategic Pricing Associates (SPA) process uses scientific computer analysis of data pulled from your own past sales. Further, the process has detailed documentation designed to enable multi-layer training for literally everyone within the distributor organization (Sales, Customer Service, Purchasing, etc.) Finally, the SPA process has metrics developed to coach, help and manage the sales team into the future.

Strategic Pricing Associates has assisted over 350 distributors through the implementation of their process. Most SPA clients see results in 90 days. The results pay dividends. The typical SPA client sees a gross margin increase of two full points.

“A final thought”

Strategic Pricing Associates hosts several Pricing Strategy Seminars. These are a gathering of clients already using the SPA system, Industry Experts and companies considering a pricing process. The seminars are thought provoking and powerful. I have had the honor of speaking at a handful of these events and will be doing so again in Chicago on June 6th.

Click here to read the complete article.

Follow SPA

To easily keep up with the latest SPA announcements, events and resources you can follow us on LinkedIn or on the following major social media channels and file sharing platforms: Twitter, Google+, Facebook, SlideShare, and YouTube.

We also encourage you to join the Strategic Pricing discussions in our LinkedIn group and to sign up to receive our Strategic Pricing Newsletter by clicking here.

Case Study: The Livingston & Haven Story – Networking, Innovation and Teamwork

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In distribution, the most innovative companies are quite often the best connected. They share best practices with a cadre of others. They build de facto cartels for exploring new concepts. Read how Livingston & Haven literally radiates the attitude of networking, innovation and teamwork and how it lead to implementing strategic pricing processes and tools that improved their margins.

Excerpts of the Case Study follow.

“had invested considerable time and effort to margin improvement with minimal results prior to deciding to make a switch to an outside plan”

To illustrate the depth of this commitment, Clif Vann, the company’s CEO, while speaking at a company wide sales meeting challenged every employee of the company to do “whatever it takes to insure the long term health of U.S. Manufacturing.” Networking, innovation and teamwork play a big part in the strategy. Here’s how an example.

Bob Decker, Livingston & Haven’s Director of Strategic Initiatives, was visiting relatives in Louisville, Kentucky when he decided to pay a networking visit to fellow distributor Air Hydro Power. Because they have a few product lines in common and similar thoughts about distribution, benchmarking made a great deal of sense. During this visit, Bob began to hear of their results with a pricing strategy – specifically the Strategic Pricing Associates process. As is often the case with networking, during the next few months Livingston & Haven hear similar stories from other networking partners.

The idea of building of margin improvement wasn’t a new one to Livingston & Haven. They had invested considerable time and effort to margin improvement with minimal results prior to deciding to make a switch to an outside plan. Further, when a new data driven plan was brought to a leadership meeting some argued for a renewed attempt at a home-grown plan. But, the stakes were high and the need for margin control great, so the decision was made to explore outside offerings.

“the effort has paid dividends….This whole new way of thinking about pricing has allowed us to change the direction of our margin percentage”

They found they needed to rethink their whole plan for handling second source materials. Through the years of working to assist customers with locating oddball items, the practice had left Livingston & Haven with a number of unanswered issues. Topics like how to handle freight, lack of specific product knowledge and customer warranty risks had gone mostly unanswered. These had to be explored, understood and policies established to improve the whole concept of their customer service.

In addition to these issues, the implementation team found themselves facing a few other issues. Jamie Blackburn, L&H Pricing Manager, commented, “We had over 72,000 line items to review. Believe it or not, we had over 60 years of exception based pricing embedded into our system. Our team is all about getting things right for the customer and each of these needed to be researched, an outcome created and a decision made before we could go live with SPA.”

But the Strategic Pricing team at Livingston & Haven feels the effort has paid dividends. For example, Mr. Decker relates, “Prior to applying the SPA process, exception pricing – deviating from the system standard – was over 67% of our business and we only counted price drops greater than 10%. This created issues with consistency and really complicated the job of our inside sales team. Today this practice has dropped to nearly zero. The system does not allow downward pricing adjustments, the inside sales team can only adjust upwards.”

According to pricing team member Blackburn, “This whole new way of thinking about pricing has allowed us to change the direction of our margin percentage. We are seeing the typical two point increase that SPA talks about, and then some.” Bob Decker chimed in, “Salespeople can no longer cave instantly to negative price messages. Our process requires them to get pricing adjustment approval from someone on the management team and that little delay often allows them the opportunity to think about the value we provide and justify the L&H price in their own mind.”

Click here to read the complete Livingston and Haven case study.

Click here to register here for our June 4 webcast where you will learn how another SPA Client, Kellermeyer, has leveraged strategic pricing tools to increase profits significantly.

Follow SPA

To easily keep up with the latest SPA announcements, events and resources you can subscribe to our Strategic Pricing Pays blog or follow us on LinkedIn or on the following major social media channels and file sharing platforms: Twitter, Google+, Facebook, SlideShare, and YouTube.

We also encourage you to join the Strategic Pricing discussions in our LinkedIn group and to sign up to receive our Strategic Pricing Newsletter by clicking here.

The Best Payback in the Distribution World

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SPA was featured in an article authored by Frank E. Hurtte Jr. who has 28 years of distribution industry experience and a lifetime in sales. It describes how strategic pricing initiatives can have a very fast ROI.

Excerpts of the article follow.

“we have an objective and standard measure for payback”

So how can I make a claim like the “Best Payback in Distribution”? Am I no different than my friends down between the Brazos and the Rio Grande? Unlike barbecue where all judgments are purely subjective, we have an objective and standard measure for payback. Here’s a short definition:

Payback period – is an estimate of the time that will be necessary for an investor to recoup the initial investment. It is used to compare investments that might have different initial capital requirements.

Early last month we had an opportunity to take part in the interview of four distributors who had applied the Cleveland-based Strategic Pricing Associates process to their businesses’ pricing dilemma. These distributors came from a number of lines of trade. During the interview we asked the question: “How long did it take for you to recoup the cost of participating in the SPA program?”

“a two month payback”

For the sake of our discussions, let’s call this a two month payback. Based on dozens of interviews with distributors who have implemented the SPA pricing process, we know that dollars returned actually increase as months go by. In other words the revenue to the distributors is very likely to not be linear but instead ramp up. So the impact of the first couple of months is not as hefty as the remainder of the year. Most companies ramp up their activity with pricing process starting first with tiny customers and gradually taking on customers with greater sales numbers. But we want to be conservative, so let’s assume the bucks remain the same throughout the year.

Click here to read the complete article.

Follow SPA

To easily keep up with the latest SPA announcements, events and resources you can subscribe to our Strategic Pricing Pays blog or follow us on LinkedIn or on the following major social media channels and file sharing platforms: Twitter, Google+, Facebook, SlideShare, and YouTube.

We also encourage you to join the Strategic Pricing discussions in our LinkedIn group and to sign up to receive our Strategic Pricing Newsletter by clicking here.