Crafting a new commercial policy (price lists and discount structure) using optimization algorithms

At an industrial coatings manufacturer, we integrated multiple price lists and  discount structures  (upon the merger of 3 brands) while minimising the net impact to customer invoice prices

Challenge

Need for a unified and standardized commercial policy (discount structures) to ensure sales force effectiveness

A large industrial company where 3 companies/brands merged into 1 and were going to be serviced by a singular sales force, there was a need to unify the discount grids. Each of the existing discount structures had challenges such as uncontrolled discounting, hundreds of exceptions, non-logical business patters etc. The objective was to align different discount structures in one uniform and standard discount grid, which should be applicable for all products and customers. The constraint was that this discount grid should have the minimum possible impact on individual customers and adhere to pre-defined business rules.

Approach

Using optimization algorithms to align the price lists and discount structures with the end-market situation

The exercise started with documenting the existing elements of the commercial policy like list prices, channel discounts, discounts for customer segments, discounts for specific products, promotions etc. The business criteria, rules and constrains for each element were defined. We then optimized the price list change,  then base discount for the new price list, and then optimizing the product-specific discounts, hereby taking into account the impact on a customer level by minimizing price increases and decreases. In addition, the algorithm should take into account how products should be marketed compared to other products. The result was clarity on discount and alignment between similar customers. Another functionality was the ability to analyse the impact to each customer.

Methodologies 

  • Optimization algorithm
  • Pricing Waterfall
  • Constraint Programming

Results

  • Standardized Price List aligned to market prices
  • Aligned discount grid that is logical for clients and the sales team
  • Reduced discounting for small and non-strategic customers
  • Fewer corrections/escalations in the SAP system
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