Fixing wholesale pricing with advanced analytics
A wholesaler was having trouble managing and developing pricing across a huge number of customers and SKUs. We helped deliver newfound clarity and actionable insights by leveraging advanced profitability analytics.
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Challenge
The pricing and profitability of the wholesaler varied greatly across a huge number of customers and SKUs, but there was very little visibility into what was driving the differences. Numerous explanations and excuses were given, but the underlying reasons behind the variance had been evading top management.
Brave the future
To tackle the client challenge, we utilized generalized additive models (GAMs) to disentangle unexplained deviations in profitability from systematic differences explained by the data. This allowed us to detect underperforming products and customers that needed special attention from the sales organization. Moreover, the modeling approach allowed us to decompose the predictable variation in customer profitability into differences explained by the products purchased on one hand and by different transaction and customer characteristics on the other. This analysis revealed, for example, that discounting was heavily driven by product-specific volumes rather than total purchases, incentivizing cherry-picking rather than concentration of purchases. This was poorly aligned with the wholesaler’s value proposition.
Impact
Advanced profitability analytics gave the wholesaler a better grasp of their pricing performance. This allowed them to fix misaligned pricing and develop their pricing logic based on fact-based insights.