developing a winning pricing strategy in times of
TRANSCRIPT
www.simon-kucher.com
PE-Backed CEO Summit
Developing a Winning Pricing Strategy in Times of Volatility
6 December 2021
Brad Soper, Partner
Bhavin Manjee, Partner
Atlanta office1180 West Peachtree St NW, Suite 1960Atlanta, GA 30309, USATel. +1 404 545 8263 [email protected]
New York office17 State Street, 37th floorNew York, NY 10004, USATel. +1 212 537 [email protected]
"If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you’ve got a terrible business."
The single most important decision in evaluating a business is Pricing Power.
“
”Warren Buffet (2010)
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 2
iStock/Imgorthand
Source: Simon-Kucher & Partners
Value creation 101
Volume
x
Price
-
Cost
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 3
Pricing is hard as it touches on a number of functions and areas within your business
ImplementationStrategy Setting
TARGET MARKETS:Identify where you want to compete & pick your fights intelligently.
SEGMENTATION:Identify the variations in customer needs and willingness to pay
STRUCTURE:Create future-proof price/revenue models
PACKAGING & VALUE PRICING:Address different segments through differentiation of product and price
DISCOUNTING: Give confidence through structure
VALUE SELLING:Sell value and execute value prices
Leadership
ORGANIZATION:Balance local authority and central guidance
MINDSET:Create a culture of growth and profit
Infrastructure
TOOLS/DATA:Use tools, processes and common sense
GUIDANCE/INCENTIVES:Make pricing matter
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 4
Source: Simon-Kucher & Partners
Where do you focus your time?
Framework for value delivery and capture
Deliver value(Operations, customer service…)
Communicatevalue(Marketing,sales…)
Create value(Availability, portfolio mix…)
Brand, product,service
Extract value(Pricing)
Price
OFFER DIFFERENTIATION
SEGMENTATION
ENFORCING TRADE-OFFS
VALUE DELIVERY VALUE CAPTURE
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 5
Agenda
1. Pricing Power: How to execute a price increase – and pitfalls to avoid
2. Smart segmentation to optimize your pricing
3. Leverage recurring revenue and dynamic pricing models
4. Aligning sales & marketing with pricing
5. Wrap up and Q&A
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 6
Source: Simon-Kucher & Partners
Simple example
Price: $ 100
Variable Cost: $ 60
Fixed Cost: $ 30 million
Units Sold: 1 million
Revenue: $ 100 million
Profit: $ 10 million
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 7
Source: Simon-Kucher & Partners
Which improvement will lead to the biggest profit adjustment?
… variable cost* …
Driver Profits($ million)
An improvement by 10% of … ... leads to a profit increase of...
100%
60%
40%
30%
NewOld
10 M60
10 M 14 M1.1 M1 M
10 M
16 M54
20 M110100
10 M 13 M 27 M30 M
NewOld
… price …
… sales volume…
… fixed costs…
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 8
COLOURBOX/ Dmitry Rukhlenko
COLOURBOX/lev dolgachov
COLOURBOX/Anatoly-Tiplyashin
COLOURBOX/-
Source: Simon-Kucher & Partners market monitoring
Unfortunately inflation is already here
iStock/JoeGough
COLOURBOX/-
+84%
Colourbox/OZMEDIA
+43%
+265%
+83%
+13%
+210%
+72%
+3%
+182%
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 9
Source: Simon-Kucher & Partners
So.. how many more units / revenue do we need to maintain profitability if our variable costs increase by $6 with no price adjustment?
Price: $ 100
Variable Cost: $ 66 (+10%)
Fixed Cost: $ 30 million
Units Sold: ??
Revenue: ??
Required Profit: $ 10 million
Your guess:
____
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 10
Source: Simon-Kucher & Partners
You would need 17% more revenue / volume to deliver the same profit.. Assuming the profit dollar expectation hasn’t gone up!
100
10
60
30
$0M
$20M
$40M
$60M
$80M
$100M
$120M
Revenue Variable costs Fixed costs Profit
Baseline Scenario
Profitability waterfall
117.6
10
77.6
30
$0M
$20M
$40M
$60M
$80M
$100M
$120M
Revenue Variable costs Fixed costs Profit
10% cost inflation w/ no price change
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 11
7%
5%
14%
23%
42%
2%
Can't track that
60 to <80%
40 to <60%
20 to <40%
0 to <20%
0%
Source: Trend Radar / Global Pricing Survey 2020
Clearly price increases are the right response, but they are hard to implement in reality
How much of your budgeted price increases did you achieve last year?
