Case Study – Staples
- Corporate stationery company $1.0B in annual revenues
- Selling 25,000 SKUs to 20,000+ customers
- Under significant margin pressure – gross margin of 27% and EBIT margin of 6%
- Engaged Pricing Insight to develop pricing strategy to improve gross margin
- $6.8M in gross profit generated in 12 months on addressable project revenues of $80M
- Achieved using Project Blackbird – Pricing Insight’s algorithmic price optimisation program that generates risk free incremental gross margin profit
How to generate an extra $6.8M in gross profit on revenues of $80M in one year
A company experiencing incredible growth rates has a slump in profits for the first time.
Losing profits despite growing revenues
Staples came to us when they were called Corporate Express, a few years before they were taken over by Staples. They had had a rocket ride on the stock market going from 20 cents a share to $10 a share over a period of 10 years.
Although Corporate Express / Staples had been experiencing incredible growth rates for over 10 years, in the last year before contacting Pricing Insight, its revenues had grown by about 5% but its profits had declined by 3%. This was the very first time that the company experienced this increase in revenues, yet a decline in gross margin profits.
A pricing strategy no longer working
Pricing Insight met with the chief operating officer (COO) to understand the business in more detail. Interestingly, the COO was quite clear about the company’s business model and sources of profitability. In his words they were a “buy side” business – generating profits by buying cheaply and selling at, or below market rates and trying to win business on price alone.
Now, this strategy can work for a time, but at some point your competitors will copy your strategy and you lose your competitive advantage.
This is exactly what was happening to Corporate Express / Staples. Customers were switching to other suppliers as there was a perception that Corporate Express was too expensive.
The chief financial officer (CFO) was very concerned with the results and was asking some hard questions. And naturally, the chief executive officer (CEO) was also asking questions of the COO and the CFO. So there was a lot of pressure, being a publicly listed company, to find an answer and to restore profitability back into the business.
The other complicating factors in this marketplace were new market entrants who were nimbler and more aggressive. We found out that these competitors were quite focused on their pricing strategies and trying to find ways to improve their profitability.
Impacts on gross margins
Another factor we had to contend with was the rise and rise of the procurement function.
Procurement has had a substantial impact on the business landscape over the last 15 to 20 years, becoming more sophisticated and aggressive in their tactics and strategies to get reductions in invoice prices and more concessions, such as increased service levels and assignment of supply chain risk back to their suppliers.
The other factors that the business faced – as many other businesses do – was the loss of experienced sales executives. A lot of experienced staff had started to move on after 10+ years with the company.
So a lot of the intellectual capital were leaving and a whole crop of new, inexperienced sales executives were joining the business. They then began applying some of the tactics and approaches they had used in other industries, which were possibly higher margin industries able to discount. At Staples however, the gross margins were just 27 percent with EBIT margins, or earnings before interest in tax, of just 6 cents in the dollar.
Staples had a very narrow price bandwidth to play with before starting to lose money. A lot of these inexperienced executives were offering discounts of 5, 10 and 15%.
But if you’re only making 6% net profit margin before tax and you’re offering discounts of 10 and 15%, you’re offering discounts that are two and three times the actual profit margins of the business.
Very quickly that level of discounting has a major impact on your gross margins and your net profit margins. If you lose one or two points of gross margin with EBIT margins of 6%, that can impact your earnings by up to 30%.
Through benchmarking and diagnostic analysis, we identified gross margin risks to the business and a threat to earnings.
How we came to work with Corporate Express / Staples?
We were invited to meet with the COO of Corporate Express / Staples after one of the sales directors of attended one of our Pricing Insight masterclass programs. This program was designed to help senior executives develop their own pricing strategies internally and covered how to develop a price strategy and list price architecture, value-based pricing frameworks and techniques to improve profitability. These concepts undoubtedly struck a chord with the senior executives who attended from Corporate Express / Staples.
After discussions with the COO, we then met with the project management team to discuss how we would go about developing a workable pricing solution.
Our work took the form of an initial diagnosis to understand the current pricing operations of the business and analysis of the data at an SKU [stock keeping unit] level. This involved a deep dive diagnostic right into the data.
What we did
We looked at 5000+ line item SKUs across a couple of different channels to market. What we found as a result of this analysis was that there were many inconsistent approaches to pricing across the functional divisions, and across the states and territories.
Corporate Express / Staples sells many different products from pens and pencils and stationery items through to furniture, print and promotional items. Many different approaches to pricing were evident.
There was an overriding culture of cost-plus mark-up to set prices, and many items were in fact overpriced, and so they just simply didn’t sell. There were quite a number of items that we found to be under-priced as well.
The diagnostic enabled us to start off with some very effective quick wins. We were able to increase the price of coffee by a couple of dollars. That small change resulted in a half a million-dollar instant improvement to gross margins and consequently went straight to the bottom line.
And there was an interesting situation with fragile tape, that orange fragile type used by removalists. Because the cost in the system was wrong, it was underpriced because they have using this mark-up on cost approach to set prices. The sale price was too low. In fact, the prices for this fragile tape in the competitor’s retail store was around $17/$18. Corporate Express / Staples were selling it for about $2.50 because the cost in the system was running at about $1.50. And it should have been around a $9 cost in the system. We were able to fix the pricing on that and generate a couple of hundred thousand dollars from that line item alone.
