Sydney Subscribed 2016: Pricing Strategies for Tomorrow

www.simon-kucher.com

How to win with New Price Models & Packaging

Pricing Strategies for tomorrowSydney, August 10th, 2016Chris Petzoldt, Partner, Managing Director Oceania

Sydney officeLevel 32, Northpoint Tower100 Miller StreetNorth Sydney NSW 2060, AustraliaTel. +61 2 [email protected]

Zuora presentation 2016 - Simon-Kucher

Overview

Pricing – an increasing challenge

Capture value with New Price Models

Capture value with New Offer Strategies

Need help? Simon-Kucher can support!

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Global Pricing Study; 2,200companies across the world; Source: Simon-Kucher & Partners

Simon-Kucher's Global Pricing Study 2016

report increasing price pressure82%

are in price war49%

Margin decrease per year as price increases cannot compensate cost increas

0.7%p

3


Why is this so alarming?

-23%

-23%

-28%5% decrease in volume...

5% increase in fixed cost ...

5% increase in variable cost ...

Example profit & loss structure

Resulting decrease of operating income*

Fixed cost45

Variable cost45

5% decrease in price...Operating income10

Price = 1, Volume = 100

-50%

Revenue100

4


Global Pricing Study; 2,200companies across the world; Source: Simon-Kucher & Partners

Top solutions companies see to cope with increasing price pressure

Top approaches to escape oppressive market conditions*

Share of respondents

34%

37%

49%

50%

66%Introduce new, innovative, or differentiated productsChange our customers’ perception of value and price

Improve our value perception & communication

Reduce our variable or fixed costs

Improve the negotiation skills of our sales force

Price models

Offer models

More vision than reality

5


Common reason why product innovations fail….

Wrong product development approach

Design it

Build it

Price it

Market it

leads to…

Bad design

In 7 years only 16,000 units

sold worldwide

Missing benefit

Feature shock Missing audience

6


Overview





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Selecting the price model cannot be that hard – can it?

Revenue: Web-shop provider Webshop customer AYear 1 $479.40 $28,000 (25 products)Year 2 $479.40 $140,000 (40 products)Year 3 $479.40 $450,000 (60 products)Year 4 $479.40 $600,000 (63 products)

What do you think of this price model?

Web-shop providerProject Example

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Case 1: From fixed to success based pricing

Situation & Challenge Solution

Project Example:B2B Marketplace

Global online platform to connect buyers and suppliers, secure invoice and payment capabilities, and software (buyers only)

Price model: Membership model for buyers Flat fee per relationship for

suppliers with qualifying activity level

Challenges: Limited number of buyers No monetisation of network

growth Huge tail of small customers One size fits all pricing created

barrier to adoption by small customers

Breakeven

Total spend

total invoice value processed

“old” flat fee

Old price

New % of

spend

Revenue impact: +

300%9


Case 2: From usage based to two-part tariff


Project Example:Rail operator

Long-haul passenger transport, regional passenger transport

Price model: “Pay-as-you-go” for more than 100

years Ticket price based on distance

traveledChallenges: Increasing competition from low-

cost airlines and private cars Decrease in passenger numbers

and revenueMore than 4m Bahncards soldIncrease in passenger volume

Revenue impact EUR 100m p.a.

appr. 1,900 km

Total spend

total km per

year

BahnCard 50%

“old” pay-as-you-go

140 € per year

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Case 3: From fixed to customer value based


Manufacturer of truck tires developed innovative new tire that has a 20% higher durability

Price model: Pay per tire Discount for higher volumes of

tiresChallenges: Intense price competition across

channels No possibility to charge higher

price for new, more valuable tire

New value proposition: Solution provider: "Keep your truck rolling"

New model: Price/km - trucker's cost aligned with revenue basis

New pricing perspective: Focus on TCO rather than unit price

Monetisation of innovation: "Automatically" higher price for better value (duration)

Project Example:Tire manufacturer

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Simon-Kucher approach step 1: Assess customer value perception

Peter F. Drucker

"Customers don't buy products, they buy the benefits that these products and their suppliers offer them."

