pricing workshop
DESCRIPTION
TRANSCRIPT
Logo client
AFC Pricing Workshop
Basics of pricing put into practice24 November 2010
Check our website: http://www.thehouseofmarketing.beFollow us on Twitter. LinkedIn or Facebook
Presentation1
– Draft –
2
Agenda
18h00-18h15 Intro
18h15-19h15 Basics of pricing
19h15-20h00 Continental Courier Case
Presentation1
– Draft –
AFC and The House of Marketing: a win-win partnership
3
Marketing expertise and support to AFC customer projects
Workshops to AFC members
Presentation1
– Draft –
The House of Marketing: a strong concept fueling continuous growth
4
History & Size
Geography & Nationality
• Founded in 1994 and growing• Privately owned, Belgium based company• 50+ marketing consultants / experts• Pool of experienced freelancers
• Serving clients based in Europe, Middle East and Africa• Team of consultants with different nationalities and cultural
backgrounds enabling us to easily integrate the local culture while managing the multicultural differences
Concept
Bridging
the Knowing-
Doing gap
Presentation1
– Draft –
Located in Mechelen
5
Presentation1
– Draft –
Marketing expertise delivered in both strategic and operational areas
6
I. Strategic Marketing
II. Go-to-Market
• Market Intelligence & assessment• Segmentation• Branding & Positioning
• Pricing• Product/ Brand/ Category/Services
Management• Communication
III. Organization capabilities
IV. Performance Management
• Customer Process Management• Organizational design & Change
Management
• Marketing Audit • Marketing Dashboards & KPI’s• Customer Lifetime Value & Return on Marketing Investments (ROMI)
• Business & Marketing Planning• Innovation• Sustainability
• Online marketing• Sales & Channel Management• Customer Relationship Management• Customer Experience
• Marketing Audit• Marketing Coaching & Training• Employer Branding
Presentation1
– Draft –
Clients across many different sectors
7
ICT & Media
Utilities & Resources
Financial & Other Services
Consumer Goods & Retail
Healthcare & Public Sector
Transport & Logistics
Presentation1
– Draft –
8
Agenda
18h00-18h15 Intro
18h15-19h15 Basics of pricing
19h15-20h00 Continental Courier Case
Presentation1
– Draft –
Name: Maarten Bosschem
Working @ THoM since 2007
Education: Commercial engineeringMaster in Marketing Management
Professional milestones:Marketing Consultant & Pricing expertise lead @ THoM• Travelled around Europe to help Microsoft with a reseller
engagement model• Assisted Electrabel with their websites, pricing &
channels• Analyzed and installed new pricing levels @ The House of
Marketing• Designed and integrated new websites for Zoo Antwerp• Launched new product for Netlog
Personal information:Live in Ghent, play soccer competitively, cannot choose between snowboarding and skiing, love electro and house festivals & parties, South-America is my favorite holiday destination.…
Who am I?
9
Presentation1
– Draft –
10
Pricing in The NewsIncreasing price
Delhaize decreased prices of 1000 products 01/04/2010, De Tijd
Danone launches discount range of yoghurt 12/09/2008, Le Figaro
Solvay keeps on cutting costs in 201018/02/2010, De Standaard
VW stops its production for a week23/02/2009, De Tijd
* Note: Common reasons given are increased costs of raw materials and other resources., reduced sales and high inflation
Lowering priceor price image
Cutting Costs
$
$
InBev & Alken Maes increase beer prices*23/08/2010, De Tijd
NMBS increases tariffs*16/08/2010, deredactie.be
Presentation1
– Draft –
Pricing is a huge lever to increase profit
11
Total Revenue
= 100Fixed Cost = 65
Reduce Variable Costs
by 5%
Profit + 13%
Improved price realization of 5% generates 50% profit improvement*
Profit increase
Profit + 50%
Improve Price by 5%
Variable Cost = 25
Profit = 10
* Note: Assuming Average Fortune 500 Company
Presentation1
– Draft –
48% agree that it is hard for them to introduce price increases
33% of respondents confirms that there are typically conflicting agendas or priorities around pricing decisions
THOM Pricing Survey: Pricing is top of mind & perceived as difficult to change in market
50% of marketers think their customers will become more price sensitive because of current economical situation
32% said prices will definitely have to be lowered in coming year
Only 14% of respondents said would raise prices, and in 10% of the cases, would raise prices less than the increase in costs, putting additional strain on margin
And yet… 62% of respondents say their customers perceive their product as offering a unique solution and are willing to pay a premium for it
12
Source: THOM Pricing Survey 2009 – preliminary results of 700 participants
Presentation1
– Draft –
From our experience, companies face many barriers to achieving higher price realization
13
Value based pricing is about addressing these gaps to increase profitability
Target price Price realized
Organizational misalignment around pricing 1
Gaps in price execution and management (Unwarranted variance in field, reactive pricing...)