These seem like obvious things to do but are never obvious if you’re not looking for them. In all, there was a range of gains that were made very quickly across the business which added up to over $1M of gross margin quick wins.
Pricing structures needed
We also found that staff were providing excessive discounts to selected customers.
There were list price structures that were rendered ineffective due to the wide disparity between the list price, the net market price and the lack of price relativities across products within product subgroups. Many customers received the same aggressive discounts regardless of who they were, despite the business setting up price tiers to attempt some form of price segmentation to capture value.
Much of the business was sold on tender, and often these tenders were set on a cost-plus market basis. An attempt to protect margins was made by creating a total basket of goods for sale as a bundle. However, unknown to the sales force, the actual costs of the entire product range were inflated in the system in an attempt to protect the margins, resulting in many tenders that were lost, simply because the tender was too expensive relative to the rest of the market. The cost-plus mark-up mind set meant that salespeople set prices against inflated cost.
This situation led us to make a discovery about the culture of the business. The procurement team had, by stealth, taken over control of the front-end pricing mechanism. They achieved this through continually inflated costs in the system. They also collected payments from suppliers for priority placement of brands in the catalogue, even though these products may not have been what customers wanted. This led to the catalogue becoming less relevant for customers, further weakening customer loyalty, as they started to shop with competitors because they could not find what they wanted. So, the words of the COO that Corporate Express / Staples was a “buy side” business was proven not to be true. Business is, and always will be, a customer led entity.
The result of this procurement led sales culture was a loss of sales of profitable major accounts and a migration to sales in the mid-tier and small size, because that pricing was not as sensitive. But this also drove up cost to serve.
In addition, there was an increase in the SG&A ] selling, general and administration of the business without a corresponding increase in appropriate volumes at scale to improve the cash profit margins.
Maximising margins without risking volumes
Following this discovery, we undertook a detailed price optimisation on over 5000 different items in the business. This took approximately eight weeks and involved the development of a customised pricing algorithm that was able to identify what we call the ‘value price arbitrage’ and inconsistencies. Then we provided recommendations on what the optimal price point would be to maximise margins without risking volumes.
We were able to generate $6.8 million in EBITDA in the first 12 months of this program and nearly $7 million on addressable revenues of $80 million. It was quite a substantial gross margin expansion result. This came as a result of being able to identify at a micro level various gains and opportunities to improve pricing without risking volumes.
We also undertook training of the staff in value-based pricing principles so they could understand the approaches to pricing to avoid falling back into cost plus pricing mindsets or commodity-based thinking. Significantly we also put in a dedicated pricing management function. We trained them via a development program to enable them to truly serve the business and act as a centralised hub of pricing intelligence and pricing excellence. Following these initiatives, we further optimised another 2000 items to generate an additional million dollars of margin.
Our conclusion in this project was that a business as large as Corporate Express / Staples [around a billion dollars in annual revenues] must have a centralised processing function to manage the complexity and minimise the margin risk.
There needs to be a clear and documented pricing strategy, pricing policy and pricing methods to allow business decisions to be executed quickly without an overload of senior management sign offs to ensure compliance and oversight. One of the key lessons learned is that you need C- level sponsorship to manage a major pricing project and to deliver substantial change.
So, if you have a company that sells over 1000 individual items with many customers and potentially a large sales force, it is crucial to centralise your pricing. It also pays to optimise your prices with a value-based approach.
Pricing insight are specialists in this form of price optimisation, and we will optimise your pricing with a straightforward process for making next price increase more profitable and to minimise the risk of volume losses or customer churn.
About Pricing Insight
Pricing Insight are specialist B2B industrial pricing strategy advisors that help innovative and action-oriented CEOs to improve profitability.
We generate incremental profit growth for our clients in three distinct ways:
- Pricing Strategy Diagnostics – A numbers and insights [Quant & Qual] led program to identify the right pricing strategy and operating capability for your business.
- Price Optimisation – A value based algorithmic approach to price setting that generates 100-900 basis points of margin across 30-50% of a company’s addressable revenues.
- Price Training – Build a culture of value to empower your teams to make more profitable pricing decisions for contract negotiations, tenders and tactical discounts.
Pricing Insight is not another big consulting firm. We are specialist pricing experts with over 21 years industry experience.
Our focus is to deliver practical pricing strategy advice and insights, generate cash margin earnings without risk to volumes and empower your staff to make more strategic and profitable pricing decisions.
Whether you’re contemplating an SAP implementation project and need a new pricing architecture to fit the SAP system, or in need of immediate cash margin expansion to drive earnings growth, or want to transform your company culture from a cost plus commodity mindset to a value based pricing centre of excellence, we will help you realise these outcomes.
We are able to work across industries and have extensive experience in B2B industrial markets for both products and services.
We have provided advice and undertaken price optimisation programs for Retail, FMCG and Service based companies.
Regardless of industry and business model, pricing excellence is technique driven.
We will help you implement the required disciplines and capabilities needed to improve margins using tested and proven methodologies.
Pricing Insight make complex pricing challenges easy, using a systematic and structured approach to pricing strategy to allow you to focus on leading the business through the next phase of growth.