A major challenge for consumer goods industries is to define the best strategy for distributing their products to different service channels. The objective of this strategy must always be to maximize the perception of the level of service offered to customers and the reduction of service costs, therefore, all actions taken must aim at at least one of these pillars without giving up the other.
In this context, the industry's relationships with its direct customers such as distributors, retail key account, retail, wholesalers, etc. Thus, the main questions to be answered when formulating the service strategy for each of the channels are:
- What are the service level components required by each of the customers?
- What is the lowest possible cost to meet each of these requests?
- Is there room for changes in the customer order format, migrating it to a lower logistical cost profile?
- How to engage sales team and customers to obtain operational gains?
A practice that has been highlighted in the achievement of these objectives is the Menu-Pricing, or Bracket Pricing logistical. The main objective of Menu-Pricing is to separate the price of the product from the cost of the logistical service provided. When clearly exposed to the customer, the separation of these two components encourages placing orders in formats that optimize logistical efficiency.
LOGISTICS MENU-PRICING
O Menu-Pricing logistic aims to separate the price of the product from the cost of the logistic service provided. This separation exposes the customer to the cost of their service specifications, such as palletizing requirements, splitting deliveries, etc. resulting in customer engagement to reduce them. There are two different possible approaches to generating this engagement:
The first consists of exposing the price of the ordered products and creating a menu with the possible forms of customer service and their respective costs that will be added to the final invoice (Figure 1).
Figure 1 – Example of Menu-Pricing separating product price and service cost
Another approach is to offer the Menu-Pricing in the format of commercial discounts that are granted from the moment orders are placed following certain rules, as seen in Figure 2.
Figure 2 – Example of Menu-Pricing via commercial discount
Due to the ease of management and verification, the second model is usually more used, in addition to being an important commercial tool in the negotiation of discounts. In this text, we will deal specifically with this second model.
Menu-Pricing Logistics Options
The offer of commercial discounts conditioned to placing orders in predetermined formats helps to discipline demand, reducing operational waste and distributing the gain throughout the chain. The main objectives are to increase the average order size, reduce order frequency and reduce the number of delivery occurrences.
The menu-pricing to be offered depend on the current profile of orders collected by the company, the commercial discount must be offered on those options that bring the greatest reduction in logistical costs. Some options that can be used in a Menu-Pricing include:
- Percentage of volume ordered in multiples of trailers/trucks
It aims to increase the size of the average order, reducing freight per ton and the number of loading operations at the DC.
- Percentage of volume ordered in closed pallets or layers
It aims to increase the size of the average order, reducing the freight per ton and reducing the cost of picking in the DCs.
- Ordered volume distribution over the weeks of the month
It aims to linearize the demand during the month. For this option, differentiated rules per customer/channel are recommended so that the global DC demand is linearized, and the demand per customer/channel may not be.
- Centralization of deliveries
Option applicable to large retail chains with the aim of avoiding store-to-store deliveries, making consolidated deliveries at the chains' central DCs.
- Zero occurrences on delivery
It aims to reduce costs with per diems, re-deliveries and returns for non-commercial reasons during delivery to the customer.
- total efficiency
This option aims to reward the customer who achieves maximum performance in all other options by offering them an additional discount on their invoice.
An example of a table Menu-Pricing can be seen in Figure 3, where the discount offered to the customer when positioning within each performance range is displayed. Thus, the customer has visibility of his potential gain by adapting his order profile within each of the ranges.
Figure 3 – Example of menu-pricing table
In Figure 3, if the customer reaches 80% of the requested volume in multiples of trailers, he will obtain a 0,20% discount on the purchase price and so on. If it reaches the maximum performance, 90-100% in the example, in all options, an additional discount of 0,30% is offered. The Total Efficiency Discount is recommended as a way to encourage customers to direct their efforts towards the Menu-Pricing.
Definition of the discount to be offered to the customer
One of the main definitions to be taken within the development project of a Menu-Pricing it's like defining the discount given to the customer. The challenge at this stage is to offer a discount that is attractive enough for the customer to adhere to the menu and at the same time ensure that the process is win-win bringing cost savings to the industry as well.