12


Simon-Kucher approach step 2: Find price model that can capture the created value best

100%

fixe

d 100%

variable

$Fix price Flat fee

units

Pric

e

Two dimensional

units

Pric

e

PAYG

units

Pric

e

Regressive

units

Pric

e

Capped

units

Pric

e

Fixed units

units

Pric

e

Adaptive flat rate

(for successive years)

units

Pric

e

Possible subscription models13


Simon-Kucher approach step 3: Optimise price levels for new price model

Value drivers Price hierarchy Price thresholds

Competitive advantages and their value as a

basis for value pricing approach

Optimal price structure within one product

category based on value drivers

Optimisation of price points

Base prices on product value

Ensure consistent pricing logic

Fine-tune prices for consumers’ eyesG

oal

Met

hods

(exa

mpl

es)

Resu

lts

Conjoint analysis

Van Westendorp

Gabor Granger

Price Map

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Overview





15


Packaging cannot be that hard – can it?

16


Bad example: Packaging is more than A+B – 15%

This "trial" cost a high two-digit million figure

Manager at Rogers: "This was our first attempt. We just wanted to try out packaging. Meanwhile, we do a better job."

Conclusion: Poor packaging destroys value

2008

17


Bad example: There should be a package portfolio not an all-in

18


Bad example: Packages need to differentiate on relevant features

A B C

…

…

……

Should these features be

differentiated across packages?

Are these features valuable enough to

create up-sell?Should these features be

differentiated across packages?

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Well-designed packages create a win-win

Increased customer satisfaction Value capturing

Vendor perspective Customer perspective

Packaging

Receive discounts(or other incentives)Exploit differences

in customerwillingness-to-pay

Enhance cross-selling

Compete on breadth of portfolio/solutions

Buy solutions, not products

Enjoy convenience (one-stop shop)

Reduce transaction/ search/delivery costs

Decrease pricetransparency

Reduce costs(Economies of scope

in sales/ops)

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Packaging can exploit differences in willingness-to-pay

$

WtP

Co.

Profit

$

Co.

WtP

Profit

Volume

$

WTt*Co.**

Profit

Example

Customer with limited budget: $5

Max. willingness to pay for either coffee or cake: $3

Customer would buy either coffee or a cake

Bundle price: $5 customer buys both

Win-Win: Customer benefit = discount Provider benefit: 50 % more profit

Price $3 Price $3 Price $5

Individual customer's budget: €5

* WtP =Willingness to Pay** Co. = variable costs

Volume

Volume

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Simon-Kucher approach step 1: Define packaging strategy

Degree of complexity (# of offers)Simple Complex

Definition: One offer with all products & features included

Examples:Workday HCM

Definition: Packages which combine a variety of product categories

Examples:Fortknox

Definition: A variety of packages with increasingly more feature functionality

Examples:Xero

Definition: A variety of packages with implementation complexity limitations

Examples:US Sage Accounting

Definition: A build-your-own package approach with bundled discounts

Examples:Oracle

PriceBundling

All-you-can-eat

Categorybundling

Good/Better/Best:

Features

Good/Better/Best:

Complexity

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Simon-Kucher approach step 2: Define package contents

... selected "leader" products

High value products / features that most customers want to or "must" buy.

Coke & Fries

... some "filler" product(s)

Medium value products / features that most customers consider "nice to have."

Coffee

... NO "killer" product(s)

Products which either have "own" willingness-to pay-or no bundle fit

A successful package consists of ...

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Identifying leaders, fillers, and killers using the Simon-Kucher feature evaluation matrix

1234

…

Features/modules

Simon-KucherProject Example

Product/feature evaluation matrix

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Simon-Kucher step 4: Develop package portfolio and pricing

Good-better-best: Role based packages:

Packages with increasingly more feature functionality

Differentiation across customers based on value and willingness-to-pay

Need for behavioral tactics to steer choice

Packages that are targeted at specific types of users

Clear segments or use-cases drive package choice

Use cases don’t change over time (no upsell path)

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Example impact of packaging optimisation

Source: Simon-Kucher project example

Approach Research showed that the

entry package met large percentage of customers’ needs

As a result, we reduced value of entry package to better align with existing price point

