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Inflation, Value-Based Pricing and Trucking

Gene Metheny, partner at Carlisle and Company, stops by the show to talk about the myriad macroeconomic problems facing B2B companies and what must be done to get ready for the next shift in supply and demand.

He and Barrett Thompson then drill into some examples of how pricing data and analytical measurement are being used to improve visibility throughout the value chain in the trucking industry. They also explore the potential for executing value-based pricing in trucking and beyond – by interpolating between the market data that you have and the data you don’t have to derive a value hypothesis.

Read the auto parts roundtable mentioned in the episode.

Gene Metheny

Gene Metheny

No one knows when the inflation wheel is going to stop exactly, but they know it's coming. What you don't want is to get caught way ahead of the chain in a continual price increase when the recession hits. Because then you're gonna lose market share pretty substantially.
- Gene Metheny, Carlisle and Company

Episode Transcript

Gene Metheny: The economy is going to continue to see headwinds that are going to try to slow down demand. While at the same time, you're going to have pockets of constrained supply that continue to exist associated with the pandemic. You're still going to see cost going up in a couple of areas, but you're no longer going to be able to pass that blatantly along to the market, which means you have to get very targeted and strategic about where those revenue opportunities are.

Barrett Thompson: Hello everyone. My name is Barrett Thompson. I'm the general manager of commercial excellence at Zilliant. And I'll be your host for our podcast. I'm joined today by Gene Metheny, partner at Carlisle and Company. Gene, welcome to B2B Reimagined.

Gene Metheny: Thank you, Barrett. Thanks for having me.

Barrett Thompson: Gene, before we jp into our topic, would you tell us something interesting or little known about you that I wouldn't learn if I looked at your LinkedIn profile?

Gene Metheny: Sure. Sure. So as a hobby, I kind of do construction projects. Some of them fairly major, so I've built screen porches, I've redone rooms, I've done fine carpentry work around windows and doors and trim and different things. Built a couple of bars. So, that's a lot of construction work.

Barrett Thompson: You sound like a handy guy. Do you have the black and blue thbnail to go with it?

Gene Metheny: Oh, definitely. Definitely. And all the tools imaginable.

Barrett Thompson: Well, [00:01:00] fantastic Gene, thank you for that. And we're thrilled to have you today on our podcast to discuss the changing pricing dynamics in automotive industries and other industries that you cover.

And so really looking forward to where that conversation goes, as we get started, would you give our audience an overview of Carlisle and Company and what it is that you all do for your customers?

Gene Metheny: Sure. So we're a boutique consulting firm. We focus primarily on original equipment manufacturers that make complex goods, mostly in the motor vehicle industry.

So motor vehicle, including automotive, heavy equipment, like heavy construction equipment, ag equipment, heavy truck, and power sports. But also a number of other major industrial players, for things like pumps and valves and complex equipment that goes into different factories.

Barrett Thompson: That sounds great. It's a space that we see a lot of activity [00:02:00] and a lot of interest in over the last five to 10 years on pricing and pricing needs. So let's start off with what I think is the biggest topic of the past year, which is inflation. And I'm curious, how have you seen OEMs and parts distributors and others in the supply chain react to the inflationary pressures?

Gene Metheny: So, first of all, there is a lot of inflationary pressure coming from the supply side. Supply is being constrained, coming out of the pandemic. Costs have been rising very dramatically for all of our customers and they have struggled with what to pass along to their customer and what not to.

At first people didn't know whether it was going to be transient or sustainable. It's clear now that the inflation has been sustained and most of our clients have passed that cost along to their customers and consumers through their various channels.

[00:03:00] Their reaction has been fairly aggressive because it's had to be. Many of our customers sought our help and how to try to do that in the smartest and most intelligent way. But a lot of them have spread that pretty much on a peanut butter approach right? Just to try to recover their costs and try to keep up with the pace of inflation at this point in time. I think we all know that the Fed is trying to put the brakes on inflation in our country and most other countries, we have similar types of reactions and it's starting to show an impact.

The latest data for consumer price index shows a dip in everything non related to food and energy. So inflation is slowing, it's clear, it's going to continue to slow and, and the Fed's going to continue to be aggressive there. And inevitably, I think it's going to be difficult to engineer a [00:04:00] soft landing because a lot of the supply constraints still exists.

