Andrew Bailey - WBS Entrepreneurship Mentoring Programme - Final Workshop

commercial strategy

4 ®strategy ▪ pricing ▪ negotiating

Pricing Strategies

Andrew Bailey

copyright Commercial Strategy and Business Support Ltd 2012

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“Price is an extremely effective profit driver. Price can generate huge profits or destroy margins”. (Simon Kucher & Partners 2009)


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Agenda

Why you should take Pricing seriously

Some insights and myths

Developing your Pricing approachProcessDefine your PricingPricing methodsPractical steps you can takeCase studies


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Agenda





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–THE most powerful Profit lever

–Perception and influence

–Communication

–The impact of Pricing decisions IS huge


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ProfitDriver

Increase in performance

Profit

(£M)

Current measure

of profit driver

Newmeasure

New

Price £100 10% £110 £20m

Sales Volume

1m 10% 1.1m £16m

Fixed costs

£50m 10% £45m £15m

Variable unit costs

£40m 10% £36m £14m

Achieving a 10% improvement, delivers an increase in profits of ….

Variable costs

Fixed costs

Volume

Price

40%

100%

60%50%


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ProfitDriver

Increase in performance

Profit

(£M)

Current measure

of profit driver

Newmeasure

New

Price £100 -5% £95 £5m

Sales Volume

1m -5% 0.95m £7m

Fixed costs

£50m £50m

Variable unit costs

£40m £40M

Pricing is the most DANGEROUS profit destroyer

-30% -50%

PriceSales

A 5% deterioration in Pricing or Sales reduces profit by ….

With a 10% price decrease, to achieve a 50% gross margin, sales volume would have to increase by 25%

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Perception & influence

Perception

Power

Value

Control


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Communication

Expectation

Signals to the market

Product and service management

Competitive intelligence


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AgendaWhy you should take Pricing seriously




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Pricing Myths •Raising prices loses customers•Customers are only interested in price•Price elasticity is necessary for price optimisation•Pricing is a big event to set and manage•This customer is different•Discounts are bad•There exists an optimal price number•Better to be safe than sorry•You need complex systems/lots of data to manage pricing•Marketing set prices, sales execute them, finance control them•Once you set the price, job done


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– 65% of companies are not able to charge the prices they deserve.• Low pricing cuts profit by 25%.

– 46% of companies think they are in a price war.• 83% blame competitors for starting it.

– Companies only get 50% of what they expect when they raise prices.• 30% achieve 75% of a planned increase.

– Better the pricing ‘know how’, higher the pricing power and the higher the

profits.• Focus ion profit not market share.

• Invest in expertise.

• Improve execution.

Source: Simon Kucher & Partners study published in the Professional Pricing Society Journal Jan 2012.

Issues companies have with Pricing ….


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Customers

Product/Brands/Service

People

Revenue

The benefits of a structured, disciplined pricing strategy


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Customers• More motivational for customers to access greater value through transparent structure

• Promotes collaboration and information sharing• Rewards growth activity

Product/Brands/Service• Ensures Investment is aligned to Brand Strategy/objectives and to execution

• Improves trade spend efficiency

People• Provides clarity, consistency, focus & guidance in a complex area• Enables building capability • Confidence & structure to negotiations• Commercial skills

Revenue• Optimal Pricing across the market place and channels• Aligned and consistent promotional pricing• Increase in promotional sales through better execution• More efficient conditional discounts• More efficient and effective Trade Funds management • More efficient supply chain• Reduced invoice queries• Improved operational cash flow through reduced overdue debt

The benefits of a structured and well disciplined pricing strategy

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AgendaWhy you should take Pricing seriously




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Pricing Strategy Development

Price Enablers – Organisational

Capability

Price Implementation

(execution)

Pricing Strategy & Execution Process

PriceDecision•Architecture•Price Levels•Negotiation

Organisationand People•People•Culture•Structure

PricePerformanceMeasurement

(enforcement)

Controlling•Trends •Performance indicators•Time series analysis•Profit performance•Elasticity

Infrastructure•IT•Processes•Systems•Tools•Framework

Execution•Discounts•Incentives•Deals•Negotiation•Roles•Accountability

Copyright Commercial Strategy and Business Support Ltd 2012

Price Strategy

Strategy•Objectives• Approach•Competition• Value• Structure• Optimisat

ion• Segment

ation• Differenti

ation

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Strategic Issues

Volume GrowthLow High

ProfitabilityGrowth

Low

High

?

