One of the perks of being a magazine editor is that people who are paid to talk about their products want to talk to you. That’s how I came across a new book by a couple of managing directors with the Boston Consulting Group, Game Changer: How Strategic Pricing Shapes Businesses, Markets, and Society.
I get a lot of opportunities to review books, with most having little to do with transportation and the supply chain—so I might’ve skipped over this one. But the agency that pitched it made sure I saw that the chapter on the “Custom Game” featured a truck OEM, which should apply broadly to much of the transportation equipment market and its custom nature.
Specifically, authors Jean-Manuel Izaret and Arnab Sinha examine how Daimler Truck North America, in the mid-2000s, reimagined their pricing strategy and grew both market share and margins through the boom times (the emissions-driven truck pre-buy) and the bust (unproven EPA-compliant vehicles, then the Great Recession and equipment market crash).
CEO Chris Patterson reportedly told his team their pricing model was “broken” and the decades-old way of doing business had to change—and soon.
“How Chris and his team prepared for a downturn exemplifies how leaders can understand and apply their pricing agency to shape demand, share value, and win the Custom Game, regardless of the economic conditions they face,” the authors write.
As the book explains, DTNA fit very well into the custom segment, one of the seven “pricing games” under the hexagon framework of the analysis. Characteristics of this custom market are products that feature a lot of options, a broad customer base of very different sizes, and a highly concentrated seller set competing for most deals. Sound familiar?
The data from actual deals show that these characteristics lead to pricing “chaos” in such markets.
“Even at second or third glance, there seems to be no relationship whatsoever between prices and volumes,” the authors say.
Indeed, company leaders have long assumed that such massive variance in deal pricing is simply a matter of how this kind of market works.
But, for Patterson, pricing uncertainty was going to get really complicated with new engine-emissions technologies. So he identified four factors that are “essential to success” in the Custom Game:
- Speed: Reduce the back-and-forth haggling between customer, dealer, and OEM;
- Business logic: Make pricing decisions and the explanations consistent;
- Predictability: Without consistent business logic, it’s difficult to analyze deals, determine trends, and make forecasts; and
- Control: Variance in individual customer negotiations makes prices increasingly hard to manage; have a plan and stick to it.
Of course, as Mike Tyson likes to say, everyone has a plan until they get punched in the mouth.
But Patterson imposed discipline by making DTNA costs more transparent to customers. Surcharges were based on the publicly available cost of raw materials. As the book notes, DTNA’s business was building trucks, not speculating on commodity prices.
And the same went for emissions-technology costs: If it’s beyond the manufacturer’s control, explain the cost and pass it on—don’t just look for places to make up the difference and otherwise absorb the increase.
Once cost is established, the next step is to create order in price discounting by quantifying the various market factors. The authors have come up with an analytical tool, the Natural Volume Slope, to codify the negotiation power of large customers.
It’s a little much to detail here, but the result is a line on a scatter chart that “anchors the deals” and sets discount ranges based on volumes. (A “curious” aside is that high-volume deals don’t see as large a discount as expected, while low-volume deals sometimes get them, which the authors attribute to higher-level decision makers being called in on big sales but they aren’t paying close attention to the smaller ones.)
“Market adjustments” are set, in turn, based on region, application, and competitive position. Again, incremental discounts may then be dialed in.
The gap between target price, based on the ranges set above, and the price floor is “sales discretion.” Once discretion is quantified, the ensuing data becomes valuable for things like setting option pricing.
“In the Custom Game, it is critical to control the high level of discretionary discounting very tightly to provide both customers and the sales force with a sense of fairness for the pricing process,” the chapter concludes.
The book goes into detail with data and charts for each of the pricing games, and many companies are likely hybrids. Evaluate your place in the hexagon and improve pricing strategies accordingly. YMMV.
Game Changer, published by John Wiley & Sons, is available for pre-order at the usual online booksellers as TBB goes to press.
