How to Optimise Average Selling Prices (ASPs) to Maximise Profitability

The role of averages in sports and business worlds is a tool to simplify complex data, bringing forth valuable insights. However, when this principle is applied to ‘average selling prices (ASPs), it may negatively impact a company’s profitability. Although these averages provide an easy-to-understand snapshot of vast data, they often need to illustrate the nuances that underlie the data. Delving deeper into these nuances often uncovers significant opportunities for boosting price and profitability.

ASPs can cover a broad spectrum, encapsulating the average selling price of a product across multiple distribution channels, a specific product category, or even an entire industry. Nevertheless, such a high-level view cannot provide a nuanced understanding to identify root causes or drivers influencing ASPs. Therefore, companies must equip themselves with resources to facilitate this in-depth analysis.

Companies aiming to improve their gross profit margin by understanding the nuances of ASPs must ensure they have a team of well-trained and seasoned pricing professionals. Additionally, they must invest in tools that accurately identify the root causes of price erosion and lost profitability. An in-depth comprehension of the factors influencing ASPs, such as product feature mix, volume mix, price leakage, transactional discounts, industry/market mix, sales channels, and list price changes, is crucial for recognising potential causes that might be eroding ASPs and subsequently result in missed sales revenue and profitability opportunities.

Case Study 1: Building Materials Company James Hardie

James Hardie, a global leader in fibre cement technology, sought ways to enhance gross margin profitability and boost its ASPs in the competitive building materials industry. While the company had a long-standing reputation for quality, pricing pressures and varied market conditions led to a decline in ASPs

The company’s first step was to comprehensively analyse its current pricing strategy, focusing on ASPs across different regions and customer segments. The granular analysis revealed that despite a strong product portfolio, the company lost business profitability due to inconsistent pricing and heavy discounting.

Identifying this issue, James Hardie decided to strengthen its pricing team with experienced pricing professionals and invested in an advanced pricing analytics tool. The company also created a structured pricing process that aimed to reduce discounting and ensure that the pricing was consistent across all sales channels.

In particular, the analysis revealed that some large customers were given more significant discounts due to their buying volume, reducing the company’s ASP. James Hardie decided to standardise these discounts, creating tiers based on order volume, to maintain a higher ASP while still rewarding larger customers.

The company also addressed the issue of price leakage. They found that many small orders were not profitable due to the costs associated with processing and fulfilling them. To address this, they introduced a small order fee, which had the dual benefit of increasing profitability on these orders and encouraging customers to place larger, more efficient orders.

Finally, James Hardie also recognised the need for a dynamic pricing model that could adapt to changing market conditions and costs. They used their new pricing tool to implement this model, which adjusted prices based on various factors such as demand, raw material costs, and competitor pricing.

As a result of these initiatives, James Hardie saw a notable improvement in their ASPs. The company reported a 5% increase in ASP in the following year, resulting in significant improvements in business profitability. More importantly, these changes also led to better pricing discipline across the company and greater transparency in their pricing processes.

Key Learnings from Case Study 1:

Granular Analysis:

Deep diving into data can provide valuable insights into areas affecting profitability.

Structured Pricing Process:

Creating a structured pricing process helps reduce discounting and maintains consistency across all sales channels.

Dynamic Pricing Model:

Adapting to changing market conditions and costs using a dynamic pricing model can prevent the erosion of ASPs.

Address Price Leakage:

Identifying and addressing areas of price leakage can boost profitability.

Standardise Discounts:

Standardising discounts, even for larger customers, can maintain a healthy ASP.

Invest in Pricing Tools and Team:

Building a competent pricing team and using advanced pricing tools are crucial in managing pricing strategies effectively.

Case Study 2: A Consumer Electronics Company

Consider a consumer electronics company that wanted to optimise its pricing strategy. They were particularly interested in understanding how the product mix and sales channels impacted their ASPs. They started by analysing the ASPs for different goods sold through various channels. They then drilled down to the transaction level to understand the impact of discounts and promotions on their ASPs.

The analysis revealed that some high-volume, low-margin goods sold through online channels were pulling down their overall ASPs. At the same time, they also discovered that a significant amount of discounting was happening at the store level, further eroding their ASPs. As a result of these insights, the company took steps to rebalance its product mix and control discounting, increasing ASPs and overall profitability.

Case Study 2: Learnings

The granularity of Analysis:

Looking at the overall ASP can be misleading. Breaking down ASPs into smaller buckets based on product and customer segments can provide deeper insights.

Transaction Level Insights:

Analysing ASPs at the transaction level can reveal opportunities for price improvements.

Understand Contributing Behaviors:

Identifying behaviours contributing to ASP erosion, such as unwarranted discounts, can guide the formulation of corrective actions.

Active Engagement of Sales Force:

Involving the sales team in pricing activities, providing thoroughly analysing appropriate tools and aligning their compensation with discount performance can help sustain healthy ASPs.

Regular Monitoring:

Continuous monitoring of pricing metrics can lead to improvements in ASPs and contribute to revenue growth.

Case Study 3: A Wholesale Groceries Distributor

In the wholesale industry, a case in point is a nationwide groceries distributor that discovered an opportunity to increase its ASPs and, consequently, increase its profit.

This distributor was struggling with the volatility of ASPs across its wide range of products and varied customer categories. The first step was thoroughly analysing ASPs across the different product lines, distribution channels, and customer segments. They found that certain products were regularly sold to big chain retailers at heavy discounts while independently-owned small grocery stores were buying at much higher prices.