So inflation is still going to have some upward. Particularly in China where the shutdowns have continued that are COVID related. And some of the pressures on transportation and energy that are related to other constraints in the war in Europe as well. So those supply constraints will continue to provide inflationary pressure and the Fed's going to have to continue to battle that. Which means that we're likely going to be facing some degree of mild to moderate recession. And we may already be in a recession. The latest data shows that the economy has contracted over the last couple of quarters, so I think we're clearly headed for a recessionary period.

Barrett Thompson: Well, there are so many systemic forces then that businesses will be obliged to respond to. One of the things I hear when I talk to customers is the [00:05:00] mechanics and the processes by which they respond to these are pretty painful, whether it's having to go to customers for the second or third or fourth price increase in a year where you might have normally had once a year price increases.

Or it's wrestling giant Excel spreadsheets to the ground. I'm hearing about a lot of pain in the outworking of that response to the systemic pressures. Are you hearing the same?

Gene Metheny: Oh absolutely. Most of our clients historically only change price once a year. And they've had fairly archaic methods for managing price and determining price.

They crunched a lot of spreadsheets. They looked at a lot of data to try to figure all of that out. Most of them were collecting some degree of market data, but not very frequently. And the rapid pace of change just forces people to do four, maybe eight, 10, price changes in a given year and that's driven them crazy because they just don't have the resources to do that.

[00:06:00] They don't have the systems to do that. They don't have the methodologies in place to do that or support it. And so it it's forced them to do so in ways that weren't very clean or optimal. As a result, a lot of people are trying to adjust those processes. They're looking at more frequent data collection from the market.

They're looking at automating their methodologies for generating price based on good competitive data and a good understanding of their cost situation and how it's changing. They're trying to get better transparency through their entire profit waterfalls. So they understand what they're giving away in terms of rebates and promotions and that kind of thing.

So they really understand where the bottom is in terms of profitability. So having better systems in place, better knowledge to analyze what's happening and what's going on with the market and to react rapidly to price adjustments and price changes. [00:07:00] I think the toughest thing is responding now that things are changing.

Barrett Thompson: I believe businesses have been able to get along, if you will, in the normal times with the manual methods, the non-scalable methods, just, it seemed to be okay. Like it didn't expose how broken those processes really were at their core until things started moving both up and down. And in fact you spoke a moment ago about a potential recession or one that may already be documented in here, and that's going to bring yet another round of volatility in the other direction.

Do you have specific thoughts about what B2B businesses might be doing or need to do to protect margins as the inflation begins to recede?

Gene Metheny: Yes. I think, no one knows when the inflation wheel is going to stop exactly, but they know it's coming. And so it's really important for [00:08:00] people to monitor what their competitors are doing, on a very timely basis almost month to month getting some snapshot of competitive data and seeing what's happening.

And monitoring their cost changes on a month to month basis as well to kind of understand when the tipping point is, because what you don't want to have happen is get caught way ahead of the chain, right? In a continual price increase when the recession hits, because then you're going to lose market share pretty substantially.

So I think there's a lot of risk to that. And as a consequence you need to have your methodology in place to be collecting and tracking what's happening at the market and inside of your own company on a much more frequent basis.

Barrett Thompson: And I imagine there too, not only do you not want to lead in that change, but you don't want to be the laggard.

You don't want to discover that now my win rate on quotes is down 50%. Oh, that must mean something. Yes. It means that the [00:09:00] market turned and you missed it. You're 90 days or 180 days behind the price inflection. That would be a pretty hard position to be in.

Gene Metheny: Exactly. It's been that way on the way up too. A lot of people were behind on the way up and as a consequence, lost a lot of profit and on the way down, you could lose a lot of market share.

Barrett Thompson: So thank you for discussing inflation, recession, those macroeconomic things that are always putting pressure on B2B pricing and what it means to be profitable and successful in that realm. Let's look to other processes or technologies or routes to market.

Other key changes that you see going on in the marketplace today that are impacting B2B.

Gene Metheny: Yes. I would say that traditionally, most of our customers were some sort of a cost plus methodology to determine price. And we have been moving them pretty regularly in a [00:10:00] direction of being more market based.

And being more value based, in terms of pricing. So in order to do that, of course you have to collect good market data on a broad spectrum of products. And since you're not going to have all of the market data that you want, you also need some way to interpolate between the data that you have and the data that you don't have.

