.webp)
White paper · Transform · 15 min read
Source: the chain's merchandise communication of 6 September 2005 (Figure 1) and the maker's own records, as set out in B2B Pricing Insight, Prologue. The maker and the chain are not named.
One account manager gave one independent hardware store a low price on particleboard flooring. Two months later the maker had lost about A$2.0 million of operating profit. Pricing Insight uses this case to show what a market leader with a 10 to 20 per cent premium and about 60 per cent of its market lacked: not pricing power, but the controls to keep it.
The sequence is short. The store advertised the price in letterbox campaigns across its area. A national hardware chain saw the advertisements and cut its own shelf price on the standard sheet by 15 per cent, from A$42.24 to A$36.00, and told every store so in the notice reproduced in Figure 1. Wholesalers then discounted their own stock to keep up. The extra sales to the store that started it were worth less than A$50,000. To win the loss back at full price, the account manager would have needed to beat budget for two years.
This paper sets out what the maker had, what happened, what the arithmetic says, and what a manufacturer selling a known product through retail and wholesale channels builds so that one price cannot become the market price. It is written for the chief executive, the CFO and the sales director of a business whose best-known product carries a published shelf price.
The question this paper answers
How does one unapproved price to one store take A$2.0 million of operating profit out of a market leader in two months, and what stops it happening?
Four findings, then the work. The findings follow the case from the position the maker held, through the notice and the arithmetic, to the four gaps that let it happen. The work is the set of decisions, designs and routines, drawn from the Pricing Periodic Table, that close those gaps.
01The maker had pricing power. It had everything except the controls.
A premium and a share. The business made particleboard flooring sheets, the panels that go under the floor coverings in new houses. Its product carried a premium of 10 to 20 per cent over its main rival, and it held about 60 per cent of the market. That is what pricing power looks like from the outside.
Inside the business, the standard sheet had no written price strategy. There was no floor the system enforced, so a price below the one the business could defend went onto an invoice as easily as one above it. Nobody owned the question of what the sheet should sell for, to whom, and why. The sales team filled the gap case by case.
Pricing power is a property of the product and the market. Price realisation is a property of the business. The first was strong. The second had no owner, no written rule and no system check, so the premium was only as safe as the next conversation at a trade counter.
02One low price became a published shelf price within days.
Three steps. An account manager in one state gave one independent hardware store low prices on the standard sheet. The store did what any retailer does with a good price: it advertised it, in letterbox campaigns across its area. A national hardware chain saw the advertisements and issued the notice in Figure 1 to its stores. From 2 September 2005 the chain's shelf price was A$36.00, down from A$42.24, a cut of 15 per cent, and the notice said why: "to not just be competitive but to be one of the market leaders".
| Merchandise Communication | No. [withheld] Date: 06/09/05 |
| Subject: | YELLOW TONGUE FLOORING | ||
| From: | [name withheld] | Dept: | BOARDS |
to new level!
Effective from 2nd September we have lowered the retail of all Yellow Tongue Flooring to not just be competitive but to be one of the market leaders.
We have lowered the sell price of the 3600 × 900 × 19mm Yellow Tongue Sheet Flooring from $42.24 to
The notice is the point of the case. It is an internal document, one page, with a photograph of the stock in the warehouse and the new price in the largest type on the page. Nothing in it refers to the maker. The chain was repricing a product its competitors were advertising, and it did so across its stores in one instruction. Once the shelf price was public, every other reseller of the same sheet had to answer it, and the wholesalers did, by discounting their own stock.
A published price is a market price. The independent store's letterbox campaign turned a private concession into a public number, and the chain's notice turned the public number into the national reference price for the category. From that point the maker's premium was being set by its customers, not by the maker.
03The arithmetic: A$2.0 million against less than A$50,000.
Two numbers. The extra sales to the independent store, the whole reason for the low price, came to less than A$50,000. The operating profit the maker lost over the next two months, at the annual rate of loss, was about A$2.0 million. The loss is about 40 times the sale that caused it. To recover it at full price, the account manager would have had to beat budget for two years.
Source: the maker's own records, as recorded in B2B Pricing Insight, Prologue. Both figures are as found; the loss is realised, not projected.
The ratio is the lesson for the CFO. A concession is usually judged against the sale it wins. On a product with a published shelf price and a dominant share, the right comparison is the concession against the whole category's margin, because that is what moves when the price becomes public. A 15 per cent cut to the reference price of a product with about 60 per cent of its market is a cut to most of the market's revenue at once, and the maker carries most of it.
