Cost-to-Serve Pricing for Consumer Products

Challenge

This food producer practiced zone- and bracket-based pricing for its products, sold across the United States. High transportation costs significantly impacted the profitability of sales and the manufacturer believed that its pricing did not accurately reflect true distribution costs. We were asked to conduct detailed logistics analyses to devise revised product pricing that would align more accurately with actual costs and incentivize cost-minimizing customer ordering behavior.

Approach

• Cost analysis: Constructed detailed logistics costs for each product, by delivery zone and order size.
• What-if analyses: Modeled the margin impact of alternative pricing policies, varying product price by zone and order quantity.
• Recommended pricing: Developed recommended product prices that better reflected true distribution costs and provided an incentive for customers to order in truckload quantities.

Results

• Revised pricing yielded 200 basis points of margin improvement for the company.
• Optimized approach allowed customers to avoid price increase by modifying their order behavior, thus creating a win-win opportunity for both manufacturer and retailers.