The Solution:
In the initial phase Copernicus benchmarked the company against itself. The detailed accounts and activities were compared to the past three years of activity to note discrepancies.
The next phase involved comparing the company to 13 other companies in the same industry and of the same size to determine the “average.” Although the industry average GP was 34%, the client’s processes and equipment should have allowed them to generate 38% GP or better.
This raised a question – why was the client’s GP so much higher than their competitors in the first place?
The answer to this question was to come from the client’s customers. Copernicus personally contacted the top 12 customers, as well as many others via an online survey tool and found the following as to why our client generated a higher GP%
History – The average customer was with the company more than 10 years.
Technology – The Company was not only replicating high-end engineering requirements, but also truly adding value via options for materials and design. With an average of 10+ years together, they knew their customers’ businesses.
Delivery. The company delivered on time – ALWAYS. To achieve this, they were willing to have excess inventory on hand and work the necessary hours to complete each order without a last minute panic.
Quality. This was a function of longevity within the organization, longevity with the customers and the technology utilized.
Commitment from Senior Management. Customers were regularly visited by a senior executive from the company. They executives didn’t deliver a “sales pitch,” but were there first-hand to see the customer’s challenges on the floor and listen to the customer and their employees.
Clearly, the client was doing a good job servicing their customers. So where was the problem? Sometimes the answer to the most intricate problem is simple. That was certainly true in this case. One glaring fact was noted: sales prices had not changed in nearly 20 months, despite the massive fluctuation in the costs of materials during this period.
Tentative reluctance existed in attempting to increase the prices back to the 38% levels. This was due to contractual relationships and a fear of jeopardizing the customer relationship with this relatively elastic set of products. However, it was decided that with the outstanding reviews from the client, aggressive adjustments were warranted. The Copernicus approach included:
Confirming what the competition was charging for similar products. The company was on average 3% lower in price than the competition. (Note: In many cases, the accounting costs are not the same as the true economic costs.) By performing a true economic costing model, the customers were able to verify that they indeed were underpaying for the products and ancillary services.
Assessing the pricing difference for new and existing customers. In two years, the company lost no clients. However, the bid work for new business had a less than 10% hit rate. The pricing for new clients was being used to compensate for underpricing present customers. And yet, new customers were not able to quantify the intangible values cited above and added by the client.
Obtaining industry costs for all the raw materials over the past three years and statistically correlating the change in these costs to an internally developed price model. From this detailed data, Copernicus prepared a presentation for each customer illustrating the ramifications of the failure to adjust pricing on a formal basis.
Visiting 100% of the revenue base with a customized presentation reflecting the sales activity of that customer for the past three years.
The client committed to live with the pricing model Copernicus developed. It was truly a “double edge sword.” It was inevitable that the then very high costs of oil, steel and other key materials would decrease, requiring the client to decrease the price proportionally.
The Results:
Copernicus developed a user-friendly process to keep the client’s customers informed each quarter about the costs of materials and the ramifications on the correlating prices. The result? The client returned to its 38% GPM within 60 days. Another key benefit of the process was a 7% increase in the quantity of products shipped.
A major surprise associated with this endeavour was that the client’s sales grew 7%, year over year. There was not only an improvement in the GP%, but also an increase in the gross volume.
The reason behind the increase was that with the automated online pricing model tool Copernicus designed for each customer, they could more accurately forecast their material requirements by reviewing year-to-year numbers for the past three years. The online tool even drilled down to the specific SKUs. This “soft sale” process was supposed to remind the customers to order in advance, which it clearly did.
Another benefit related to the online tool was the virtual elimination of “firefighting” due to reduced last minute orders. With this forecast and the development of a formal communication process, the client was able to proactively plan their quantity for the next quarter.
In the initial phase Copernicus benchmarked the company against itself. The detailed accounts and activities were compared to the past three years of activity to note discrepancies.
The next phase involved comparing the company to 13 other companies in the same industry and of the same size to determine the “average.” Although the industry average GP was 34%, the client’s processes and equipment should have allowed them to generate 38% GP or better.
This raised a question – why was the client’s GP so much higher than their competitors in the first place?
The answer to this question was to come from the client’s customers. Copernicus personally contacted the top 12 customers, as well as many others via an online survey tool and found the following as to why our client generated a higher GP%
History – The average customer was with the company more than 10 years.
Technology – The Company was not only replicating high-end engineering requirements, but also truly adding value via options for materials and design. With an average of 10+ years together, they knew their customers’ businesses.
Delivery. The company delivered on time – ALWAYS. To achieve this, they were willing to have excess inventory on hand and work the necessary hours to complete each order without a last minute panic.
Quality. This was a function of longevity within the organization, longevity with the customers and the technology utilized.
Commitment from Senior Management. Customers were regularly visited by a senior executive from the company. They executives didn’t deliver a “sales pitch,” but were there first-hand to see the customer’s challenges on the floor and listen to the customer and their employees.
Clearly, the client was doing a good job servicing their customers. So where was the problem? Sometimes the answer to the most intricate problem is simple. That was certainly true in this case. One glaring fact was noted: sales prices had not changed in nearly 20 months, despite the massive fluctuation in the costs of materials during this period.
Tentative reluctance existed in attempting to increase the prices back to the 38% levels. This was due to contractual relationships and a fear of jeopardizing the customer relationship with this relatively elastic set of products. However, it was decided that with the outstanding reviews from the client, aggressive adjustments were warranted. The Copernicus approach included:
Confirming what the competition was charging for similar products. The company was on average 3% lower in price than the competition. (Note: In many cases, the accounting costs are not the same as the true economic costs.) By performing a true economic costing model, the customers were able to verify that they indeed were underpaying for the products and ancillary services.
Assessing the pricing difference for new and existing customers. In two years, the company lost no clients. However, the bid work for new business had a less than 10% hit rate. The pricing for new clients was being used to compensate for underpricing present customers. And yet, new customers were not able to quantify the intangible values cited above and added by the client.
Obtaining industry costs for all the raw materials over the past three years and statistically correlating the change in these costs to an internally developed price model. From this detailed data, Copernicus prepared a presentation for each customer illustrating the ramifications of the failure to adjust pricing on a formal basis.
Visiting 100% of the revenue base with a customized presentation reflecting the sales activity of that customer for the past three years.
The client committed to live with the pricing model Copernicus developed. It was truly a “double edge sword.” It was inevitable that the then very high costs of oil, steel and other key materials would decrease, requiring the client to decrease the price proportionally.
The Results:
Copernicus developed a user-friendly process to keep the client’s customers informed each quarter about the costs of materials and the ramifications on the correlating prices. The result? The client returned to its 38% GPM within 60 days. Another key benefit of the process was a 7% increase in the quantity of products shipped.
A major surprise associated with this endeavour was that the client’s sales grew 7%, year over year. There was not only an improvement in the GP%, but also an increase in the gross volume.
The reason behind the increase was that with the automated online pricing model tool Copernicus designed for each customer, they could more accurately forecast their material requirements by reviewing year-to-year numbers for the past three years. The online tool even drilled down to the specific SKUs. This “soft sale” process was supposed to remind the customers to order in advance, which it clearly did.
Another benefit related to the online tool was the virtual elimination of “firefighting” due to reduced last minute orders. With this forecast and the development of a formal communication process, the client was able to proactively plan their quantity for the next quarter.