This definition is generally made through simulations of logistical cost reduction according to the level of adherence of customers to each option of the Menu-Pricing together with information from the commercial team. Some practices observed in the market offer a maximum discount of between 1,0% and 1,5% depending on the customer channel, leaving the rest of the gain with the industry. in experiences of Menu-Princing developed by ILOS, we observed that, of the total cost reduction, around 40% is passed on to the customer in the form of a commercial discount and the remaining 60% are industry gains, and these percentages may vary according to the business environment involved.
Model for calculating and granting the discount
It is advisable that the verification of the achievement of the Menu-Pricing and concession of discounts are not made note by note. The difficulty of calculating grade by grade and the complexity of managing the discounts granted have both systemic and resource restrictions.
Thus, it is suggested that the calculation be carried out only once at pre-defined time intervals and referring to the previous period. Targets achieved in these periods are converted into commercial discounts. Figure 4 shows the periods for measuring, calculating and validating discounts.
Figure 4 – Example of measurement schedule, calculation and granting of discounts.
The next question to be answered is how to pass on the discount amount to customers. This pass-through can be made by depositing the discount amount for the entire billing period in a current account, applying the discount in the subsequent period (example shown in Figure 4) or generating commercial credit to be discounted on future purchases. Regardless of the alternative chosen, the communication of the rules with the client must be extremely clear.
Key success factors and implementation challenges
The development and deployment of a Menu-Pricing brings enormous challenges to be overcome by industries. For the development of the project, a cross-functional team involving and engaging the operational, sales, finance and customer service areas is required. The design of the solution must be carried out by all areas, considering all commercial and operational restrictions. Given the high degree of involvement of all areas during project development and implementation, leadership engagement is essential.
It is also necessary to develop a risk matrix with potential problems that may arise during implementation. For example, if the customer places the order in multiple trailers and the industry suffers a 20% stockout of the order, the industry will not obtain the expected gain in the consolidation of cargo in transport, but will have to grant the discount agreed with the customer . Thus, solutions and adjustments to the project that mitigate the mapped risks must be proposed.
It is also recommended that the implementation be carried out in waves, starting with the customers with whom the industry has the best relationship and who present the greatest potential gain, in order to investigate and make adjustments to the project.
Finally, communication is also an important key success factor. It is recommended to draw up an internal and external communication plan, involving sales team training and approaching customers through visits and explanatory printed material.
Conclusion
O Menu-Pricing proves to be an excellent tool for reducing logistics costs, especially for less profitable customers, encouraging greater demand discipline in order to reduce costs in the chain.
The sharing of gains obtained with logistics solutions brings industry and customers to the same side, creating a collaborative environment aimed at reducing operating costs. The implementation experiences show that from the moment the customer becomes aware of the costs involved in the specifications and format of their orders, there is a tendency of strong engagement to reduce these costs.
In addition to operational gains, the development of the Menu-Pricing it brings developments for the company that can become starting points for other collaborative projects, both between the industry and the client, as well as between the operational area and sales.
As key success factors, the strong engagement of a cross-functional team in the development of the Menu-Pricing, preparation of a risk matrix, phasing of implementation and preparation of an internal and external communication and training plan.
Finally, despite being a well-established practice in the consumer goods market, there are few industries that successfully implement the Menu-Pricing. The main obstacles observed are the lack of internal collaboration between the commercial and operational teams, which do not allow joint solutions with gains for the company as a whole, in addition to the paradigm that meeting customer specifications at all costs is an immutable factor in the market.
In an environment increasingly focused on collaborative solutions and the need to reduce costs, these obstacles must be overcome and the Menu-Pricing stands as an important tool to achieve these goals.
To reference the article in your publication, use:
MILLHOMEN, G. Menu-Pricing: Obtaining logistic cost reduction through win-win relationships with customers. Tecnologística Magazine, São Paulo, Year XX, n. 232, p. 84-86, Mar. 2015.