67% of companiesdid not even achieve half of their planned price increase last year
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 12
YesNo
38%
I do not
know
3%
Source: Simon-Kucher Trend Radar / Global Pricing Survey March 2021 (n = 2,210); Q1: Overall, did your company improve its profit margins in 2020? (n=2,210), Q10: Do you plan to implement a price increase this year (2021)? (n=1,304)
Unfortunately looking forward, ~1/3 of all planned price increases are meeting or beating inflation
Overall, did your company improve its profit margins in 2020?
Do you plan to implement a price increase this year (2021)?
Danger ahead: The need to react decisively to inflation is largely still underdeveloped!
18%
10%
38%
25%
9%
None Belowinflation
In line withinflation
Aboveinflation
Significantlyabove inflation
66%
59%
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 13
Source: Simon-Kucher & Partners
Food for thought: Simon-Kucher’s proven Price Increase Campaign framework shows the steps that separate winning companies from others
Monitoring
Make sure there’s full
transparency on the status at
all times.
High-level targets/strategy
Sales incentives
Steer / countersteer behavior
Product-specific targets
Customer-specific targets
React immediately and
adequately if you observe
deviations from target.
Reward successful price
increases!
Typically higher increase
potential for value-added
products or slow movers!
Differentiate customer
(segment)s and channels
according to "ease of
increase".
Consider relevant revenues
only!
Communication
Communicate your price
increase incl. reasoning
externally and internally.
Supporting material + KPIs
Provide battle cards,
argumentation guidelines,
and a negotiation roadmap.
Guidelines and escalation rules
Define clear approval rules
in case of derogations from
target!
1
2
3
4
5
6
7
8
9
…get prepared… …and roll-out the initiativeConfigure the levels…
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 14
Source: Simon-Kucher
Lift
Peer set increase
• Target customers with products priced below the median
• A minimum spend per product can be applied
Shift
List price increases
• Standard annual escalators
• Additional price increases confirmed via willingness to pay studies
Differentiate
Behavioral adjustments
• “Lean-forward” or “lean-backward” price adjustment based on price sensitivity
A$
B C
If you are not in the practice of raising prices to match inflation – or if you lack price consistency – we recommend a three-step process
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 15
Source: Simon-Kucher & Partners
Continue to earn majority of revenue through existing
packaging/pricing, offering advanced only upon request
Offer existing packaging/pricing to current customers and new use-case bundles to new customers in
parallel
Gradually shift customer base away from current
packaging/pricing in stepwise fashion
Duration: 2 - 3+ years
Aggressively migrate entire customer base to new
packaging/pricing using blend of carrots and sticks
Duration: Less than 2 years
Migrationtime horizon
“Hybrid Approach” “Accelerated Migration”“Phased Migration”“Reactive”
“In Cycle” is Preferred by Most Companies
“Out of Cycle” vs “In Cycle”: Your company should determine the type of migration approach based on inflation expectations and strategic goals
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 16
Agenda
1. Pricing Power: How to execute a price increase – and pitfalls to avoid
2. Smart segmentation to optimize your pricing
3. Leverage recurring revenue and dynamic pricing models
4. Aligning sales & marketing with pricing
5. Wrap up and Q&A
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 17
Source: Simon-Kucher & Partners
Segmentation primer: Demographics can be misleading
AGE 72
BORN UK
MARRIED
HOME Castle
INCOME LEVEL Wealthy
Two customers: Seemingly alike... ...but very different
72
UK
Castle
Wealthy
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 18
Source: Simon-Kucher & Partners
Segmenting a market means breaking it down into a few different parts on which
you can act differently
Communicate, advertise, influence,
reach out to, etc.
