Value Creation and Estimation MK814 Gerald Smith

Value Creation and Estimation

MK814Gerald Smith

2Copyright © 2006, Strategic Pricing Group, a member of Monitor Group

The Pricing Strategy Pyramid

PriceLevel

Pricing Policy

Value Creation

Value Communication

Price Structure

Economic Value, Offering Design, Segmentation


Economic Value Estimation® Framework

PositiveDifferentiation

Value

PositiveDifferentiation

Value

Your uniquevalue

delivery

Competitive Reference

Value

Competitive Reference

Value

Price of Next Best

CompetitiveAlternative

Negative Differentiation

Value

Negative Differentiation

Value

Costs unique to doing business

with you

Price to capture a share of

this value

Total Economic

Value


DataCare: An Example of Economic Value Estimation®

Benchmarking Database– Nationwide study of over 300 nursing care institutions – Patient satisfaction and health outcomes by institution– Production input levels (e.g. Nurses per bed) and cost data– Templates for user analysis and comparison with own data

Question: What price should DataCare charge?


Understand the Customer Business Model

“What drives profit & loss in a nursing home?” – Nurse Turnover– Infections– Bed Occupancy


Quantify the Value Drivers

“What happens when a nurse leaves?”– Temp agency nurse = incremental $160 / day– Want ad = $600 / week– Time frame = 10 – 14 days – Selection process costs = ?

“So if I’ve heard you correctly, a nurse turnover costs you at least $2200 to $2800 per turnover. Is that right?”

“So if I’ve heard you correctly, a nurse turnover costs you at least $2200 to $2800 per turnover. Is that right?”


Quantify the Impact of Your Product on Value Drivers

How would improving nursing turnover affect your business ?”– Nurse Turnover rate: 46%– Best-in-class Turnover rate: 30%– Nurse staff: 50

“

Impact: (46%-30%) x 50 x ($2800 - $2200) = $15,400-$19,600

Impact: (46%-30%) x 50 x ($2800 - $2200) = $15,400-$19,600


Quantify the Total Potential Impact on Main Value Drivers

Impact of achieving best-in-class performance across Impact of achieving best-in-class performance across your business:your business:– $15,400-$19,600 for nurse turnover– $9,000-$12,000 for infection rates– $4,000 for bed occupancy

Total impact = $28,400 - $35,600

Total impact = $28,400 - $35,600


Process for Economic Value Estimation®

UnderstandCustomerEconomics

UnderstandCustomerEconomics

QuantifyValueDrivers

QuantifyValueDrivers

EstimateDifferentialValue

EstimateDifferentialValue

1 2 3

Three Steps for Economic Value Estimation 1. Understand Customer Economics: this step centers on the discovery

process used to understand customer business models and to establish the main value drivers and develop hypotheses about which drivers are most important for product offering.

2. Quantify Value Drivers: this step centers quantifying the financial worth of the hypothesized value drivers in order to test the hypotheses and provide a key input to the EVE®

3. Estimate Differential Value: this step centers on developing the algorithms for calculating quantifying value and combining customer economics, competitive reference, and differential performance data to develop quantified value estimate


Economic Value EstimationTM for Dyna-Test

Reference Value= $30 per kit

Yield Opportunity Costs

= $1,560

Reference: EnSyn = $30

Yield Labor Savings= $384

QC Labor Savings = $48

Sample SizeOpportunity Costs

= $468

SS Labor Savings = $38

Total PositiveDifferentiation Value

= $2,498 per kit

TotalEconomic Value= $2,528 per kit

Industrial Buyers


Reference: EnSyn = $30 Total Reference Value= $30 per kit

Yield Opportunity Costs

= $1,055

Yield Labor Savings= $231

QC Labor Savings = $29

Sample SizeOpportunity Costs

= $317

SS Labor Savings = $23

Total PositiveDifferentiation Value

= $1,655 per kit

TotalEconomic Value= $1,685 per kit

Non-Industrial, Academic and Government Buyers

Economic Value EstimationTM for Dyna-Test


Economic Value Estimation®

Example – Heavy equipment manufacturerExample – Heavy equipment manufacturer

Reference

Competitive alternative

for this customer =

$72,500

Add’l warranty cost = -$1050

Increased revenue from higher uptime

– rental svc = $2350

Invoice processing & consistency

savings = $1500

Parts inventory pgrm savings =

$1250Total offering

economic value$79,950

Differentiation value = $7,450

Reference value= $72,500

Improved residual value = $1200

Fuel economy savings = $2200


Value-Based vs. Traditional Segmentation

Traditional Segmentation• Segment to operationally adapt

to customer needs

• Give priority in segmentation to needs that have highest variance among customers