For each product that has a published shelf price, take the annual gross profit on that product across every channel, multiply by the discount a competitor could advertise, and compare the result with the largest single concession anyone in the business can give without approval. If the second number is a small fraction of the first, the control is the problem, not the salesperson.
04The account manager was not the cause. Four gaps were.
It would be easy to blame the account manager, and wrong. Four things were missing, and any one of them would have changed the outcome.
No written pricing strategy for the best-known product.
Nothing said where the sheet competed on price, where it held, what the premium over the main rival was for, and what the business would do when a reseller advertised below it. Without the document, every account manager wrote their own.
No floor the system enforced.
The business could defend a price. It had not loaded it. A price below the floor went onto an invoice without an approval, a reason code or a report, so nothing inside the business flagged it before it was public.
No owner for the question.
Nobody held the authority to decide what the sheet sold for, to whom and why, and nobody was required to answer for a price that moved. The account manager filled a vacuum the business had left open.
No competitive response rule.
When the chain cut its price, the maker had no written answer: which resellers it would support, with what, for how long, and what it would not match. The wholesalers' discounting followed because nothing said otherwise.
Mapped to the Pricing Periodic Table, the four gaps sit in six of the sixty-one elements: a written pricing strategy (Ws), competitive response rules (Cm), roles and decision rights (Rs), price corridors and exceptions (Co), discount authority and controls (Da) and market price intelligence (Ci). None needs new data. All need a signature, a loaded rule and a report someone reads.
| Element | What was missing in 2005 | What the control looks like |
|---|---|---|
| Ws Written pricing strategy | No document for the standard sheet | Two pages, signed by the chief executive: where the product competes, where it holds, what the premium is for |
| Cm Competitive response rules | No answer when the chain cut 15 per cent | Who may match, what is matched, what the customer must show, how long support lasts |
| Rs Roles and decision rights | Nobody owned the sheet's price | One named owner of the price list, one approver above the floor, one above the corridor |
| Co Price corridors and exceptions | No target, floor or approval band | A corridor by channel; inside it no approval, below the floor a named approver and a reason code |
| Da Discount authority and controls | Any price went onto an invoice | The floor loaded in the system, so a price below it cannot be invoiced without an override that is recorded |
| Ci Market price intelligence | No register of advertised reseller prices | A register of advertised and quoted prices by reseller and region, read weekly |
05What a manufacturer in this position builds.
Three kinds of work, in order. Strategy is a set of decisions the chief executive makes and writes down. Structure is a set of designs the CFO and the pricing manager load into the system. Operations is a set of routines that run on a calendar and produce a report. The order matters, because a floor loaded before anyone has decided what the product is worth is a floor set at cost.
Strategy
Decisions for the chief executive
Three decisions, two pages. None needs new data, and the maker in the case could have made all three in an afternoon.
Write the pricing strategy for the key value items.
The products a builder or a buyer checks by name are priced to the market and tracked; for each, the document says what the premium over the main rival is for, and the channels in which the business will and will not compete on price.
Set the channel relativities.
The independent store, the national chain and the wholesaler each buy on different terms for different work. The strategy states the relativity between them, so a price to one cannot undercut the published price of another without a decision.
Write the competitor response rule.
What is matched, what is not, who may match it, what evidence the customer must show and how long support lasts. A written rule replaces the reflex to follow, which is what the wholesalers did in 2005.
If one of our account managers gave one store a price tomorrow, what in our system would stop it going below the floor, and who would know by Friday?
Structure
Designs for the CFO and the pricing manager
Three designs. Each replaces a judgement made at a trade counter with a rule the system enforces.
Build a price corridor by product and channel.
A target, a floor and an approval band. Prices inside the corridor need no approval; prices below the floor need a named approver and a reason code, and the floor on a key value item is set from the published shelf price, not from cost.
Load the discount authority matrix.
Who may approve what depth of discount, by product group and channel, loaded in the quoting and invoicing system so that an unapproved price cannot be invoiced. The matrix is the control the maker did not have.
Register every special price with an end date.
A price given to one customer for one reason is an agreement with an owner, a term and a review date, visible to everyone who quotes. A price with no end date is the one still being honoured a year later.
Which of our prices could be invoiced tomorrow below the floor without anyone approving it, and how would we know?
Corridors and authority limits slow the sales team down. They do, by the time it takes to type a reason code. The case puts a figure on the alternative: about A$2.0 million in two months, against less than A$50,000 of sales. A control that costs a day of friction a year and prevents one such event pays for itself many times over.
Operations
Routines for the sales director and the pricing team
Three routines. Each runs on a calendar, has one owner and produces a report someone reads.