2
Offer not aligned to different value requirements of segments or desired customer behaviors
3
Not effectively communicating value to change customer’s perceptions
5
4 Failure to drive and sustain value differential
Presentation1
– Draft –
Organizational misalignment around pricingDiffering, and at times conflicting goals, relating to pricing within same company can limit the effectiveness of pricing strategies
14
PresidentPresident
MarketingMarketingFinanceFinanceR&DR&D SalesSales BU General Manager
BU General Manager OperationsOperations
“Get me both higher market share and profit . . . now”
“This is the best product with the best technology on the market. It should be worth
millions”
“This product took years to
develop and our prices need to recapture this
huge investment”
“If we bundle in more services we can justify higher prices and drive market share”
“Customers are saying our price is too high and
competitors have and lowered
price”
“We are well behind this
quarter. Let’s do what it takes to
start driving volume now”
“Special requests from customers
are killing us. It’s driving our costs through the roof”
Pricing should be addressed strategically after finding common grounds and approaches on pricing and value management
Pricing should be addressed strategically after finding common grounds and approaches on pricing and value management
1
Presentation1
– Draft –
Price execution gaps: Unwarranted variance across pricingSophisticated customers use your discounting policies to gain unwarranted discounts
15
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
€0 €100.000 €200.000 €300.000 €400.000 €500.000 €600.000 €700.000 €800.000 €900.000 €1.000.000
Acceptableline
Sales revenues
Act
ua
l d
isc
ou
nt
Results
Outliers
2
Outliers
Presentation1
– Draft –
Price execution gaps: Unwarranted variance across pricing Companies can decrease these gaps by managing pricing proactively
16
Example:• End-of-quarter discounts• Meeting competition
Reactive, exception-based price management, drives prices down
Proactive, policy-based price management ties pricing to value
Example:• “Loyalty” discounts for high store share• “On-line”, fast pay, low service discounts
Develop proactive policies that set proper customer expectations
Develop proactive policies that set proper customer expectations
2
Presentation1
– Draft –
Offer is not aligned to different segments, value requirements or desired customer behaviors
17 17
High
Low
Rec
eive
d V
alue
Segment Size
A B C D
Setting price here
….leaves money on the table for these customers and communicates that value does not have to be paid for…
1
2
….and misses growth opportunities by pricing these customers out of the market
3
• Offer configuration is necessary to serve all segments more profitably• Differences in value can be captured with product variations or service
augmentation that creates natural fences between segments
• Offer configuration is necessary to serve all segments more profitably• Differences in value can be captured with product variations or service
augmentation that creates natural fences between segments
3
Presentation1
– Draft –
Failure to sustain and drive differential value
18
Traditional way
Product
Price
Cost
Customers
Value
Value-based way
Reference
Value€ 0.85 / kg
Next bestcompetitiveAlternative
internal mixing costs
Less Defective€ 0.08
Less WIP Scrap€ 0.07
Positivedifferentiation
Less Freight€ 0.03
Fewer Material Rejection
€ 0.05
Sustain differential advantage Drive differential advantage
Change approach for new product development to ensure delivered value
e.g. IKEA
Change approach for new product development to ensure delivered value
e.g. IKEA
Innovations sustain and expand differential valueInnovations sustain and expand differential value
Product
Price
Cost
Customers
Value
Example Carbon Black Producer4
Presentation1
– Draft –
Not effectively communicating value to change customer’s perceptions
19
FeaturesFeatures Product Focus“What do we offer?”
BenefitsBenefitsApplication Focus
“Why should the customer care?”
€ Value€ ValueCustomer Focus“What is that worth?”
Revenue Drivers
CostDrivers
Better product dispersability creates
more complete mixing that...
Our cleaner product creates output
reliability which...
… reduces total raw materials used.
decreasing input cost by
… allows you to target supply – sensitive
segments. generating improved revenue of
€ 0.06 / kg € 0.10 / kg
Concept
Better articulating value helps to change price perceptions and justifying price points
Better articulating value helps to change price perceptions and justifying price points
FeaturesFeatures
BenefitsBenefits
Example Carbon Black Producer
Example
Carbon black particles
5
Presentation1
– Draft –
A classic example of value selling…5
Presentation1
– Draft –
Three elements need to be considered to pricing
21
Identify how your offer compares to competition and develop
competitive scenarios
Understand cost to serve and how these
change over time
Determine value needs, perceptions and price
sensitivities of customers or segmentCosts Customers
Competition
Presentation1
– Draft –
Costing: deciding on the most profitable activities
22
Determine contribution margin1
Identify incremental costs2
Identify volume/price trade-offs3
4 Evaluate the market context to understand profit implications
Cost
Comp
Cust
Presentation1
– Draft –
Contribution margin: variable & fixed costs
23
Total Contribution=3.000
(Per Unit = € 3).......................................
