Price Optimization
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Situation
- $2.5B polymer business unit of Fortune 500 company
- Product had become a commodity under severe price pressure
- Conversely, raw material prices had increased dramatically
- Margins were decreasing rapidly
- Previous attempts at increasing list price were only partially successful
- Wall Street hammered the stock price based on failure to manage prices effectively
Actions Taken
- AlixPartners took 10 weeks to define improvement actions and mobilize implementation
- Rather than raise list price, the objective of the project was to improve pocket price
- Products were prioritized based on annual sales volume and gross margin
- The top 20% of the products became the project focus
- Multiple sources and legacy systems were used to gather data and develop price waterfalls
- On average, there was 17% margin leakage after the invoice price was reached with the customer
- Specific actions were identified to close each margin leak
Results
- Specific leakage reduction actions included:
- Moved from volume discounts to earned rebates
- Charges for expedited orders
- Reduction of payment term discounts
- Charges for technical support
- Customers were much more receptive to leakage closure activities than had been to list price increases
- Delivered bottom line impact of 3% of revenue within the first six months