Your sales forceYour marketing
departmentYour company
There is no point in segmenting and then acting the
same with the entire market
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 19
Basic Sophisticated
Demographic Geographic End-market Occasion / use caseNeeds and Behavioral
Customer size/importanceLocation (or any other single, physical describing variable)
Vertical market Functionality typesNeeds and value drivers of
customer
• Annual revenue• # Projects• Overall profitability• Product Mix• …
• North, South, etc.• Urban vs Rural• …
• Industrial • Healthcare• Government• CPG• …
• Professional use• DIY use• Executive use• Manager use• …
• Cost-to-serve• Loyalty: transactional
vs partnership• Urgency• …
Examples
ILLUSTRATIVE
A variety of segmentation approaches exist with the vast majority of firms deploying a basic approach leaving room for improvement
Source: Simon-Kucher & Partners
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 20
-20%
0%
20%
40%
60%
80%
100%
0 500 1000
Thousands-20%
0%
20%
40%
60%
80%
100%
0 20 40 60 80 100 120
Thousands-20%
0%
20%
40%
60%
80%
100%
0 5 10 15 20 25 30 35
Thousands-20%
0%
20%
40%
60%
80%
100%
0 2 4 6
Thousands
A Customers B Customers C Customers D Customers
Median Margin46.3%
Median Margin39.8%
Median Margin35.5%
Median Margin35.4%
60% of revenue 20% of revenue 15% of revenue 5% of revenue
% Gross Profit Margin *each dot is a CustomerAvg. margin
Source: Simon-Kucher & Partners.
Demographic: Simple B2B customer size segmentation reveals small customers receiving better pricing than larger customers, controlling for mix
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 21
Geographic: A common finding is a National approach to local pricing
$30.91
$30.90
$30.88$30.93
$30.88
$30.89
$30.88
$30.98
$30.88
$30.88$30.67
$30.88
$29.12
$29.12
$30.88$30.95
$29.12$30.62
$30.88
$30.88$30.88
Key Takeaways:
▪ Pricing between 29.12 and 30.98 in all states (+/- 3% of avg price)
▪ Opportunity: Explore regional (market-based) price differentiation based on value, demand, competition, and other factors
Represents states of which no sales for this product were indicated in the data.
Illustration represents average distributor net price by state of client product
Net Prices
Source: Simon-Kucher & Partners project experience; data anonymized for client confidentiality
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 22
Agenda
1. Pricing Power: How to execute a price increase – and pitfalls to avoid
2. Smart segmentation to optimize your pricing
3. Leverage recurring revenue and dynamic pricing models
4. Aligning sales & marketing with pricing
5. Wrap up and Q&A
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 23
Source: Simon-Kucher & Partners, Zuora
Leading firms have recognized that digital enables a shift from a transactional/product mindset toward a recurring/customer approach
customer
product
channels
vs.
service
channels
experience
subscriber
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 24
Reduced barrier to purchase Differentiation to Customer Needs Scalable and Expandable
▪ Ability to offer alternative cost profile
− e.g. predictable recurring fee
− eliminates large upfront capex to customers
▪ Decreasing risk for the customer
▪ Increases customer stickiness
▪ Allows for more creative packaging solution
▪ Ability to meet multiple needsprofiles
▪ Facilitates concession planning, upselling and cross-selling
▪ Revenue realization is more closely linked to customer value
▪ You own the customer journey…not the customer moment
▪ Prepares for value realization coming out of recession!
2020 demonstrated the incredible resiliency of recurring revenue models for those who have embraced their intrinsic value
Source: Simon-Kucher & Partners
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 25
Metric reflects how the customer utilizes the equipment
Metric relates to how well the service provider performs
Metric is linked to how much business value the equipment creates for the customer
Usage-based
Performance-based
Output-based
e.g. pay per click (page) in photocopiers
e.g. service-level agreements on
reactive maintenance response time
e.g. volume of purified water
from water treatment equipment
Price metric:Reference base unit of measure on which the total fee/price charged to a customer is calculated
Recurring revenue models often accelerate growth by enabling alternative price metrics that better align price paid with value received
Source: Simon-Kucher & Partners
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 26
Source: Simon-Kucher & Partners
Private Equity has spearheaded this change across more sectors than most realize; Simon-Kucher anticipates this trend to accelerate post pandemic
Elevators
Surgical robots
Industrial watertreatment
Heating systems
Cargo handling cranes
PV1 plants andself consumption
Sector Original model New revenue model
▪ Sell elevator to building owner
▪ Charge separately for service / maintenance
Sign contract with owners for 10-20 year “elevator rights”
Charge flat monthly rate
▪ Sell robots to hospitals
▪ Tight hospital budgets limited sales of robots
Charge hospitals per surgery for use of the robots
