Precision Pricing, Superior Results. ™ BOM Analysis INFORMS 6 th Annual Conference on Revenue Management and Pricing June, 2006 DRAFT

© 2005, 2006 Zilliant. Confidential and Proprietary Abstract “Bill-of-material (BOM) represents the core of B2B transactions. Quite often the BOM portfolio affects the prices of its line items. Hence, it might be reasonable to pose the following hypothesis: The optimal price of an item (product) changes depending on its BOM portfolio. Zilliant has investigated and validated this hypothesis in several industries. This presentation will provide examples of BOM portfolio pricing drivers and discuss how to take advantage of those drivers.”“Bill-of-material (BOM) represents the core of B2B transactions. Quite often the BOM portfolio affects the prices of its line items. Hence, it might be reasonable to pose the following hypothesis: The optimal price of an item (product) changes depending on its BOM portfolio. Zilliant has investigated and validated this hypothesis in several industries. This presentation will provide examples of BOM portfolio pricing drivers and discuss how to take advantage of those drivers.”

© 2005, 2006 Zilliant. Confidential and Proprietary Presentation Overview Problem Statement –B2B Pricing Environment –M&D –BOM Problem Statement Business Context Hypothesis BOM Attributes How to useConclusion Background CoreWrap Up Hypothesis –BOM Attributes –Affect prices –Can improve revenue BOM Attributes –Top of BOM –Lump Sum –Prime product –End USe Deployment Cases –Case 1 –Case 2 Conclusion –Proper management of BOM pricing can increase margins –Next generation B2B pricing systems need to account for and capitalize on BOM attributes

© 2005, 2006 Zilliant. Confidential and Proprietary Overview of B2B Domain Players Supplier Manufacturer Agent / Dealer Customer Supplier Manufacturer Agent / Dealer Customer Zilliant Clients Distributor Builder Lighting Fixtures Raw Mat Ex #1

© 2005, 2006 Zilliant. Confidential and Proprietary Problem Statement GivenGiven –A BOM Products, quantities, end use, timing attributes, asking agent and may be the end customer –Historical Data Years of transaction data –B2B context Multiple products, multiple items, negotiated prices DetermineDetermine –BOM and Item prices

© 2005, 2006 Zilliant. Confidential and Proprietary Observations The revenue from a BOM is not merely an additive property of the individual items, but is driven by their interdependence and other BOM attributesThe revenue from a BOM is not merely an additive property of the individual items, but is driven by their interdependence and other BOM attributes –Mathematically z = BOM Revenue x = price of item 1 y = price of item 2 or other BOM attributes z = z (x, y) dz/dx = ∂z/∂x + ∂z/∂y. ∂y/∂x –Not accounting for these attributes and interdependence could lead to erroneous inferences B2B transactions (BOM) have unique attributes that affect individual item prices in ways not captured by many current pricing systemsB2B transactions (BOM) have unique attributes that affect individual item prices in ways not captured by many current pricing systems

© 2005, 2006 Zilliant. Confidential and Proprietary Presentation Hypothesis BOM attributes (1) Affect item prices (2) Can improve revenue if properly managed

© 2005, 2006 Zilliant. Confidential and Proprietary Segmentation Variables Segmentation Variables Product Attributes Location Attributes Customer Attributes BOM Attributes Agent Attributes Which variables affect pricing?

© 2005, 2006 Zilliant. Confidential and Proprietary Examples of BOM Attributes BOM Priced as lump sum Line number On BOM Revenue Velocity Product Mix BOM End Use Presence of high priced item Which BOM attributes affect price of an item?

© 2005, 2006 Zilliant. Confidential and Proprietary Presence of High Price Item - Example This item max margin is more than 60% when it is part of an invoice with max-margin GT 50% The same item max margin is less than 4% when it is part of an invoice with max-margin LT 10% Every point on the chart represents an item that appeared at least once in each group of invoices Equal Margin Line Items on this line have constant margin

© 2005, 2006 Zilliant. Confidential and Proprietary Interaction - Top of the BOM & Lump Sum Top of BOM Lump Sum Negotiation Higher Prices Line Item Negotiation Lower Prices

© 2005, 2006 Zilliant. Confidential and Proprietary How to act on BOM attributes? Can Existing Pricing System support factor? YES 1.1 Existing Segmentation Sensitivity Analysis 1.2 New Segmentation Check 6 criteria and deploy NO 2.1 Modify Existing Pricing System Redefine an used field in pricing system Add fields to pricing system 2.2 Store one price and account for BOM attributes manually Store floors and increment quotes e.g. A1: +1%, A2 : +4% Store ceilings and decrement quotes e.g. A1: -1%, A2 : -4%

© 2005, 2006 Zilliant. Confidential and Proprietary Illustration of Sensitivity Analysis for Case 1.1- Existing Segmentation Adjust demand model and optimum prices using sensitivity analysis techniquesAdjust demand model and optimum prices using sensitivity analysis techniques

© 2005, 2006 Zilliant. Confidential and Proprietary Manage BOM Attributes in all Pricing Stages Plan & Set (Optimize) Measure & Analyze Negotiate & Enforce Segment  Deal-specific price recommendations and metrics to enhance pricing outcomes  Quantitative approach to setting prices and policies that maximize financial performance  Pricing business intelligence tool informs all price-related decisions  Actionable price segments based on statistical analysis and market dynamics support all pricing activities

© 2005, 2006 Zilliant. Confidential and Proprietary Conclusions Items prices change significantly depending on BOM attributes B2B organizations can realize considerable gains if these attributes are managed properly Next generation Pricing Systems should enable pricing based on these attributes