So we generally recommend that people do that based around some value attribute that's scalable around the product, whether it be horsepower or some other relatable scale associated with the product that they're manufacturing and figure out how to interpret between the data that you do have and the data that you don't.

So you can follow the market appropriately. I think it's also really important to understand how your customers value your product relative to your competitors, right? [00:11:00] What are the attributes that they value more than others? What value do they put on your brand? How do they value your different product, differentiators like special types of material or different aspects there.

And so in order to find that out, I think it's inherent that you do enough customer research with the key decision makers in the value chain that actually make a decision at your product versus some other product. And we utilize a lot of survey methodologies to kind of determine what those value points are and then you can price to them.

So understanding that value and doing the right level of market research to determine it, I think is key.

Barrett Thompson: Gene, when we spoke earlier, you mentioned that the trucking industry is a prime example of improved technology and even improved data sharing and changing the dynamics among the [00:12:00] buyers, the sellers, and ultimately the customer - sort of an information oriented value chain.

Would you elaborate on that for our audience?

Gene Metheny: Yes. I think that most of our clients live in a relatively complex value chain where the end customer is several steps down from the prime manufacturer. And of course, connecting that value chain in ways that better serve the end customer and understanding how to make that work across different separately owned businesses is a complex task and people have been moving that direction for a long time.

And they've done it through a combination of tying together disparate data sources, to try to understand and measure what's really happening in the market and then incentive programs and schemes that help incentivize all the channel partners to do the right thing. And to [00:13:00] have the right behaviors that then drive the right results for the end customer.

The trucking industry is an excellent example of that because they sell mostly to fleets and fleets have a tremendous amount of buying power for both the vehicle and all of the service associated with it. And they measure all of their vehicles from an uptime perspective.

So they know if I bought a truck from this manufacturer versus that manufacturer. Exactly what kind of uptime and downtime I'm experiencing on that truck. And they use that in their decision making process to buy new trucks. And as a consequence, the OEMs have had to say, how do I measure the same thing?

As my customer is measuring. And then how can I find out how to improve it? And in order to measure it, you really have to look at this thing completely holistically. So you have to start from when the truck had a problem. Well, they know that through telematics data, it says that this [00:14:00] truck had a fault that it went offline, then they can measure how long did it take for the truck to reach a repair center?

So they geofence all of their dealerships. They can see when the truck actually came into the repair center. Then the next question is how long did it take the repair center to start work on the vehicle? So between when it was geofenced and when a repair order was open, they have to collect that data from the dealer to understand when the repair order was opened and then they can also track, if I didn't have the parts I needed, how long did I wait for those parts to arrive? And they can track that part of the process through a combination of dealer data and OEM data. And then once that's done, did the dealer later identify additional parts that needed to be put on the vehicle?

Hence they failed in the diagnosis of the problem and misdiagnosed the problem. Then they have to wait again. And then when they [00:15:00] get finished with repair, how long did it take for the truck to get back in service and on the road? And they can tie that together again with telematics data.

So you can see that you've got data from multiple different sources and you can tie all that information together and then say, okay, well, where are the big problems? And where are the big delays? And it turned out that a large chunk of the delay was waiting in front of the dealership for repair because the dealers felt comfortable with a long queue of trucks sitting there for their repair shop so that they could manage their shop efficiently , but that led to a lot of downtime. So, how do you incentivize the dealer to change that behavior? Because it may not be in their best interest, right? From managing a shop standpoint, to really drive that queue downwards.

So with the right level of incentive payments and metrics and monitoring, then you can change behavior in a way that benefits the end customer and hopes [00:16:00] to provide better business for everybody. So I think those types of connections are happening on a regular basis throughout most of our client's world.

And they're trying to figure out what are all of their various channel partners. What role do they play in satisfying the decision make in the value chain that decides their product versus somebody else's product? What does that group value? And how do I make that value occur throughout my value chain?

So that's, I think how people are tying data together and creating really an information world that's administered through financial incentives to make everybody perform in a good way.

Barrett Thompson: I think this is a rich example and I'm glad you shared it. Often, I will hear a B2B business, a leader, a data leader, technology leader, a [00:17:00] pricing leader say, I want to tie data sets together, but they're thinking mostly data sets within their organization. But what you've described Gene, if I'm hearing you correctly is tying the data sets together down the value chain through the supply chain, if you will. So as the OEM, if I understand the application to which my product is being used and the performance metrics, when it is applied.

