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Celebrate – Pricing Power Pricing principles that capture value and enhance profitability Pricing can no longer be an after-thought, with the pricing strategy and rate structure applied after the service offering is developed. Increasingly, clients want unique pricing structures that include shared accountability – this applies not only to agencies, but is part of a larger trend across many service-business industries. Successfully aligning interests requires integrating the pricing strategy as a core component of the offer – using price to help determine: What is included? How is success defined? How services are delivered. This discussion will take lessons learned from both advertising, and other segments to frame the role of pricing in the sales process. We will also discuss the ways leading-class pricing organizations find success with client procurement teams – who have been very effective at driving down rates. This includes the importance of differentiating cost vs. fees vs. value. Successful alternative fee programs are not positioned as new forms of discounting, but are leveraged as a different way to measure and compensate for value. And, finally, we will discuss the concept of "losing on price." Speaker: Scott Lippstreu, Principal, Deloitte Consulting LLP
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Celebrate Pricing PowerPricing principles that capture value and enhance profitability
Scott LippstreuDeloitte Monitor Consulting [email protected]
March 10, 2013
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Overview of today’s discussion
I. Evolution of Pricing Moving from Labor-Based Pricing to Performance-Based Pricing
II. Fundamentals of Performance Pricing Components, Execution, and Obstacles to Effective Pricing Strategies
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-10%
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2006 2007 2008 2009 2010 2011 2012 % R
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Total Ad Spend & Ad Agency Revenue Growth 2006-2012
Ad Spend Agency Revenue Growth
Increased pressure on rates and margins are causing ad agencies to work more for the same total fees
Drivers of Rate Pressure
Source: IBISWorld Advertising Agency in the US Industry Report; Yahoo Finance
Evolution of Pricing
• New digital elements disrupted the traditional value chain• Shift to targeting led to decrease in campaign size• Clients demanding discounts or rate freeze• Increasing role of procurement – either advising or even limiting CMO• Increasingly looking at “un-conventional” providers of advertising services • Increasingly asking for alternative fee arrangements – with limited success…
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Clients asked us to put our fees at risk, tied to the
outcome
Rate pressure has evolved new pricing strategies to take hold across service industries
Deloitte Consulting’s Challenge Response & Capabilities
We are the world’s leader in the performance-base services model, looking at hundreds of deals a year
Designated Value Pricing Experts: Dedicated senior resources who look at deals and manage a portfolio
Investment Approach: Take real risks that represent an investment portfolio, rather than a series of one-sided offers
Proactive: Not only ready to respond to clients, but actively seek opportunities and deals
Cultural Fit: Aligned leadership behind the concept and managed risk to individual delivery partners
Evolution of Pricing
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Transparency – The client is entitled to know what the fees would be if the job was priced traditionally
Measurement and Baselines –measurable goals must be defined and the means to compare those measures to a baseline must be established
Risk/Reward – A portion of fees will be invested in the success of the program
Goal Alignment – It is essential that all stakeholders that will influence the success of the program have goals aligned with it
Scope Commensurate with Goals – The scope of work provided must be commensurate with the goals and measurement of the risk/reward arrangement
Beneficiary is Sponsor – The executives whose span of responsibility is most impacted by the program must be the key program sponsors
Exit Conditions – Conditions may occur that render this type agreement unfair to one party and they should be identified at the outset
Guiding Principles of Performance Pricing at Deloitte Consulting
Evolution of Pricing
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Common Obstacles
Difficult to measure or baseline
Account Executives aren’t skilled at estimating work
Integrity of the client or at settlement Client forgets the spirit of the agreement
Firm not comfortable with true risk
Misunderstandings
Inappropriate upside (payouts or risk profiles)
Client doesn’t agree with price --- Agency must sell value before Alternate Fee can succeed
Why Performance Pricing is Difficult to Replicate…
Evolution of Pricing
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Define the value
– Don’t let client think a “just as good for less” offering exists
– Align the value of the service with the price
Re-think basis of pricing: Cost (billable hours) vs. results
When using Gain-Sharing:
- Recognize it’s not a way to “lower” prices
- Offer must be fair to both parties
- Be proactive (with the offer)
Compete on value not on price
Cornerstone of any performance fee structure is making sure the client understands and believes the value
Evolution of Pricing
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Recent research suggests selling on value how companies survive in the long term
The Three Rules: How Exceptional Companies Think
By Michael Raynor & Mumtaz Ahmed
1 Prioritize better value over cheaper prices
2 Prioritize revenue over cost side of profitability equation
3 The only rules are 1 & 2
Source: “The Three Rules: How Exceptional Companies Think” by Michael Raynor and Mumtaz Ahmed; Available May 30th, 2013
Evolution of Pricing
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Whether it is performance or fixed pricing, it is important to hit the fundamentals
SOME PRICING FUNDAMENTALS
Understand the drivers of economic profitability at the transaction level
Use reliable data that are relevant to the economic profitability (not allocation of accounting burdens)
Identify and control the variance in your current pricing execution
Define, document, measure and manage the sales and pricing process to promote profitable behavior
Build profit accountability into your organization and processes
Guard against policies and procedures that have unintended consequences or loopholes that promote misaligned incentives
Clearly define discounting policies, exception processes, and the chart of authority for approvals
Fundamentals of Pricing
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This is a visualization of transactional data
Overall Transactional Database Waterfall
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Cost to Serve
Allocated Costs
List Price
Needs to be built at the customer and transactional level
Invoice Price
Net Price
Pocket Price
Margin
Common Challenges and Obstacles to Data Lack of proper Rate Card use
Omission of oft-missed discounts
Lack of data management and pricing processes to improve revenue
Services delivered, yet not tracked
No transactional cost analysis
Use of allocations
Fundamentals of Pricing
Revenue Elements
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This is a price bands visualization of price variability
0%
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Realized Price by Customer Size
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Bands can be run by product or customer segment
The goal is for the bands to be tight, or little variability
It is important to differentiate between mature and new products
Key Analytics
Fundamentals of Pricing
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Pricing strategy – Where possible, link pricing to value, and use a rate structure the client can understand
Pricing Governance – Have clarity for pricing and discounting authority– Have a process that get’s to “no”
Pricing Execution– Reward AEs for “quality of revenue” - not just quantity– Hold your clients accountable
Have the Data – pricing is an art and a science!
Selling:– Never discuss price without discussing value– Never let yourself be commoditized (& avoid procurement)
24 Years of Pricing Transformations – Lessons Learned:
Closing Thought: An organization that “never loses on price” probably does
Fundamentals of Pricing
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Copyright © 2012 Deloitte Development LLC. All rights reserved.
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A balanced approach across six core competencies enables the journey to a value-based pricing strategy
Pricing StrategyDefines a pricing framework that supports business objectives by understanding and
capturing the value of an offering relative to competitive alternatives and customer demands
Pricing Technology & Data Management
Designing and deploying pricing analytics, optimization and execution tools to enable effective
pricing decisions and to enhance quality and consistency of pricing processes
Organizational Alignment & Governance
Effectively managing the people and cultural dimensions of an organization so that it can
sustain pricing excellence
Advanced Analytics & Price Setting
Determining profit-maximizing prices for products and/or services
Tax & Regulatory EffectivenessProactively managing the tax, regulatory compliance and governance issues related to pricing decisions
Price ExecutionExecuting defined policies and processes that govern profitable decision making on a daily operational
level
Foundational
Profit Retention
Com
petit
ive
Adv
anta
geS
ustainability
