IDEX Pricing Spineometer: 2 of 5 Vertebrae

IDEX, a global applied solutions provider, had a mixed Q3 2024. Revenue rose 0.6% to $798 million while earnings before interest and taxes fell 6.1 % to $168 million over the same period last year.

A review of IDEX’s 30 October 2024 earnings call and associated financial reports provided insight regarding the importance of pricing on performance.

IDEX is a diverse and complex business. It has three reporting units, Fluid & Metering Technologies, Health & Science Technologies, and Fire & Safety/Diversified Products. It operates with over 50 wholly-owned subsidiaries. IDEX serves customers in industrial, fire & safety, energy, life sciences, water, semiconductor, automotive, instruments, and many other industries. IDEX sells largely through distributors to many accounts, none of which constitute more than 3% of their business.

It has the order of 50 distinct product portfolios and thousands of individual items. Competes in highly competitive markets with a variety of major corporations including Dover Corporation, Ingersoll Rand, Parker Hannifin, Valco, Jenoptik, Tecan Trading AG, American Cast Iron Pipe Company, Holmatro, Corob, and Panduit. Some of these competitors are known for their extremely strong pricing teams; others are not.

IDEX’s quarterly report provides an Operating Income Bridge identifying the impact of changes in volume, price and variable costs, mix, and investments on EBITDA. This technique for calculating an advanced variance analysis has recently been updated. See Smith, T. J., (2023). Margin variance analysis for informing customer engagement strategy. Association of Marketing Theory and Practice Proceedings 2023. 35. https://digitalcommons.georgiasouthern.edu/amtp-proceedings_2023/35

In the recent earnings call, Abhishek Khandelwal called out the pricing performance several times. For the Fluid & Metering Technologies segment, he stated, “Net sales were up 2% organically. We had strong price capture across the segment.” In Health & Science Technologies, he stated, “Net sales were down 5% organically. Although we have strong price capture, it did not entirely offset the volume declines driven by continued challenges in the end markets we serve.” In Fire & Safety/Diversified Products, he stated, “We had strong price capture and higher volumes, mainly driven by Fire & Safety and BAND-IT.”

Regarding the recent acquisition of Mott, a microfiltration company, Abhishek Khandelwal stated, “we laid out a very clear plan that demonstrates that we’re going to generate 400 to 600 basis points of margin improvement in — at Mott, the next 12 to 18 months.” Pricing has a key role in capturing that business goal.

Out of 8,800 employees at IDEX, industry benchmarks would suggest seven to 35 people to be engaged in pricing. Due to the complexity of their markets and product offerings, and due to the clear value of pricing excellence at some of their competitors, executive management should aim for the higher end of this range. Given their application of the 80/20 rule and orientation towards operational excellence, a strong pricing capability should fit well with their corporate culture because a small improvement in pricing has an outsized impact on corporate performance.

1. Regarding product innovation, IDEX would benefit from the use of Economic Value to Customer studies to identify the price and price positioning of their offerings both within their product lines and in comparison to their major competitors in that product line.
2. For periodic price adjustments, IDEX would benefit from the use of competitive intelligence, perhaps gathered by salespeople from customers, as well as well-defined procedures to adjust the prices on thousands of items in relation to input-cost changes, competitive price changes, market demand shifts, and market-share benchmarks. Impacts on gross margins, selling volumes, and profit impact of these periodic price changes should also be considered. For instance, if gross margins are pressured by competitors in considering a price change, specific accounts and anticipated volume increases associated with any margin reduction should be identified to determine the potential profit impact of such a decision. In contrast, if gross margins are increased by a price change or remain the same, the potential loss of sales at the account level if any must be estimated. In both cases, the hypothesis created by these estimates must be validated with the actual customer behavior changes, if any, afterward to determine if the hypotheses were valid.
3. At the account level, IDEX may benefit from deploying a wide array of statistical methods. Price guidance studies could detail the expected price capture from a customer in a sales negotiation. Account performance by mix and price capture can identify which accounts are most due for a price correction and which are perhaps at risk of loss to a competitor. Account management overtime may enable IDEX to identify specific product-account pairs that will benefit from a price increase without risking the relationship, and which should be managed with greater precaution.
4. Pricing capture would benefit from the introduction of profit-based incentives, a technically simple replacement of revenue-based incentives that have proven to improve price capture without impacting sales volumes. Managerial, this change has proven difficult without senior executive advocacy.
5. IDEX sells and manufactures in many companies and in many segments. Financial reports indicate an awareness of the impact of various economic changes, such as trade wars, tariffs, inflation, currency fluctuations, and geopolitical conflicts. An applied economist monitoring and modeling these potential impacts would improve the resiliency of IDEX.
6. IDEX reports fluctuations in raw material prices can impact pricing. This raises the potential use of Index-Based Pricing to automatically pass raw-material prices to major customers. This pricing technique does not appear to be in use and may not be necessary. We raise the question however for management to ponder as they consider managing prices with one or several of the well-known ten basic price structures (two-part tariffs, tying arrangements, unit or add-on, good-better-best versioning, bundling, subscription, yield management, index-based, dynamic, or even pay-what-you-want).
7. In acquiring new businesses, IDEX would have the opportunity to review pricing of the acquired target for potential margin expansion as we suspect is occurring with Mott.
8. Given their industry and global footprint, one standard practice is to have customer-focused pricing capability embedded within trading organizations globally and product-focused pricing capability embedded within business units.

Research into the investment by IDEX in pricing yielded underwhelming results.

1. Neither were pricing professionals identified by title as working at IDEX nor were pricing professionals being hired by IDEX at this time.
2. Pricing skills and were identified with many professionals at IDEX working in sales, product, finance, and executive roles. Some have even interacted with me directly in the past.

Given the importance and capability of pricing at IDEX as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of December 2024.

IDEX Pricing Spineometer: 2 out of 5 Vertebrae. Executive management clearly understands the importance of pricing and many people at IDEX have some pricing skills. Unfortunately, the domain of pricing, where a few experts can have an outsized impact on performance, is not organized in a cohesive functional manner at IDEX. This is in contrast to how some of their competitors have organized themselves. It is suspected, though not known, that IDEX has some pricing software. The question remains: who is operating the software and driving results from it? As I routinely state, “People without software are underpowered. Software without people is useless.” Pricing is too important and complex to be left in everybody’s hands and nobody’s responsibility simultaneously. Perhaps IDEX is still operating in a cost-plus world where their value-add is not being properly captured, or perhaps their sales, product, finance, and executive teams are geniuses that can do both their standard job and manage complex pricing challenges and responsibilities with detailed analysis simultaneously. Neither sounds plausible. Rather, we strongly suspect there is a significant opportunity for improvement in this domain.

IEX (IDEX Corp.) rose from 204 the day prior to their earnings call to 229 one week later. FY 2023 revenue of $3.3 billion with a 22% operating margin and P/E ratio near 29.

For FY 2023, a 1% improvement in price would yield a 5% improvement in operating profits holding all else constant at IDEX.