Background and Challenge
The client was a global leader in the manufacturing of a commodity chemical. Historically, the client's U.S. operations had produced lower relative prices and margins, suffering from participating in a market characterized by overcapacity and irrational competitors.
The client decided to re-evaluate its pricing strategy and asked L.E.K. Consulting to develop a pricing strategy, tool and implementation plan to improve its profitability and maximize the value of its business in North America.
Approach and Recommendations
We developed a pricing strategy that considered numerous supply, demand, and company specific factors.
- Analysis of our client’s accounts indicated inconsistent pricing practices across account sizes, locations and end-use segments
- An assessment of the customer base highlighted significant price sensitivity across suppliers but limited sensitivity to market wide pricing changes
- We developed detailed, driver-based demand forecasts by end-use and micro-region (i.e., at the customer level) to inform how the supply-demand balance would evolve over time
- We also modeled the delivered cost (plant-gate plus transportation) from each potential supply source (including imports) to each demand point, which consisted of several hundred individual market locations
- The model used an iterative process whereby all ‘players’ sequentially optimize their own distribution to maximize profit until an equilibrium across the entire system is reached
The pricing model results showed significant opportunity existed to shift supply and raise prices across the client’s network. The model produced the optimal price points per market, assuming continued aggressive pricing practices by competitors. We recommended account specific actions for the client to take to realize significant returns.
The financial impact was estimated at more than $80M per annum in incremental revenues spanning five years.
In addition to re-pricing its key accounts, our client is utilizing the pricing model to inform a wide range of strategic decisions (e.g., refining contracting strategy, modeling the impact of potential changes to the competitive landscape, etc).
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