THE ROI & IMPACT OF PRICING - PROS

©2014 PROS, Inc. All rights reserved. Confidential and Proprietary.


THE ROI & IMPACT OF PRICING

Stephan M. Liozu, Ph.D.

Founder of Value Innoruption Advisors

June 5, 2014

©2014 PROS, Inc. All rights reserved. Confidential and Proprietary. 2

Source Impact Description Year

Simon-Kucher & Partners 35% Increase in EBITDA for firms with higher pricing power. 2012

Deloitte 3.20%Average operating margin increase of 3.2% for pricing initiatives after 18 to 24

months of implementation.2012

Deloitte 26%Companies that are pricing leaders are 26 percent better at managing true

profitability.2012

Gardner 2 to 4%Pricing optimization software leads to average total revenue improvement of

between 2 to 4% and a payback of under 2 years.2012

Innovation Insights 15%

By 2015, best-in-industry enterprises will increase revenue by up to 3% and

profits by up to 15%, due to improvements made using price optimization

technologies.

2012

Simon-Kucher & Partners 14%Companies with a dedicated pricing organization are 14% more likely to expect

a (strong) increase in EBITDA in the next 3 years.2012

McKinsey & Co 15 to 25%

Well-executed pricing-improvement program often yields price increases of two

to four percentage points or more, sustaining a long-term price advantage may

represent roughly 15 to 25% of a typical company’s total profits.

2010

Monitor Group 8%Firms adopting non-value –based strategies earn 8% less in EBITDA versus

their peers - Monitor.2008

Monitor Group 30%

Together, the right strategy with an empowered organization can deliver a

powerful payoff – operating profits 30% higher than those of low performing

firms.

2008

McKinsey & Co 2 to 7%Committee leadership on pricing strategy improves a company's operating profit

margin by between 2 and 7 percent.2002

McKinsey & Co 8.7%1% point improvement in average price of goods and services leads to an 8.7

percent increase in operating profits for the typical Global 1200 company.2001


“Big Data will deliver transformational benefits to enterprises within 2 to 5 years, and

by 2015 will enable enterprises adopting this technology to outperform competitors

by 20% in every available metric.”

Gartner Cloud Computing Hype Cycle 2012

“By 2015, best-in-industry enterprises will increase revenue by up to 3% and profits by

up to 15%, due to improvements made using price optimization technologies.”

Innovation Insight: Price Optimization Leverages CRM, Big Data and In-Memory Computing to Increase Profits and Innovation in the Customer Experience

Published: 26 April 2012 /Analyst(s): Chris Fletcher

“For all of us involved in big data, and me personally, it is an incredibly exciting time.

The next 5-10 years are going to be breathtaking” “Here is the ultimate value in big

data… 1) time to insight, and, 2) return on accessible data.“

Microsoft STB technical fellow Dave Campbell

CIOL, March 12, 2013: Microsoft busts 3 Big Data myths


2012 Survey Sample Description


Formal Process to Measure ROIP (n=313)

33%

53%

14%

Yes

No

Not Sure


Importance of Measuring ROIP (n=203)

36%

33%

13%

11%

3% 3%

1%

Very Important

Important

Somewhat Important

Neutral

Somewhat not important

Not important

Not important at all


Difficulties in Measuring the ROI of Pricing Function (1 to 7 scale) (n=204)

4.00

4.01

4.34

4.45

4.48

4.56

4.59

4.72

4.89

0.00 1.00 2.00 3.00 4.00 5.00 6.00

Defining all relevant costs

Defining relevant KPI’s to track

Evaluating overall incremental pricing gains

Calculating return on investment (ROI)

Setting time boundaries for incremental profit gains

Setting up the proper reporting process for ROI

Defining overall incremental pricing effect

Agreeing on a definition of Pricing ROI

Estimating the isolated and specific pricing effect


Difficulties in Measuring The ROI of Specific Pricing Activities (1 to 7 scale) (n=204)

3.83

3.83

4.16

4.21

4.25

4.27

4.28

4.29

3.00 3.20 3.40 3.60 3.80 4.00 4.20 4.40 4.60 4.80 5.00

Defining the scope of pricing initiatives

Defining all relevant costs for specific pricing initiatives

Evaluating specific incremental pricing gains

Calculating the actual return on investment (ROI)

Estimating the specific pricing effect of initiatives

Agreeing on a definition of Pricing ROI for initiatives

Setting up the proper reporting process for ROI

Defining overall incremental pricing effect for initiatives


What Do You Measure ROI For? (n=204)

18%

11%

15%

18%

24%

27%

29%

29%

29%

32%

39%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

None of these

Hiring of new pricing professionals

Impact of overall pricing team

Pricing and value training programs

Deployment of value-based pricing strategies

Pricing-related consulting projects

Divisional pricing programs

Investments in pricing software

Customer-specific pricing programs

Comprehensive corporate pricing program

Pilot projects for pricing programs


10 Best Practices with ROIP Measurement

Establish a culture of

systematic measurement

and make it part of the

accountability contract.

1 Do not start any project

without having the right

measurement and

tracking metrics in place

to evaluate impact.

2 Establish thresholds of

pricing ROI & impact: for

every $ invested in pricing $7 to $10

dollars in return.

3

Use the Pricing Council as

the body that approves,

tracks and controls ROIP.

4

Develop an internal

consensus of the ROIP

measurement process.

5


10 Best Practices with ROIP Measurement (cont’d)

Analyze thoroughly over-

and under- achievement

in project projects

6

Study how other functions

measure ROI: R&D,

manufacturing,

marketing.

7

Focus on controllable

variables. Do not try to

measure everything and

“boil the ocean”.

8

Clearly state your

measurement

assumptions and do not

leave room for

interpretations.

9

Take clear ownership of

and for ROIP. Do not

leave it to sales, finance

or marketing.

10


Tools Available for the Measurement of ROIP

Controlled

Experiments Pilot Projects

Isolated

Pricing

Action Tracker

Dashboards and

cockpits

Advanced

statistics to

derive

incremental

impact through

data

Six Sigma for Pricing:

DMAIC/DFSS


The Don’ts of ROIP Measurement

Do not make too complicated.

Do not overwhelm top management: reduce it to one or two impactful numbers.

Do not measure ROI for a 10 year project!

Do not forget the organizational and behavioral dimensions of pricing in your budget (training, coaching, communication).

Do not overpromise and under deliver.

Do not argue on who is getting the credit: make your contribution compelling!



Q&A


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Let’s get connected!

Stephan M. Liozu, Ph.D. Tel: +1 484 347 1458

Fax: +1 413 541 8816

[email protected] www.stephanliozu.com

http://www.linkedin.com/in/stephanliozu

@StephanLiozu on Twitter!

mailto:[email protected]

http://www.stephanliozu.com/

http://www.linkedin.com/in/stephanliozu



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THE ROI & IMPACT OF PRICING - PROS