Most consumer goods companies are well versed in the challenges of pricing and margin pressure in the Australian market. The combination of downward pressure on retail prices combined with rising input costs results in a familiar negotiation starting point for most.
Retailers have raised their focus on customer data and sharpened their analytical practices enabling them to engage more effectively with both consumers and suppliers. This has increased the need for consumer goods companies to rethink their commercial approach.
Defining Revenue Management
The answer lies in more systemic, fact-based analytical approach typically known as revenue management. While the term is broadly familiar to many, its definition and practice is less consistently understood. We think of revenue management in three ways, as illustrated in the diagram below:
- Governance: Co-ordination of strategy, planning and commercial tactics across the functions of the business that influence margin outcomes i.e. not just the sales or commercial functions
- Levers: A broad set of levers influence commercial outcomes, from understanding where consumer demand is and how it might most profitably be served, to innovating the consumer offer
- Enablers: Outcomes are achieved through systemic development of skills and capabilities within the organisation, ranging from data analytics to performance measurement.
Common challenges in managing for commercial outcomes
Anecdotal evidence from dialogue with local consumer good companies suggest there is opportunity to make the practice more systemic, and to invest in the capabilities and tools required to do so. In these conversations, a number of common commercial challenges come through, including trade
spend driven by history not strategy, product line extensions as a proxy for price increases, decentralised negotiation, or ad hoc measurement of promotional effectiveness.
Trends such as growth in convenience, online and home delivery, changes in promotional approach and consolidation in channels all give rise to a situation where the old approach no longer works as well as it did in the past.
The concept of an integrated approach to managing revenue and margin to improve commercial effectiveness is far from universally adopted. However, the benefit of doing so can be significant. One organisation has overhauled its channel growth investment strategy by analysing the
effectiveness of investment vs growth across channels.
This resulted in a dramatic reapportioning of investment dollars. A 5% average growth uplift was achieved whilst spend was reduced by 1%. The first step in considering a fresh approach to Revenue Management is an evaluation of current commercial practices. This involves assessing the extent to which these practices are driven by history, individuals, or trading partner priorities.
What does better practice look like?
There are several hallmarks of organisations who operate at best practice on this subject:
- Comprehensive view on investments across channels and customers, combining information from multiple functional areas (finance, supply chain, sales), and revenue elements
- Clear guidelines on how to allocate investments across channels and customers, supported by standard definitions and processes
- Ongoing insight in performance of trade spend and promotions, and on cost to serve, with the ability to steer allocation of investments and costs deliberately during the year
- Clear roles and responsibilities between local and central teams on how to effectively manage customers, supported by tools to enable fact-based decision making.
Who is Oliver Wyman?
Oliver Wyman is a global leader in management consulting. We combine deep industry knowledge with specialised expertise in strategy, operations, risk management, and organisational transformation. In the Retail & Consumer Goods Practice, we draw on unrivalled customer and strategic insight and state of the-art analytical techniques to deliver better results for our clients. Find out more here: Oliver Wyman Retail & Consumer Goods.