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Price (Subject) / Price Controlling (Lesson)
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- 7.1 Definition and dimensions of price controlling In price management controlling is required in order to ensure therationality of a customer oriented strategy.Its objective is to monitor – and if possible improve – the effectivenessand efficiency of the pricing strategy. Main tasks:• complete intuition through more rational elements• take decisions on the basis of reliable and valid information• ensure that pricing processes are optimally structured• to link pricing with incentive and motivation instruments
- 7.1 Price objectives An objective is clear when the following aspects are clearly specified: Dimension Content ExampleWhat About what objective are we talking Price levelObject What project, product or service Audi A4When In what period or at what moment? In 2011Where In what region or for what customer (group)? In FranceHow much Extent to which the objective should be modified Increase by 3%
- 7.1 Examples of indicators in price controlling siehe skript bro
- 7.2 Price-level analysis: Scanner data as source of price information Sources of price-levelcontrolling information Internal data External data:• Accounting system• Sales contracts• Sales forceobservation• Mystery shoppers• Etc. External data• Industry associations• Market surveys• Household panels• Store panels• Etc. • Scanner data collected on consumer purchases fall into two categories:point-of-sale or store scanner data and household-based scanner data.• Point-of-sale scanner data are collected at cash registers and identify theproducts, quantities sold, and prices paid.• Household-based scanner data come from a sample of households thatscan universal product codes (UPCs) of all purchased products after eachshopping trip.• These data provide information on household demographic characteristicsthat are not available in store scanner data.• In addition, because the household scanner data panelists are instructedto scan all purchases from all outlets, the datasets from household-basedscanner data are more complete than datasets of purchases of individualhouseholds collected through store scanner panels (bias because of nonparticipatingretail chains).
- 7.2 Additional price related controlling tools In addition to classical market research tools, other sources provideprice-related data, e.g.:• Specialized magazines and newspapers• Product testing laboratories (private or publicly funded)• Consumer rights associations• Non-governmental associations• Etc.
- 7.3 Revenue and market share based analyses Analysis of turnover: Revenue indicators:Quantity: Sales, Orders, Customers (existing, new) Value: Price, Discounts, Other price reductions In absolute terms:• Revenue = number of products sold x price per unitIn relative terms:• Market share (value) = Own revenue / Value of the market (revenue all firms competing)• Market share (volume) = Own volume / Market volume (units sold by all firms competing)
- 7.3 ABC analysis • Classification of customers or products into categories onthe basis of certain criteria, e.g.• Current revenue (last period)• Potential future revenue (next year)• Analysis of activities per category (visits, contactfrequencies, visit duration etc.) A= e.g. 20% of customers make 80% of cummulated revenue (cash cows)BC
- 7.3 Traditional Revenue-Deviation Analysis RD (Revenue deviation) = PA (Achieved Price) * QA (Achieved Quantity) -PP (Planned Price) * QP (Planned Quantity) RD = (PA-PP)*QP <-- Price Effect +(PA-PP)* (QA-QP) <-- Interaction Effect +PP *(QA-QP) <-- Quantity Effect
- 7.4 Profit based analyses: Product profitability analysis § Direct fixed costs are incurred by a specific product or service§ Indirect fixed costs are incurred to support the total business.Indirect costs can be broken into two categories: • Traceable costs are indirect costs that can beallocated to various products on some nonarbitrarybasis. • Nontraceable costs are not assigned to individual products.§ The percentage variable contribution margin indicates thepercentage of each additional sales dollar that will beavailable to help the firm cover its fixed costs andincrease profits. In order to establish a customer’s attractiveness after deduction of thecosts of serving him, different approaches exist:• Direct costing based performance measure• Customer contribution margin costing• Activity-based customer performance calculusAll approaches have to deal with the problem, that it is difficult to establish whichpart of a company’s overall costs have their roots in the company’s business withthis specific customer. Output = monetary value
- 7.4 Customer contribution margin = Gross turnover- product costs- customer-related direct reduction of turnover (e.g. order-related discounts, skonti)= Contribution margin 1- direct costs of orders (e.g. delivery, commission for sales reps, bonuses / soft money, salespromotions)= Contribution margin 2- general customer-related costs (e.g. sales rep salaries, sales rep visits, samples, service personnel, training of customer employees)= Contribution margin 3
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- 7.5 Discount analyses: The need for discount controlling At a large industrial goods company with more than 40.000 articles the sales forcehad important autonomy in pricing. Sales people were partially remunerated basedon commissions.Commissions were paid based on turnover. Increasing competitive pressure andhigh turnover objectives for sales men led to an increased use of discounts inorder to obtain orders. Profitability decreased by 50% within five years.The introduction of an anti-discount-commission (variable revenue) led to achange.Now commissions depended upon the use of discounts for obtaining orders:The higher the discount the lower the commission. Within few months the averagediscount moved from 16 to 14 percent without a loss of customers. Profitabilityincreased by two percent.