Achieving Pricing and Margin Optimization
By Paul Thompson
As CPG companies worry about making advances in the area of pricing and margin optimization, the pressure to move quickly is strong And while big data – and all of its promise – may seem like the answer, leveraging it in conjunction with great analytics alone will not deliver the insights that businesses need to beat the competition to the punch. Data-driven insights can create value across a business, helping managers tailor assortments at the store level, simultaneously enhancing the customer experience and improving unit economics, but they have to be done methodically.
Achieving this can be challenging due to company inertia, employee bandwidth or a variety of other reasons. As the pace of change increases and the marketplace becomes more complex and competitive, it is critical that CPG businesses maximize the insights they have available.
Without a major change-management effort, though, most people will keep thinking, planning and executing in the same ways – and achieving the same results. The right people with the right mix of analytical and business experience need to be on board to use much more rigorous decision-making processes, standardize processes across categories and geographies, and synchronize efforts across the organization. Superior data management is essential to providing refreshed and regular insights, and powerful tools need to be available that don’t require an advanced computer science degree to use.
Here are five top tips to help ensure improved pricing and margin optimization:
It’s a Journey not a Trip: Companies increase their chances of success by taking small measured steps, each big enough to make a difference in performance, but small enough to be embedded and scaled within the organization. Changes that are too small won’t move the needle on performance, and changes that are too big won’t stick. In addition, companies should commit to a strategic roadmap of how they will embed analytics, insights and actions into their organization, which should be educated and committed to this vision. A company that commits to improving pricing each year, for example, can begin by asking what steps it can take this quarter and next.
That said, senior management should look beyond pricing or promotions toward broad revenue management, which will mean changing the way they run the business and becoming more insight-driven at scale.
Leaders should consider all constituents required to drive their strategy, including organizational elements such as staff capabilities and best-in-class processes, along with technical elements such as data management, analytics and software systems. This holistic approach across people, process, and technology generates significant impact, including better decisions on promotional activities and trade investment, and sustainable change within the organization.
Get the People on Board: It’s easy, and potentially also dangerous, to focus on the short-term benefit or impact of change, yet the change process is often long and interlinked. The right people need to be in the right seats on the right bus going in the right direction. This may mean hiring additional talent, moving people into a more efficient structure, or even aligning the organization to the strategy. It should also be noted that hiring outstanding candidates is intensive and must be done with rigor and focus.
Move to Decision-Based Data Management: It’s human nature to look at the information in front of us for clues. But most CPG businesses do better if they first define the kinds of decisions they want to improve and then look for data that can inform those choices. Selecting improvement areas can also help managers structure the data, decide where accuracy is paramount, and determine whether to buy software or build it from scratch.
For example, data-driven insights can often help make promotional spending more efficient. But what kinds of decisions does the company need to improve? How are targeted customer segments responding to the promotions? What behavior is the business trying to incentivize? How big should discounts be? What time of year or in which geographies should a discount be offered? Each decision requires distinctly different data and analyses.
Choose the Right Solution: In choosing or designing tools, businesses should look for an easy-to-use solution that can improve performance with insights the company and analytics team understand. More sophisticated tools can be useful for expert users, but if a typical end user doesn’t understand the insights behind the tools, the investments may be wasted and adoption slow. Our experience has shown us that the best tools offer sophisticated insights, and are intuitive (and almost fun) to use. The software also has to be flexible enough to keep providing useful insights as the marketplace changes. Some early rules-based systems were built on the assumption that the single overriding goal was optimizing for profit, but profit is rarely the only goal of a well-conceived strategy.
Change Mindsets and Behaviors: Successful transformations typically begin with a “coalition of the willing” who are prepared to show the way. These leaders help form dedicated teams that begin documenting processes. The revenue management team should be the foundation. Experts help teams improve core revenue management processes and guide the evolution of a flexible and expanding set of databases and tools. Experts “teach the art” and throughout the organization employees receive training.
It is a multi-year journey to insight-driven leadership that can present many challenges along the way. The rewards of success—and the costs of falling short—are enormous. CPG businesses need to start down that path now to keep pace with their competition in a marketplace that is revolutionizing itself with incredible speed.
Paul Thompson is Vice President & Global Sector Manager, CPG, for Periscope By McKinsey.