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The Pricing Analytic Group Inc. 7353 Meadowhaven Drive Chippewa Lake, Ohio 44215 (330) 958-4036

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www.pricing-analytic.com

How do you calculate price realization? Executive Summary: Businesses generally incorporate a price factor in their growth or profit plans that are based on list price increases across all product lines. These increases are expected to mitigate material and inflation costs with the prospect of maximizing price realization. That is, the list price increase will mostly flow through the P&L. However, there are many price influences that impact a list price increase both positively and negatively that can result in either a positive or adverse price realization on a product by product, SKU to SKU basis. This article will explain this process and help you monitor your price actions and determine your actual price realization through changes in average unit price (AUP). Whatever the pricing strategy used in determining the list price increase, e.g. cost plus, market driven or value based, it is instructive to analyze how the increase will flow through the business. As seen below there are a number of mitigating price factors that contribute to the average realized price bucket and affects the new average unit price after implementing a list price increase.

Transactional Discounts: Even with a good limit of pricing authority process, an analysis of transactions will find that the list price increase did not stick in every line item or transaction. Mining the sales transactional data will provide the average discount from list before and after the list price increase. There will be a time delay from the date of the increase until the channel and end user see the actual price increase. Product Feature Mix: Product lines that are built on a matrix contain features that a customer can select when ordering. So the average unit price of a particular product will vary depending on the feature selection. Varying feature mix will impact the average unit price. Also, different features within the matrix can absorb different list price increases depending on the value they bring to the customer. Distribution Channel Mix: A product sales channel will influence the ability to realize a price increase along with an impact on the AUP. Different prices will be realized by distributors, direct sales, wholesalers, intercompany transactions, projects and negotiated deals. Revenue management will help monitor and tabulate the sales flow to determine where and if list price increases are being realized. Industry and Segment Mix: Different industries, market segments and customers value your products differently. The mix of sales for high end segments versus low end segments will influence the average unit price realized and can be monitored. This becomes more influential when comparing the current year sales to the previous year sales. Product Backlog & Previous Year carryover: Some products may have a different price due to the age of the backlog or whether the mix contains sales from the previous year at a different price. A large carryover will limit the increase of the AUP based on a current year price action.

As the AUP example calculation shows below, implementing a 3% list price increase yields a 2 % price realization or a 2% change in the average unit price. Depending on the product and factors shown, some list price increases can result in negative price realization. In some circumstances the percent price realization will be greater than the list price increase.

AUP price calculation example: Average Unit Price In List Price Increase (3%) Transactional Discounts Feature Mix Channel Mix Industry Mix Carry over Average Unit Price Out $1,000 $30 -$15 $10 -$10 $15 -$10 $1,020

The Pricing Analytic Group (www.pricing-analytic.com) provides price management, optimization, analytics and realization consulting services in a B2B industrial and manufacturing environment to enhance profitable growth. The Pricing Analytic Group is focused on finding pricing opportunities and customer value propositions, converting them to increased operating profit and price improvement. Dick Sobel is a member of the Professional Pricing Society and principal consultant of the Pricing Analytic Group.

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