Issue link: https://www.e-digitaleditions.com/i/480616
26 FEDA News & Views continued on page 30 Early in my career, I was part of a major pric- ing transformation pilot project with a large dis- tributor. The purpose of the pilot was to demon- strate success on a small scale and to secure the CEO's endorsement for a roll out to the rest of the organization. For five months, we worked tirelessly to make sure our pilot regions were armed with everything they needed to achieve improved pric- ing performance. At the end of the pilot, we started to look at the numbers. We were shocked at what we saw: Margins for our pilot regions were actually down 200 basis points! Horror! What could have gone wrong? Was there a data error? How could we have spent five months focusing on pric- ing improvement, only to bring margins down 200 basis points? For the next two weeks, we analyzed the data back and forth, hoping to find a data error to blame for the apparently negative results of our project. Instead, we ended up validating that the data was com- pletely accurate. It wasn't a data issue. The decreased margins didn't make any sense to us. In fact, during the entire five-month pilot, we never recommend- ed a lower price. All of our recommen- dations were either to hold or raise prices. So how could margins be down? To find out the answers to this ques- tion, we knew we would have to do some deep-dive analysis to understand what really happened in the pilot. It was clear what we were seeing on the sur- face wasn't telling the whole story. To understand what was driving the over- all numbers, we realized we needed to dissect and analyze the data in chunks. The one big margin percentage number was made up of a number of individual margin numbers. We needed to know which ones were good and which ones were not so good. Lesson #1: Dissect your results. We decided first to focus on the core set of regular purchas- es from regular customers who purchased in both the before- and-after periods. After all, this was probably the closest we could come to an "apples-to- apples" comparison. After a little analysis, we found the first piece of really good news: Margins on these products were up approximately 400 basis points over the pilot period. Then another piece of good news. Margins on the same business in the control regions were actually down 200 basis points. That meant that our pilot regions performed 600 basis points better than the control regions on this segment of the business. Lesson #2: Start with the core—regular purchases from regular customers. Since this experience, I have been in many executive meetings where the dis- cussion has been all about one number— overall margin percent. Unfortunately, this number can be filled with deceit and also be very misleading. It is a great summary metric to measure the sum of margin performance, but it's typically not sufficient to understand what's really going on under the covers. Back to the story. Digging deeper, we found our first segment—regular pur- chases from regular customers—could be further dissected. We divided them into two groups: The first included all orders where the sales rep generated a price recommendation from our sys- tem; the second group contained orders where the sales rep did not request a price from the system. More good news: We found that orders where the sales rep got a price from the system were up 490 basis points, while the other group was up only 50 basis points. Lesson #3: Focus on what you control; what you By Jeff Robinson Interpreting Performance Metrics & Data Results can't control is probably "noise." The more analysis we did, the more we felt like we were uncovering enough data to make a strong case for the value of our pricing solution. Nonetheless, we still hadn't solved the initial question of why the overall margins for our pilot regions were down 200 basis points. Shifting our analysis to the "non-core," we found three major factors that were negatively impacting the overall margin percentage number for the pilot regions. A very high-margin, seasonal product in the "before" period was being sold at a huge discount during the pilot period to clear inventory. This was actually a good thing, and it was easy to explain because it affected both the pilot and the con- trol regions. But it still put downward pressure on the pilot margin percentage number. Two of the pilot regions had a very large and irregular volume of very low- margin products. These were manufac- turer-direct items that represented a large volume of incremental business with very little cost. Margin dollars were big, but margin percentage was small. This also put downward pressure on the overall margin percent number. During the pilot period, one of the pilot regions was on the verge of sign- Important Lessons strate success on a small BUILDING PRICING CONFIDENCE WITH YOUR SALES REPS See Page 38 I continue to benefit from these four lessons: Dissect your results. Start with the core—regular purchases from regular customers. Focus on what you control. Put context around the major events that impact the results.