Keep a market price register.
Every advertised price, catalogue price and competitor quote a customer shows the business is logged by product, reseller, region and date. The key value items are checked weekly. In 2005 the letterbox campaign would have been in the register within the week.
Review overrides weekly, by account manager and customer.
Every price below the corridor, with its reason code, goes to the sales director weekly and to the pricing council monthly. An override without a reason is reversed.
Hold a monthly pricing council.
Chaired by the chief executive with the CFO, the sales director and the pricing manager. It owns the strategy, decides the response to any competitor move on a key value item, and reads the override and register reports.
If a reseller advertised our product below our floor this week, who in the business would see it, and by when?
Account managers will say the register and the reason codes take time they do not have. The time comes back from the negotiations that no longer happen, because the account manager can say what the floor is and who set it. The 2005 account manager had nothing to point to.
06The 2005 notice was a fax. The mechanism has not changed.
Twenty years on, the sequence is faster. A low price to one reseller is on that reseller's website the same day, in a price-comparison feed the next, and in a national chain's price-match system without a merchandise communication at all. The gaps are the same: a product without a written strategy, a floor nobody loaded, a question nobody owns and no register of what resellers are advertising. The difference is speed.
For a manufacturer with a published shelf price on its best-known product, the test is the one in Section 3. If a single person in the business can give a price that, once public, costs more than that person's annual sales, the control is missing. The fix is not a smaller discount limit. It is a written strategy, a loaded floor and a named owner, in that order.
07Questions a chief executive asks about this case
Was the account manager disciplined?
The case does not record it, and the book's view is that it would have been the wrong response. The account manager did what the business allowed. The fix was to change what the business allowed.
Could the maker have refused to supply the chain at the new price?
The case does not record what the maker and the chain negotiated afterwards. The loss came from every channel once the shelf price was public, and from the wholesalers' response to it. A written channel relativity and a competitor response rule are what a maker takes into that negotiation; without them it is negotiating against its own advertised price.
Does a price floor stop a sales team winning work?
Inside the corridor, no approval is needed. Below the floor, an approval and a reason code are needed. The floor stops the one price that costs the category, not the hundred that win a job.
Where does a business start?
With the key value items: the handful of products a customer checks by name and a competitor can advertise. Write the strategy for those first, load their floors first, and put them in the register first.
08How Pricing Insight works on this
The starting point is the business's own invoices, quotes and competitor prices, not a template. Our Pricing Diagnostic and Quick Wins finds the key value items, measures the spread of prices given on each, records what the sales team says about how prices are set, and identifies where a single concession could become a market price. The work runs in three linked workstreams.
Diagnostic
We extract price files, overrides, special prices and competitor quotes, measure the price spread on every key value item by channel, and survey the sales team and management on how prices are set today. The output is a sized register of exposures with an owner for each.
Strategy and structure
We draft the two-page strategy for the chief executive to sign, design the corridors, the authority matrix and the channel relativities, and specify the floors to be loaded. Project Blackbird prices the range to value and pricing power line by line where the data supports it.
Operations and capability
We stand up the market price register, the override review and the pricing council, and train everyone with discount authority through Pricing University in margin arithmetic, value selling and negotiation, so the controls hold after the engagement closes.
Discuss the controls on your key value items
The first conversation covers which of your products carry a published price, who in the business can move that price today, and what the system would do if they did. Ron Wood, +61 410 534 099.
Ron Wood is the Founder and Managing Director of Pricing Insight, an Australian pricing strategy consultancy he established in 2007. He has worked in pricing for around 30 years, first as a pricing and commercial manager in consumer goods, building materials and capital equipment, and since then across more than 160 pricing engagements in Australia, New Zealand, South East Asia, India, the United States and the United Kingdom, including building materials manufacturers, hardware co-operatives and trade distributors. He also founded Pricing University, which has trained more than 5,000 executives.
To discuss how this applies to your business, contact Ron Wood at info@pricinginsight.com.au or on +61 410 534 099, or visit Pricing Insight.
The flooring maker and the hardware chain in this paper are described by industry and are not named. Figure 1 is redrawn from the chain's merchandise communication of 6 September 2005 with the chain's name, the sender, the memo number, the product code, the distribution list and the support line removed; the wording and the figures are as issued. The A$2.0 million loss and the figure of less than A$50,000 of extra sales are as recorded at the time and set out in B2B Pricing Insight (Pricing Insight, 2026). The controls in Section 5 are recommendations drawn from the Pricing Periodic Table; no result from applying them to this business is claimed. The CFO's test in Section 3 is a method, not a measured finding.
