In this article, the author digs deeper into average selling prices to identify opportunities to improve revenues and profits. He also presents a pricing case study in which ASPs were analyzed by a building materials company, which aimed to improve the impact of its pricing as well as the return on investment of a pricing function and appropriate pricing tools. Author Peter Maniscalco is a Pricing Management Professional with more than 10 years of comprehensive business experience in strategic and tactical pricing, market and competitive analysis, as well as corporate finance. He can be reached at pman9788@gmail.com.

The Pricing Advisor, August 2017

The use of averages is as commonplace in the business world as it is in the sports world. Averages reflect important data and hope to provide us with some kind of insight, be it current or future tense. Not using averages to assess performance would leave us with numerous data points without any relevant context for consideration or comparison. However, averages, or more specifically “average selling prices,” can also have a detrimental effect on a company’s profitability. The benefit of using the metric of an average is that it compiles a huge amount of data into a single number for drawing critical conclusions. Average Selling Price (ASP) can refer to the average selling price of a product across multiple distribution channels, across a product category or even across the industry as a whole.

This average measure may provide more clarity but it doesn’t reveal the granularity that may be sought. It’s at the granular level where opportunities for price and profitability improvement reside. Companies will look at ASPs amongst their various lines of business to glean some information and insight. However, this surface level ‘view’ does not provide insight at the granular level, which can reveal important factors which may be affecting ASPs. Without this deeper view into the data, one doesn’t really know what may be happening or what the real root causes or drivers might be behind a reported observation.

Therefore, it’s important and valuable for a company to invest in the appropriate pricing resources. This is not just about having a team of properly trained and experienced pricing professionals but, also having the appropriate tools to do the analysis to uncover root causes of price erosion and lost profitability. ASPs can be very helpful but also deceiving. If companies don’t have a true understanding of the underlying elements of ASPs such as what’s driving them higher or lower, and what it’s telling them, it may quickly lead to a distorted view and erroneous conclusions or actions.

What are some of these elements that can affect ASPs? Product feature mix, volume mix, price leakage, transactional discounts, industry/market mix, sales channels, and list price changes to name several. If you don’t have a good understanding of these underlying elements and their individual influences, you will miss out on the potential causes behind the erosion of ASPs, resulting in additional lost revenue and profitability opportunities.

The following case study was a successful project, at a building materials company, which aimed to improve the impact of its pricing. More specifically, the return on investment of a pricing function and appropriate pricing tools. The company wanted to uncover its customer cost-to-serve elements in order to gain better insights for management of their discounting, as well as to improve and sustain its pricing levels. They had undertaken an eight-week pricing project with an outside consulting firm collaborating with the company’s new Pricing Manager. The discoveries were significant. First, it was uncovered that the company was entertaining too many negotiated discounts. This was revealed by means of a waterfall analysis. This showed the company where its product prices were eroding between invoice and actual transaction price, as seen in Figure 1:

In the Price Waterfall, each Component Represents a Revenue Leak

Note: Concept developed by McKinsey & Co.

A common premise is that the market frequently sets the price at the macro level, i.e. an average “market” price. However, companies set the price at the transaction level which is where margin and revenue leakage occurs.

This leakage can significantly contribute to lower pocket prices, which is a major reason it’s important to control discounting. You will never eliminate leakage, however great strides can be made in alleviating and controlling it when companies have a good understanding of the contributing behaviors such as unwarranted discounts for example.

A second step taken was to look at price bands (compares prices attained for products or services across transactions and sales people) of the company’s top 20 revenue generating products. A good way to gain some of this insight, and pinpoint sub-par pricing decisions, is by taking a view of ASPs at the transactional level, as shown in Figure 2:

Fig 2.

Note: chart use granted with permission by R. Singh, Deloitte Consulting.

There can be multiple price band views, but a basic view can reveal steps to be taken immediately for improving pricing and financial performance. Transaction prices that fall below the overall weighted average price should be investigated further. They should receive consideration for a price increase, hence contributing to improvement of ASPs. In this particular project, in performing the ASP analysis, the approach was taken a step further. Instead of solely focusing on the overall ASP, “buckets” of ASPs were analyzed, i.e. ASP’s were captured by product and customer segment. Then, a drill-down analysis was done by transaction and territory/sales rep within the respective bucket or category. A small and medium customer segment could have the same ASP. However, one wouldn’t know whether there was more or less opportunity for price improvement without deeper analysis.

This analysis was done for the top and bottom 20% of customers within each ‘bucket, and then all others within the same bucket. This approach enabled the company to view the opportunities that existed for ASP improvements, and what were the underlying factors stifling ASPs and profitability. In some cases, it also provides insights to what contributed to artificial inflation of some ASPs, e.g. a backlog of rebate claims by some customers in certain territories.

What was the result of this pricing analysis the company had undertaken? Upon completion of the project, the ongoing refresh and monitoring of these pricing metrics created by the project team was led by a better equipped, expanded pricing team. In less than 12 months, there were noticeable ASP improvements in certain product lines which contributed to an improvement in the company’s revenue by approximately three percentage points.

What did the company learn? The company had come to understand the importance of value-based pricing, as well as the significance of controlling its discounting. And, that there’s more to ASPs than meets the eye! It also realized that there was too much (unwarranted) discounting being done, especially by their sales force. By improving its ASPs, it contributed to improved revenue, margin, and price realization. It also realized the importance of developing a pricing team, or at least initially having a pricing expert, in order to provide the pricing analysis, guidance, and education to the company, especially to the sales force. Had the company not undertaken this pricing project, as well as not having a pricing manager, the trend of revenue leakage as well as price and margin erosion would most likely have continued.

What’s also a key takeaway, and the company understood this, is that it’s important to ensure the sales force is engaged with the pricing function and activities that can also help improve and sustain average selling prices. What kind of activities? Equip your company’s sales force with the appropriate tools, e.g. a price matrix which provides an acceptable range of prices they can use to quote, such as target, objective, and floor prices. Also, consider, if not already done, aligning sales’ compensation with discount performance.

It’s a team effort to ensure that discounting is alleviated and better controlled, as was uncovered by the pricing analysis that was undertaken in this aforementioned case study. The importance of a pricing function or pricing “czar” in any company should not be taken lightly. It will contribute to a company’s bottom line dramatically. As it may just be the most ‘profitable’ investment a company can make.