In that way, I will understand so much more about what my customer values and experiences that then causes them to choose me or not choose me as the OEM at the beginning. As the OEM, I'm tempted to think it's all about the speeds and feeds of my product right out of the gate. But what I hear you saying is it's about the lived experience.

Once I take that product and I have to live with it and get supported by channel partners and other kinds of downstream implications across years, maybe that's where the rubber meets the road. I'll make the decision as an end [00:18:00] buyer, whether I stay within your brand or move on to somebody else based on things that may have historically been out of your control.

But it sounds like the forward thinking OEMs are understanding what's happening throughout that value chain. Once the product leaves their shop. And then to your point, they're incenting their partners to do the kinds of things that make the overall experience of being inside the brand, and using that OEM's product, a wonderful experience and kind of locking in their customer that way, locking in that loyalty.

Gene Metheny: Absolutely. And I don't want to overemphasize the incentive part of the puzzle, although it does play a significant impact, but just collecting the data, sharing it with your channel partners and having them understand their role in this process and what it means and how it impacts the end customer is very impactful and your channel partners as well, can see the value chain and figure out how to react.[00:19:00]

The other thing that we see that I think is really relevant here that most customers don't have is a complete visibility of their true profit at the customer level. Particularly looking down the value chain. So I sell to a distributor, the distributor sells to a dealer. The dealer sells to an end customer. And I may have incentives at multiple stages and discount structures at multiple stages to that perspective.

Right? So I give a discount to the distributor, right? Based on their size of their business, et cetera, cetera. I give incentives to maybe the dealer to use our product versus somebody else's product and the dealer in terms is selling to the end customer. And sometimes they ask for [00:20:00] support to do that because they're trying to meet a price point that the customer wants.

And so maybe even I give another incentive in the chain somewhere along the line. So I've given away profit at every stage of that process. And most of our clients don't really have a good way of tying all that data together to understand where did I give away that profit? And am I still profitable?

Am I still profitable at a product level? Am I profitable at an end customer level? Or did I give away so much that I'm losing money on this customer. I may be making money over here, but I'm losing money on this customer. And most of our clients really don't have good systems in place to understand that.

Usually when we come to assess their situation. We do a complete waterfall tear down and we identify those points. But having a system in place that they can monitor it on an ongoing basis, , because you know, the [00:21:00] sales guys are making one set of decisions. The pricing guys are making another set of decisions.

The product managers are making another set of decisions and they don't all know the impact of each other's decisions in that process. Tying that together to really understand what's happening is important.

Barrett Thompson: I can acknowledge seeing the same. Most customers will ask us when they're looking at our software applications, Zilliant’s, for example, they'll ask what are your capabilities to manage and display a waterfall, a true waterfall, all the way down to that net, net profitability that you're speaking about.

And we're able to do it. There are clearly some data challenges that need to be addressed if you've given free shipping on an order. And there were 10 different product categories on that order, you know, which of those do you allocate the absorbed cost if you will, of that shipping, right?

There's some things to be worked out there, but they can be, and [00:22:00] those give a different picture that businesses need and often don't have.

Gene Metheny: They absolutely do. And you really need to be able to slice and dice that waterfall either by product or by customer hierarchy. To understand what's going on.

Barrett Thompson: Some of our customers are not only using backward looking waterfalls. If you will, show me where I've been based on what I've done, transactions I've made, decisions I've made, but that also becomes a nice lens for forward looking strategy and tactical decisions.

It's possible to take a new price rule that you're considering, or a new price strategy that you're considering and play it out in a scenario based environment and answer the question. What would the waterfall look like if I took these prices into the market, if I took this discount program to my market for these customers, for these products, what would my waterfall look like then?

And I think that's a really excellent way to complement [00:23:00] the hindsight looking waterfall and a forward looking waterfall. So you can make better decisions you can know before you go, what that P&L would look like and where you would be profitable and where you wouldn't be.

Gene Metheny: Exactly. The other thing that I think that people are trying to do better is understand the true impact of promotions. A lot of people run promotions, they run them for a short time period. And sometimes they run the same promotion year after year. And of course the customer anticipates that promotion and they destock and advance it and then they stock up during and then they sell out otherwise.