Trade off – Which customers prepared not to do business with

‘Dream Position’

Use Business Goals as input to the process

Depending on Goals there are different Pricing strategies to adopt

Recognised a Trade-off between Profit and Volume

Dream Position can be achieved, however not by Pricing alone

Pricing has to be part of the overall Business strategy and integral and aligned to it

Trade off – Volume growth at the expense of Profit

Strategy & Goals are crucial inputs to developing Pricing Strategy


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Strategic Issues

Price/Value strengthIncrease Decrease

PriceDifferentiation

Price Attack

Introductory Pricing

Pricing Differentiation

Value Pricing

Market Position

Competing Strategies

Depending on your position in the market you will have a different set of products/service goals and therefore Pricing Strategies

Market Leader/

Defender

Decrease

Increase

Follower/Invader


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Agenda





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•In

voice

d

disco

unt

List price/ Gross Price

Invoice price

Pocket price

•Tu

rnov

er re

bate

•Pro

mot

iona

l

Suppo

rt•

Mar

ketin

g Sup

port

•Hos

pitali

ty/G

ift

Pricing & Investment covers all these areas and should be considered holistically.

The pocket price waterfall shows the true profitability of customers

Individually, each item in the pocket price waterfall may be small, but together they have a significant impact on profitability

What do we mean by Price?


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•Res

erve

d se

ating

Basic price

Pocket price

•Che

cked

bag

gage

•Adm

in fe

e

Basic price attracts customers

Customers can choose what they want to pay

Business strategy based on overall revenue generation

What do we mean by Price?

•Prio

rity b

oard

ing fe

e

•Spo

rts e

quip

men

t


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Agenda





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Cost Based Pricing– Pricing relates to the internal costs of the business

– It is easy to do, assuming you know the true costs of doing business

– Is better for businesses that deal with large volumes, lower margins or operate in markets dominated by price

– Does not take account of what the customer actually values in the product or service

– Can be less competitive if your costs are not competitive


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Cost Plus Pricing

Dependent on accuracy of cost measurement

Improvements in cost are passed through to the customers

Competitor improvement in costs impacts your competitive position

Cost + price may be lower than Value delivered to customers and willingness to pay

Std Profit margin

Variable costs


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Market/Competition Driven PricingDefinition:

Competition Driven Pricing is where Pricing decisions are influenced primarily by observed or anticipated actions of actual or potentials competitors

Motivated by:

A fear of being unable to sell if prices are not aligned with competitor price levels

Objective of maintaining/increasing market share or sales


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Price Comp A Comp B Comp C Comp D

Taking competitor Pricing as the Standard.

Product could be perceived as being expensive against the competition.

You need to know about the competition and the value you create compared to them.

Market/Competition Driven Pricing


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Competition Driven Pricing

Assumptions (wrong)

Products are difficult to differentiate High volume = High Mkt Share = High Profits Price is THE most important purchase criteria

Risk

Price wars, undifferentiated products Customer needs neglected Reactive approach Chasing unprofitable volume

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Value Based Pricing– Based on the price that customers are willing to pay and the

benefits the business and product offers them

– Therefore you need to know– Benefits– Value– Buying decisions

– You need to consider– The strength of the benefits– Competitive products, price, offering, points of difference– Customer perception

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Value Based Pricing

Reference Value

Differentiation Value

Total Customer Value

Customer value is the price of the best alternative (reference value) +/- the value of whatever differentiates the offering from the

alternative (differentiation value)

The Higher the VALUE the greater the

Willingness to Pay

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Insight•No relationship between Production Costs and Willingness to Pay.

•Cost Based Pricing can leave value on the table.

• Competition/Market Based Pricing is based on assumptions and can be considered high risk.

• Product Value allows Pricing to be higher (than the competition) and still gain high sales and market share.

• Customers regard Product Attributes and Product Service as more important than Price.


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Value Based

Market Based

Cost Plus


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Agenda





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Structuring your PricingBundled pricing

• Getting value from customers for products they have a lower willingness to pay for by bundling them with other product you know a customer wants e.g. McDonalds

Reward customer behaviour• Behaviour that adds value to your business• Only pay for the behaviours that matter e.g. Consumer Goods

Menu Pricing• Give customers options e.g. Cars, Insurance, subscriptions

Discounting• Incentivise customers to drive the business in the way that you want them to e.g. sales volumes

Rebates• To reward loyalty or to encourage longevity

Portfolio • Offering a range of products at different value and price levels.• Packages can be created that ensure overall deal value.