• Define as many segments as unique needs will support to maximize opportunity for revenue growth

Value-Based Segmentation• Segment and compare based on value

drivers and economic value estimation

• Segment to find most profitable opportunities given your capabilities

• Give priority to those determinant needs with greatest strategic impact based on value and operations

• Define additional segments when isolating them will have a positive financial/operational/strategic impact


A “Good” Value-Based Segmentation

• Based on the segment’s profit potential -- I.e., the value the segment receives relative to your operational ability to service the segment

• Needs between segments are different enough that you can design different offerings at different price points

• Able to facilitate the creation of product/service offerings• Based on identifiable criteria that easily separate one segment

from another• Helps managers to make better marketing and pricing decisions

(statistical significance is a nice-to-have, not a necessity) • Actionable in the field, i.e. easily enabling customers to make

trade-offs between offerings and willingness to pay


6 Steps for Value Based Segmentation

1. Determine basic segmentation criteria that create “natural fences” between customer groups

2. Identify discriminating value drivers3. Determine your operational constraints and

advantages with regard to those value drivers4. Create primary segments based on overlap of

customer needs and your internal constraints, and secondary segments based on most important needs

5. Create detailed segment descriptions for easier identification in the field

6. Develop metrics and fences to operationally separate conceptual segments


Customer Controlled Scheduling

Printer ControlledScheduling

Brand Focus Segment

Consistency Segment

Unique Equipment Segment

Cost Conscious Segment

Low Touch, Low Price Segment

Personal TouchPremium Service

Customer Choice

Specialty Productivity

SolutionsBaseline

Create Primary Segments Based on Overlap of Customer Needs and Internal Constraints

Further subdivide those Primary segments into Secondary segments with substantially different needs for the things that the seller has a competitive advantage/disadvantage in providing.

Further subdivide those Primary segments into Secondary segments with substantially different needs for the things that the seller has a competitive advantage/disadvantage in providing.

Catalog Market

Take groups in Step 3 and divide them into Primary segments based on the extent to which needs that drive purchasing decisions have an impact on the sellers operational constraints (i.e. “overlap”)

Take groups in Step 3 and divide them into Primary segments based on the extent to which needs that drive purchasing decisions have an impact on the sellers operational constraints (i.e. “overlap”)


Associate More Detailed Descriptions for Easier Identification

Segment Brand Focus Consistency Unique Capability

Needs • Maintain brand image across channels

• Custom services tailored to customer needs

• Proactive problem resolution development

• High Maintenance• Full service bundled solutions

• Margin Management• Expects big 3 standard

services, managed by the customer’s staff

• Precision Printer Performance

• Moderate Maintenance• Needs Print/Bind, Dist – will

provide won PMT• Paper supply options

• Products that are distinct to the end user

• Advanced targeting techniques to drive demand

• Product longevity requires longer catalog shelf life

Representative Catalogs • Coldwater Creek• Spiegel• Eddie Bauer• William Sonoma

• J Crew• Brylane• Fingerhut• Brooks Brothers

• Viking• Bon Marche• Quill• Industrial Catalogs

Key Demographics • Large Print Order Quantities• Mid-size Catalogs• Prints 1-4 or > 12 times per year• Uses high quality paper grades• Mostly Saddle Stitched

• Small to Medium Print Order Quantities

• Mostly Short Cut-off/Standard Trim Sizes

• Medium Sized Catalogs• Mostly Saddle Stitched

• Small Print Order Quantities• Smaller sized catalogs• Must have Supplied

Component Parts• Catalogs carry numerous

store brands• Higher percentage of B2B

catalogs

CUSTOMER CONTROLLED SCHEDULING SEGMENTS

Documents

Value Creation and Estimation MK814 Gerald Smith