Welcome back to our strategic sales management specialization.
This is our third lesson about pricing.
Let's get ourselves located.
This is course four.
We're talking about sales and marketing alignment.
We are on a first module marketing principles for strategic sales planning.
In this first module,
we have a taste of the history of marketing and talking about how pricing impacts
sales with a discussion how much influence should sales have in pricing decisions.
In today's lessons, we were approached pricing from another angle.
What happens after marketing has set the prices to consumers or clients?
The price clients and consumer space just the top of
what is described has the pocket price waterfall.
You can see that on the screen.
The pocket price waterfall is a powerful tool to
identify opportunities to increase revenues.
We call revenue our net sales.
What remains after all deductions are taken out of the gross sales.
These deductions are discounts, rebates, sales taxes,
distribution expenses, product returns,
retail margin, promotional allowance, and some more.
For the revenues, fixed and variable costs must be
deducted and you are left with your operating profits.
Some people call gross profits.
Pricing is the fastest and most effective way to increase profits.
Suppose you have a product that has a 12.5% profit margin.
Give it a 1% price increase in your profits will go up 8%.
The assumption here is that no loss of volume will occur.
Suppose now that you were able to cut your costs by 1%.
Instead of increasing price,
profits would increase should but by only 5% not eight.
Another scenario, instead of increasing price by 1%,
you increase the volume by the same percentage.
But, profits will of course go up by just 2.5% not 8%.
But as the same goes,
what goes around comes around,
the impact of price decrease is also enormous.
For a typical SNP 1500 company,
a 5% price cut would have to be compensated by growing
the sales volume by 18.7% just to offset the loss and profit.
This underscores the power of
pricing or should we say the power of net price or pocket price.
Pocket or net price is analogous to revenue.
List price or full price is equivalent to gross sales.
So, gross price times volume sold is equal gross sales.
Pocket or net price times volume sold is equal revenue or net sales.
Let's examine in detail the deductions that are typically made from the list price.
They are standard distributor discount,
special distributor discount, retail discount,
and customer discount, on invoice promotion.
It is always equal invoice price.
Those are deductions that generally appear invoices.
Nevertheless, there are other deductions that do not appear in the invoice.
They are off invoice items.
So, from your invoice price you must to deduct cash discounts, product returns,
cost of carrying an account receivables, cooperative advertising,
merchandising allowances, volume rebates,
special promotions, and even freight.
What is left? That's your pocket price,
and it will still have to take care of manufacturing costs and all the other expenses.
For now, we want to focus on improving the pocket price.
The discipline of managing pocket price is called
revenue management or gross-to-net management.
Why is it important?
Think about this, if you increase your list price,
you will in the great majority of cases lose demand in volume.
Customers again will buy less units.
But what you really want to achieve is to increase the pocket price which
can be achieved without messing with the end customer.
You can do it by decreasing the items that appear between list price and pocket price.
Let's have an example here.
Let's say your list price is $100 and your deductions are $50,
of which $8 is due to product returns.
Thus, your pocket price is $50.
Say your manufacturing costs are $20,
then your gross profit margin is 30 divided by 60%.
Imagine that by improving processes,
the product returns are cut in half.
Your list price is still $100 and your deductions are now
$46 of which $4 now is due to product returns.
Now, your pocket price is $54 and your manufacturing costs are still
$20 then gross profit margin is 34 divided by 54, 63%.
This means that by managing the gross-to-net,
you're able to increase your revenues without having
to touch on the price-to-customers, the list price.
What all this has to do with sales people,
the account managers and sales managers a lot.
The majority of deductions from gross sales to revenue or
list price to pocket price are under the control of the sales functions.
The marketing functions deals primarily with Price to Consumer.
In most of the time,
gross-to- net deductions fly under the radar.
The message here is that the sales function has the power to
improve the business by managing the pocket price waterfall.
How can this be done?
I'll give you some ideas and best practices,
but you'll have to wait for the next meeting.
I see you later. Chao.