New features were added and existing features shifted to premium tiers to justify higher prices

Before re-design: After re-design:

May August0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Plus (55%) - $39

Plus (24%) - $39 (reduced value)

Deluxe (32%) - $79

Deluxe (48%) - $99

(Price increase)

Elite (12%) - $149Elite (21%) - $199(Price increase)

Advantage (7%) $349

% of new subscribers

New tier

# of new subs 1,524 1,313 -14%Average MRR per new subscriber

$66 $124 88%

MRR from new subscribers $100K $162K 62%

Project Example:SaaS

Impact

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Overview





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Zuora presentation 2016 - Simon-KucherSource: manager magazine, August 2011/IMB, survey among German top managers

Simon-Kucher is the world’s leading advisor in Pricing

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1 Simon-Kucher & Partners

2 Boston Consulting Group

3 McKinsey & Company

Ranked #1 in the last 2 surveys

Best consultancies in marketing and sales* manager magazinWorld leader in giving

advice to companies on howto price their products

Pricing strategy specialists

The world’s leading pricing consultancy

In pricing you offer something nobody else does

BusinessWeek The Economist

Professor Peter DruckerThe Wall Street Journal

World leader in pricing

Atlanta

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Zuora presentation 2016 - Simon-KucherSource: Simon-Kucher & Partners

Simon-Kucher specialisation: Strategy, Marketing, Sales and Pricing

Pricing

Strategy Marketing

Sales

Strategic goals and direction Pricing strategy Growth strategies Business models Competitive strategy Market sizing/forecasts Market due diligence Corporate organisation

Customer segmentation based on value, needs, willingness to pay

Value and brand positioning Product and service development Portfolio design and management Marketing effectiveness and efficiency Customer retention and loyalty programs Up & Cross sell initiatives

Price models and bundling Price setting (launch and post-launch) Rebates, incentives and discount systems Price negotiation and key account pricing International pricing Price organisation and processes Price monitoring and controlling Pricing training programs

New channel development/partnering

Up and cross-selling Sales channel mix Channel incentives Sales force organisation Sales force performance and

compensation Negotiation support Sales force training programs

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Simon-Kucher support clients across industries…

Dow JonesDuPont

EmiratesEuropcarFerrero

FreseniusGoldman Sachs

HoneywellHewlett Packard

HSBCIntelIveco

Johnson-JohnsonKiaKPN

Kimberly-ClarkLufthansaLA POSTELinkedIn

MedtronicMetLife

MichelinMicrosoft

NestleNikon

PermiraPorsche

RBSSAP

SiemensSingTel

SwisscomShellSkype

Smith & NephewTelefonica

TPGTNTUBS

VodafoneVolkswagen

Zurich

ABBAccorAdidasAllianz

Assa AbloyAudiAxa

BarclaysBayerBMWBosch

British Airways Caterpillar

CastrolCitibank

CitrixDaimlerChrysler

DB SchenkerDeutsche Bank

Deutsche TelekomDHL

AMPAshdown Ingram

BoralBostikCastrolCoats

Commercialisation AustraliaCSR

Fairfax MediaFoxtel

Innovations Development AustraliaKomatsu

METAOptus

OutotecRexel

Rio TintoSanitarium

Secure ParkingSkaffoldSky NZ

Spirit of TasmaniaTapestry

Telecom New ZealandViega

Vodafone Fiji

Selected international references Local references(AUS/NZ/Fiji)

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References in the subscription space

Telco

Software & othersOnline

Media


Selection

AxiataHutchison 3IndosatMacquarie TelecomOptusOoredoo

SingTelTelefonicaTelecom / SparkT-MobileVodafone…

AbrilBertelsmannBloomsburyFairfaxFAZPubliGroupe

Reed Business Infor.TamediaScholasticThe EconomistWiley…

Anchestry.comCars.comImmoScoutGameforgeLinkedInLifeLock

ManheimSkypeTruliaTotalJobsXing…

AdobeAdventActivisionCitrixDeutsche BahnFC Cologne

IntuitMichelinMicrosoftParis St GermainSAPUbisoft…

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