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Pricing Strategy

Issue

Improve Business InsightA company had a $40M product line which sold to specific regions of the country.  The product line has been with the company since its inception but its performance had been lagging in recent years.  The top line was performing close to its goals but profitability was below expectations.  The product line was also heavily investment intensive and the new owners believed there was a better use of assets as the product line’s return on assets was far below company targets.  They began contemplating selling off the product line and investing the proceeds in more profitable areas of the company.

Action

We began a business review with the objective of understanding the product line’s poor profit performance.  We held a series of meetings and interviews with the management team and sales force.  We also began to analytically dissect the product line into its different types of customers and markets that it serves.

Based on the discussions and analytic review of the product line, we found the product was serving two very different markets. The first market, which was 35% larger in sales for the product line, was the long-standing market with strong competition in which the company made a reasonable profit rate.

The second market, which was growing nicely, had the same end-use for the product but in a totally different industry.  The competition’s product was selling at a much greater price point primarily because of the more expensive raw materials used.   Based on historical precedence, the company sold this product at the same pricing level as its first market.  The company altered its pricing strategy to increase the price level to this market dramatically and still be below its competitor’s price.

ResultsProfit Performance Assesment Tool

The pricing strategy change resulted in dramatically higher margins for this second market without loss of volume and brought the combined product line’s profitability consistent with expectations.  In addition, the performance of this product line was now monitored by the two different markets served.  The product line was not sold and continues to perform very well in both their markets.

Value

It is crucial to fully understand an issue before making critical decisions that can have a dramatic or unexpected effect on the business and profitability.


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