▪ Sells equipment to factories
Sets up the equipment on site and handles maintenance
Charges per volume of water used
▪ Manufacturer sells heating systems to homeowners / contractors
Charges only for the warmth provided
▪ Sell cranes
▪ Charge separately for maintenance
Sells containers moved where infrastructure and maintenance is provided
▪ Sell photovoltaic modules
▪ Turnkey EPC contracts
Charge for energy generated kWh including equipment maintenance
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 27
Agenda
1. Pricing Power: How to execute a price increase – and pitfalls to avoid
2. Smart segmentation to optimize your pricing
3. Leverage recurring revenue and dynamic pricing models
4. Aligning sales & marketing with pricing
5. Wrap up and Q&A
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 28
Source: Simon-Kucher & Partners project experience; data anonymized for client confidentiality
Pricing needs to consider the realities of the associated salesforce if it is to be successful
0%
5%
10%
15%
20%
25%
30%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
% of project bids
Avg. discount per bid
No approval required Sales director VP Global AccountingSVP and VP Product LineVP Sales
Discount approval by:
The primary driver of this client’s realized prices was the levels at which sales approval thresholds were set
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 29
Struggling Sales FTE’s in undersized markets
▪ This is the concept most people quickly understand
▪ Implications include
− Erratic pricing
− High cost-to-serve
− Sales FTE churn
Underperforming Sales FTE’s in oversized markets
▪ This is the concept that typically flies under the radar
▪ Implications include
− Inflexible pricing
− Low customer-satisfaction
− Long-tenured Sales FTEs
Data-driven approach reveals
0
0.5
1
1.5
2
2.5
3
3.5
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71
Ma
rke
t O
pp
ort
un
ity
Sales FTE
Opportunity per sales FTE
Indexed Spending
Optimized Territories
Lacking Opportunities
Overloaded
Sales’ impact on pricing: We repeatedly observe erratic pricing in undersized markets and strict adherence in oversized markets
Source: Simon-Kucher & Partners project experience; data anonymized for client confidentiality
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 30
Remember that “Cube” logic?: Firms leverage actual sales transactions to establish credibility & target price points decoupled from costs
Revenue ($M)
Price targets derived from sales data
Cumulated revenues
Yearly volume for the category
Se
gm
en
t cate
go
ry
% of annual volume
Discount 0%
100%
High discounts
Low discounts
Ø discounts
Best practice
Worst practice
List price
Relative performance can be observed within homogeneous segments
$/unit prices
Best internal performance
credible yardstick for
the sales force steering
Project example
Source: Simon-Kucher & Partners project experience; data anonymized for client confidentiality
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 31
Source: Simon-Kucher & Partners project experience; data anonymized for client confidentiality
Deal scoring in practice: These are the underpinning of deal scoring tools that tap into seller’s competitive nature and triangulate market clearing prices
Customer scoring:reflecting customer value, i.e turnover, vertical market, payment terms, loyalty, …
Target price:clear vision of the price the team should aim reflecting internal best practices
Deal specificities:differentiated price recommendations by type of deal, i.e. new logo vs cross-sell, product type, associated service/support, contract duration, geography, industry, urgency, …
Project exampleSimon-Kucher offers a configurable deal-scoring tool
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 32
Agenda
1. Pricing Power: How to execute a price increase – and pitfalls to avoid
2. Smart segmentation to optimize your pricing
3. Leverage recurring revenue and dynamic pricing models
4. Aligning sales & marketing with pricing
5. Wrap up and Q&A
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 33
Source: Simon-Kucher & Partners
Parting thoughts – What is the role of the CEO in pricing?
▪ The ultimate responsibility of the CEO is to increase enterprise value (EV), and price is the strongest driver of EV; therefore pricing deserves highest CEO-attention
▪ Cases where price destroyed EV are numerous and this happens faster than building EV through smart pricing
▪ CEO-involvement is really important, it improves pricing power and successful price implementation which leads to higher margins, growth and EV
▪ The CEO should focus on creating awareness for the critical role of price, on setting the right goals, on providing clarity in positioning and effective pricing processes
▪ The CEO should create a culture which avoids destructive price aggressiveness, inspires price leadership and instils pricing discipline
▪ The CEO’s role is not to interfere in pricing details and negotiations; trust your team once the governance structure is in place
Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 34
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