The ASP challenge in Life Sciences

For most companies who perform worldwide transactions, there is a certain challenge to creating ASP transparency. In an ideal world, all the transactions are properly consolidated and budgeting your price is a kid’s game.

Sad, reality is not as easy.

Let’s start by clarifying what ASP is. At its core, ASP is about solving the price invisibility challenge[1]. Think of a proper definition for ASP: Amazing Sales Profit, Advertising, Sponsorships & Promotion, or is it really an Average Selling Price?

One will tell you, the formula is simple: divide your net revenue by the quantity of items sold; and that will be easy enough to do, right?

Really?

ASP

There are many elements to consider, such as, are all your rebates and discounts recorded and reported in the same manner across the organization? Who oversees the data consolidation? Do you have visibility at the stock keeping unit (SKU) level, by sales channel, and by deal? Are the transactional records already aggregated? And, at this point, we are not even thinking about including free of charge products. In summary, ASP is creating two challenges: Defining the terms including their respective calculations, and having the data in one place.

This blog will address the various dimensions that affect such calculations and explain some workarounds to achieve visibility of your ASP.

  1. Data to mimic a global enterprise resource planning (ERP) system

Because you don’t necessarily have a global ERP system, you need to figure out how to replicate one. The first solution could be locally downloading all the transactional records from your local ERP as a main source and upload them into a central repository or global data lake. The function in charge of ASP at a Global level (e.g., Pricing Department or Finance) will work from the global transactional database to calculate ASP and perform the financial reporting. A global data lake may not be the sole solution; an Access database or similar system can also do the trick, but generally, bears the risk of being a little more error prone. It’s, of course, desirable to have only one platform, but in reality, would force you to use an alternative. Microsoft Excel would have limitations in terms of records. In the end, any system/solution/repository that can collect all transactions in a single place would enable the calculation.

  1. Product hierarchy

A simple way to overcome the lack of a standardized product hierarchy, is to adopt the “brand” as a starting point as it’s a terminology usually commonly used across the organization. Your brand has different names across the globe, why not split the hierarchy into two brand levels to accommodate global and local names? Furthermore, it can expand depending on the various needs from finance to medical to marketing to sales in just a few minutes. Nevertheless, the product hierarchy should include a maximum of six or seven levels. Although it could be tempting to use the product hierarchy to sort out any issues around pack size, strength, presentation and so forth, the better approach would be to keep such information in separate fields which can easily be used to calculate or converts (e.g., from pack to International Unit (IU)). Starting with a common simple denominator will drive business acceptance.

  1. Discounts, rebates and other revenue

Consolidate all discounts and rebates into a single sales reduction bucket from the start. If local accounting practices or financial reporting (preferred source) allows further drill downs, you can expand this section to get a refined picture of each market dynamics. Free of Charge (FOC) deliveries might be trickier as the local method to record those may vary, a standardized accounting policy should take care of it (e.g., enforcing discounts for FOCs at 100 percent, not pricing them at zero). Documenting the standard discounting practice in each country can help you understand the numbers especially if combined with sales channels. A proper alignment between global and the local affiliates will improve the quality of the consolidation.

  1. Sales channels

Start with a simple sales channel structure such as hospital/non-hospital sourced from your local customer relationship management (CRM) customer records and develop as internal knowledge progresses, a consensus on the definitions. To bring this dimension to the transactional level you need to combine your sales records and customer segmentation. A proper customer segmentation can also create a strategic advantage when implementing a pricing policy or deciding to pursue tender opportunities.

Thinking about tenders[2] is interesting but going forward, don’t forget outcomes-based[3] contracts. The focus here is on defining the structure that is right for your organization, therefore, ask your sales teams.

  1. BI system

The most obvious option is to build a database with data fields needed for your analysis using the local transactional records already identified above in point 1. Once done, your BI should take care of all calculations and conversions which will allow users to run various analysis at any aggregation level such as at SKU and company currency just to name one.

Obviously, translate the records in local currency into global company currency – applying the budget exchange rates will keep the maintenance to a minimum and revenue can easily be reconciled with Finance reporting. To deal with high volatility exchange rates such as Turkey or Brazil, you could implement a secondary conversion table with monthly rates which you could also source from global Finance to keep alignment. In order to minimize the consolidation efforts and data manipulation complexity, a monthly data extract would already give you enough visibility.

  1.  Invoice details

Having all transactions from each invoice isn’t essential, but it’s most desirable to have that level of granularity. Trickier are credit notes and other sales reductions not directly related to single SKUs, such as annual discounts or rewards based on account performance. Handle these manually and allocate using a pragmatic distribution key like percentage of sales by SKU or by brand.

Think of the advantages of being able to analyze each transaction for a specific SKU or its related product hierarchy globally? The essential advantage for this level of details would go together with the points described above — one reporting tool that serves the needs of various teams within the organization. In case the records cannot be broken-down into a single transaction (or by invoice), then aim for a consolidation at the SKU level.

  1. National list prices

To get list price visibility, the creation of a matrix compiling the list prices in local currency for each SKUs in every country is a simple approach which can be easily used in analysis. Then, go one step further and add the products various characteristics, such as pack size, fill size, Unit of Measure and IU. Use the same currency conversion to compare your prices in your reporting/company currency. They can then be merged manually with every pricing champion’s favorite: Excel lookups. Depending on the size of the portfolio it can be overwhelming, logically apply the 80/20 rule, and focus on the SKUs that matter most to your organization.

ASP: A common definition

All in all, the ASP challenge is just a question of common definition and method within the organization, providing alignment from local to global, from finance to marketing or from sales reps to pricing champion, thereby improving and simplifying communications.

Best-in-class processes can definitively support solving the pricing invisibility challenge, but proper translation, data categorization, system and vision, goals and understanding will help resolve it and create a competitive advantage. By allowing to properly slice and dice your sales transactions, you will better understand your customer’s willingness to pay or market behavior by brand, sales channel, local or reporting currency, and will allow you to compare countries and competitor products more easily and in a reliable manner.

Focus on the products with the most revenue potential or where your organization thinks the most revenue leakage will occur. Isolating a group of products and markets to be part of a proof of concept approach might be the most rewarding way to go, with the opportunity to expand across your portfolio and countries.


[1] Pricing Invisibility: The Challenge of Pricing Data blog

[2] Tendering in the Procurement environment

[3] Uptake of Outcome-based Contracts – A Country Example