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Value Mapping – Price & Value

Perceived Value

Pri

ce

Gain Market Share as Cus-tomers receive > Vlaue for the Price they pay

Lose Market Share as Cus-tomers receive < Value for the Price they pay

The Value Equivalence Line illustrates where customers get exactly what they ay for.

On this line the perceived benefits match the price they pay for them

Simon Kucher & Partners 2009

Value Equivalence Line


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Product and Price Differentiation

Price

Sa

les

Products/services can be differentiated to appeal to different customer segments. Consider how segments differ in what drives value and what drives cost to serve. Create a Price structure that charges more when a sale creates more value for the

buyer or higher cost to the seller.

Price

Sa

les

Profit Profit

Stimulate greater usage

Skim value


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Agenda





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Case Study 1 Established business – new product

Objective Introduce product with superior performance and features and drive higher and ongoing revenue than competition.

Issue Tracking technology product being introduced to established market.

Solution Identify competitor products.Map where the product out performs current products.Understand customer ‘willingness to pay’.Create strong Value Proposition.

Results Three variants of the product;•Basic – comparable to most competitors.•Medium – enhanced functionality, higher pricing.•Full – complete functionality, higher spec. than all rivals.

Equipment was the same for all variants.Basic/Medium included options to upgrade functionality.All variants included;

•One off payment.•Ongoing revenue driver.•Subscription options for added value services.

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Position vs. CompetitionWeaker Stronger

RelativeImportance to the customer

Low

High

Over Performing?

Competitive Disadvantage

Competitive Advantage

Superior performance in the most important factors

Acceptance of inferior performance in less important factors

Internal and external view of the market

Markets where Price is less important are good places to be

Tracking visibility

Access to multiple

sites

Tracker design/usab

ility

Pricing

Alarm functions

Reports

Mapping to site (scale)

Reliability

Data history


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Case Study 2 Start up technology business

Objective Bring new product to market that delivers significant margin in the future and creates equity value.

Issue Innovative technology in new area, some competition but unproven.

Solution Develop pricing approach focused on the value the product brings to end users and hardware suppliers.Structured model that enables;

• Initial cost recovery through one-off charge.• Ongoing revenue through yearly licence fee.• Per user charge on monthly basis.• Per application charge on monthly basis.• Additional revenue opportunities through support packages.

Results Flexible pricing approach that allows revenue to be generated through a number of sources.Model can grow/contract with the user enabling them to manage costs.Contract basis allows business to project forward revenues.


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Value Creation

Before Where do they have

problems How can we fill these gaps Do existing activates add

sufficient value

Before

During

After

After How is the customer

rewarded for using our product

What value do we create to ensure repeat purchases

During Do our products help our

customers solve their problems What further activities can we

provide to add value Can we make our Customer

value more thingscopyright Commercial Strategy and Business Support Ltd 2012

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Case Study 3 Service business – new product

Objective Introduce new product to the public sector consulting market based on high value proposition.

Issue Developing product offering and pricing approach that enables the companies to engage with the public sector to access services at an acceptable level, while at the same time generating revenue for the business.

Solution Product offering with a range of attributes and price points.Service accessed virtually to enable high value – low cost – affordable pricing.Customers/Clients can move up/down product offerings depending on requirements and context.

Results Price introduced successfully.Flexibility to evolve the service offering to cater for the requirements of public sector.


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Case Study 4 Business to Business

Objective To grow pricing and margins in line with financial requirements and brand positioning.

Issue Continual pressure on pricing from customers/competitors. Low profitability from some customers.Lack of control over pricing.Risks of industry consolidation.

Solution Identify and understand pricing architecture.Introduce pricing structure to link volume to price.Change customer pricing according to architecture.Implement sales processes and systems to ensure compliance.Improve sales skills and awareness of pricing issues.

Results Improved overall margins delivered over period.Adverse customer reaction avoided through phased approach.Sales buy in achieved through re-aligned incentives.


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0 20,000 40,000 60,000 80,000 100,000 120,000 140,00021.00

22.00

23.00

24.00

25.00

26.00

27.00

Product sector

Volume

Net

Pri

ce i

n £

/t


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Case Study 5 Consumer Goods

Objective Grow pricing and margins and resist customer and competitor pressure.

Issue Sales teams inability to withstand demands from customers to reduce prices and reacting weakly to competitor actions in the market.

Solution Increase (recruit and train) capability in pricing knowledge and expertise.Identify the key issues for sales people.Improve value selling skills.Develop negotiating capability.

Results Improved margin retention.Greater confidence in dealing with customers.Signals to competitors resulting in reduced levels of price competition.


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Questions?


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Closing remarks