The company realised that these excessive discounts to big retailers were eroding their ASPs and were not necessarily driving additional volume as initially thought. As a corrective measure, the distributor decided to revise its discount policy, ensuring that the discounts given were proportional to the purchase volume and not merely to the retailer’s size.

Furthermore, they implemented an advanced analytics tool to track transaction-level data, monitor discounting trends, and flag outliers. This approach helped them maintain healthier ASPs while still offering competitive prices.

As a result of these strategic moves, within six months, the company saw a considerable increase in its ASPs, leading to an overall profitability improvement of around 4%.

Case Study 3: Learnings

Understand Your Customer Segments:

Identifying and understanding the differences in purchasing behaviours across customer segments is crucial. In this case, the company learned that offering disproportionate discounts to larger retailers was not beneficial.

Review Discount Policies:

Regularly reviewing discount policies can reveal discrepancies that may be eroding ASPs. Implementing structured discounts proportional to the volume of purchases can help maintain healthier ASPs.

Use Advanced Analytics:

Using data analytics tools to track real-time transaction-level data essentials can help monitor trends and identify outliers that may impact ASPs.

Assess Your Discount Impact:

Be aware that heavy discounting doesn’t necessarily equate to higher volumes. Assessing the actual impact of discounts on sales volume can prevent the erosion of ASPs.

Case Study 4: A Multi-Brand Retailer

On the retail front, consider the example of a multi-brand fashion retailer operating both online and brick-and-mortar stores. They found that the ASP for their in-store transactions was significantly higher than their online transactions.

Delving into the data, they identified two primary factors contributing to this disparity: higher promotional activity online and a different product mix with a higher share of lower-priced items sold online.

In response, the retailer adjusted their online product mix to include more high-end products and decreased the frequency and depth of online promotions. They also introduced an online AI-based dynamic pricing tool that adjusted real-time prices based on demand and inventory levels. This ensured that they could maintain healthier margins while remaining competitive.

Further, to maintain customer loyalty, they launched exclusive member benefits for frequent online shoppers, including early access to new collections and exclusive member-only sales. This strategy encouraged customers to purchase high-end items, thus driving up the ASPs.

Within a year of implementing these changes, the company saw its online ASPs increase significantly, leading to higher overall profitability.

Case Study 4: Learnings

Understand Channel Differences:

Realise that different sales channels (like online and in-store) can significantly impact the ASPs due to variations in product mix and promotional activities.

Adjust Product Mix:

Adjusting the product mix to include a balance of high-end and low-end products can improve ASPs.

Implement Dynamic Pricing:

Utilising AI-based dynamic pricing tools can help maintain margins while remaining competitive. It can adjust prices in real time based on demand and inventory levels.

Leverage Customer Loyalty Programs:

Designing effective customer loyalty programs can incentivise customers to purchase high-end items, thus driving up the ASPs.

Manage Online Promotions:

Overuse of promotions, especially in online channels, can significantly reduce ASPs. It’s essential that real-time advertisements balance the use of promotions to avoid devaluing the products.

Summary of ways to improve average selling prices

1. Granularity Matters:

Averages can mask the complexities of the data. Understanding data at a granular level is necessary for revealing price and profitability improvement opportunities.

2. Investment in Resources:

Companies must invest in a team of skilled pricing professionals and the right analytical tools to uncover the causes of price erosion and lost profitability.

3. Understanding ASP Drivers:

A deep understanding of the factors affecting ASPs is crucial. These may include product feature mix, volume mix, price leakage, transactional discounts, industry/market mix, sales channels, and list price changes.

4. Control Discounting:

Companies must control discounting to prevent revenue leakage. A price matrix that outlines the acceptable range of prices can be helpful in this regard.

5. Value of Pricing Function:

Companies should recognise the value of a dedicated pricing function in providing the necessary analysis, guidance, and education, particularly to the sales force. This team can help ensure that pricing strategies align with company goals.

6. Engage the Sales Force:

To maintain and improve ASPs, engaging the sales force in pricing functions and activities is crucial. Sales compensation can be aligned with discount performance to incentivise optimal behaviour.

7. ASP Analysis Impact:

An in-depth analysis of ASPs can lead to revenue, margin, and price realisation improvements. This investment may be one of the most profitable for a company.

As you can see, optimising average selling prices (ASPs) is crucial to maximising profitability for businesses. While averages are valuable tools to simplify complex data, relying solely on them to understand pricing dynamics can lead to missed opportunities and erosion of profits. Instead, businesses must delve deeper into their pricing strategies and employ granular analysis to uncover the underlying factors affecting ASPs.

The case studies presented demonstrate the significance of thorough analysis, structured pricing processes, and the implementation of dynamic pricing models. They also emphasise the importance of standardising discounts, understanding customer segments, and utilising advanced analytics to monitor transaction-level data.

To succeed in optimising ASPs, businesses must invest in well-trained pricing professionals and cutting-edge pricing tools. By understanding the nuances of pricing, companies can identify and address issues such as price leakage, unwarranted discounts, and variations in product mix, all of which can impact ASPs and overall profitability.

Moreover, actively engaging the sales force and aligning their compensation with discount performance can promote pricing discipline and support sustainable ASP improvements. Developing customer loyalty programs and leveraging dynamic pricing mechanisms can help businesses maintain healthy margins while remaining competitive.

Optimising ASPs requires a comprehensive approach considering various factors influencing pricing strategies. Businesses can unlock substantial revenue growth and profit potential by focusing on granularity, investing in resources, and continuously monitoring pricing metrics. Embracing the value of pricing functions and recognising the impact of ASP analysis