So tying together with getting data from multiple sources and through the channels to understand what's going on. It's really important to get data from your distributors and dealers to understand are your promotions really getting passed on to the end customer? And are they having an impact on the end customer or are they just a fluctuation of demand[00:24:00] that's working its way through the chain. And what's the impact to your supply chain for fluctuating demand? Is it doing what you want it to, or is it just causing more chaos in your supply chain? So, understanding and analyzing how effective your promotion spend is, and whether it's adding to true net incremental profit, and whether it's sustaining growth in sales or opening up new markets, that's a pretty important aspect of business.

And most companies spend a ton of money on promotions and don't really have a good idea of what they're actually doing. Whether they're shifting demand around or creating new demand.

Barrett Thompson: Yeah. This is such a valid point in my mind. That one way that I can think about pricing and price schemes and price setups, and price incentives of all types is at the end of the day, we're seeking to modify a customer's [00:25:00] buying behavior. It might be to have them do business with us at all. It might be to have them place orders of at least size X. Maybe we're trying to incent larger order sizes and fewer deliveries, or in some cases the other way around, maybe we're trying to incent a broader portfolio of product categories that someone is purchasing from me.

So this gives rise to things like cross product promotions. If you purchase so much of category X, I give you a discount on category Y so I look at many of the pricing programs that is essentially buyer behavior modification programs. Gene, and then to your point, we could ask what is the specific behavior you were trying to incent.

And then are you getting it? And sometimes just having clarity on what was I really after, as opposed to just the moment of it's that time of year to run a promotion. I do it because it comes up every year on the calendar. No. What is your specific intent? And can you measure and how do you go about measuring the particular buyer [00:26:00] behavior modification that you're receiving?

Is it really what you intended and how's that affecting your bottom line? It's so important. We can't just rest on inertia or programs of the past anymore.

Gene Metheny: Absolutely. And the other thing that happens is the behaviors that you want change over time. So you may have a promotion that's designed to elicit a behavior that you needed 10 years ago, and you're still running that promotion.

But the behavior that it drives is actually now counter to what is valuable to you. Right? And most people don't realize that it is all too common.

Barrett Thompson: Unfortunately, I say this with all empathy that the strategic alignment all the way down through some of these programs. There are gaps, there are gaps still, and it comes through, I guess it comes through the habit. The well worn habit or the rut of doing certain things. And perhaps someone says yes, but I've finally worked out all the kinks in the spreadsheet to [00:27:00] handle that one. It's the easiest thing I run. Of course. That's why I run it again. Hey, we have to be willing to question that maybe to set that aside and ask what's really aligned with the strategy and the behavior that I want today. I'm so glad that you brought that up. It, it is possible to, you know, be moving boldly into the 1990s with your promotional program if you're not careful.

Well, Gene, this has been a wonderful discussion. And before we leave, do you have any parting thoughts for the audience on what you think the next six to 12 months might look like for the industry?

Gene Metheny: Six to 12 months in the future. I think that the economy is going to continue to see headwinds that are going to try to slow down demand. While at the same time, you're going to have pockets of constrained supply that continue to exist associated with the pandemic.

And that's going to squeeze people [00:28:00] even more, because you're still going to see cost going up in a couple of areas, but you're no longer going to be able to pass that blatantly along to the market, which means you have to get very targeted and strategic about where those revenue opportunities are. So in order to do that, you have to have a lot of good information.

You have to have some good methodologies for doing things in a consistent way to the market. And you have to have a lot of analysis tools to support what's happening and how customers are responding to that. It's a good idea to have some market share metrics in place, some competitive benchmark data metrics in place and have a routine methodology for collecting that information on a timely basis so that you can understand in more real time what's happening.

Barrett Thompson: I want to thank you again for taking the time to have this conversation with us today. It's highly [00:29:00] relevant. Thank you for sharing your perspective with us.

Gene Metheny: Thank you very much, Barrett. It's been a pleasure.

Barrett Thompson: I want to thank each of our podcast listeners for being with us.

Please check out the link to an auto parts distribution industry roundtable, which Gene participated in with us earlier this year, for a deeper dive. At Zilliant, we're committed to your success. And if you need any assistance, please reach out to us.

Would you do us a favor and take a moment to rate and review the show in your podcast app, as it helps us to continue to put out great free content. Until next time have a great day.

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