PriceEx. € 10
Unit variable cost
Ex. € 7Fixed Costs
Ex. 1.500
Unit SalesEx. 1.000
Profits= 1.500
Total Contribution = Sales revenue – Total Variable Cost
ContributionMargin
= 3.000/10.000
= 30%
Company XYZ:
Contribution Margin (%) = Total Contribution / Sales Revenue
1 Cost
Comp
Cust
Presentation1
– Draft –
Identifying The Incremental Costs
Incremental costs: Cost of production for one additional unit
Variable cost: Cost of last produced unit NOT average variable cost
Fixed costs: Most seen as incremental BUT be careful of step changes…
Opportunity costs: The contribution foregone when an asset is used for one purpose instead of another
24
Cost
Comp
Cust2
Presentation1
– Draft –
Identify relevant costs for pricing decision:
25
- General & admin costs € 500 € 700
- Direct Fixed Costs € 1,000 € 1,400
- Direct Var. Costs € 7,000 € 10,350
Costs
Revenues € 10,000
Units
Total Euros
Total Costs
€ 8,500 € 12,450
Profits € 1,500 € 1,550
1,000 = 1,500
€ 200
€ 400
€ 3,350
€ 4,000
+ 500
€ 0.5
€ 1
€ 7
€ 10
Euros per unit
€ 8.5
€ 1.5
1,000
€ 0.47
€ 0.93
€ 6.9
€ 9,3
€ 8.3
€ 1.0
Full cost
€ 14,000
Costs
Revenues € 10,000
At Company XYZ, there’s an opportunity to sell 500 more units at a price of € 8/Unit.For this, additional capacity is required at a cost of € 400 and admin costs would increase with € 200. Variable production costs would only be € 6.7 per unit….
Cost
Comp
Cust
€ 0.4
€ 0.8
€ 6.7
€ 8
€ 7.9
€ 0.1
+500 (Incremental)
2
Presentation1
– Draft –
Identify volume/price trade-offs: Breakeven analysis
Unit Breakeven Sales
26
Total ContributionPer Unit = 3
.........................
PriceEx. 10
Unit variable
costEx. 7
Fixed Costs
Ex. 1.500
Unit Sales= 1000
Break-Even
Example
Current price: € 10
Variable cost/unit: € 7
Current Weekly Sales: 1.000 Units
How much would sales have to increase to make a 10% price reduction profitable?
% Breakeven sales change
3
Break-Even Sales = Fixed Costs / Total Contribution per unit
Break-Even Sales = Fixed Costs / Total Contribution per unit
-Δ Price%BE =
(CM + Δ Price)
-Δ Price%BE =
(CM + Δ Price)
- (-10)%BE =
(30+ (-10))= 50%
Cost
Comp
Cust
Presentation1
– Draft –
Strategic guidelines when facing different cost types
High Variable costs
High Fixed Costs
Opportunity Costs
Low Contribution Margin
High Contribution Margin
Contribution Margin foregone
Drive Price
Drive Volume
Capacity Optimization
Cost Type Cost Type Strategic Objective
Example:
Example
Wholesale distributionOffice supplies, Technology distribution
Chemical plant, Pulp and paper. …
4 Cost
Comp
Cust
Presentation1
– Draft –
Price competition can be a very dangerous game Think before you step into prices wars…
Sports Competition Price Competition
• The more intense, the better
• Play as hard as you can
• Goal is to win, regardless of the cost
• The more intense, the worse
• Weigh the cost of each confrontation
• Goal is to profit, considering all costs
Cost
Comp
Cust
Presentation1
– Draft –
The value received and thus the willingness to pay is not the same across all customers
Pri
ce
Pa
id
Value Received
high
low
low medium high
medium
Missed Opportunities
UnharvestedValue
Price relative to Value
One size fits all
Cost
Comp
Cust
Presentation1
– Draft –
Offer is not aligned to different segments, value requirements or desired customer behaviors
30 30
High
Low
Rec
eive
d V
alue
Segment Size
A B C D
Setting price here
….leaves money on the table for these customers and communicates that value does not have to be paid for…
1
2
….and misses growth opportunities by pricing these customers out of the market
3
• Offer configuration is necessary to serve all segments more profitably• Differences in value can be captured with product variations or service
augmentation that creates natural fences between segments
• Offer configuration is necessary to serve all segments more profitably• Differences in value can be captured with product variations or service
augmentation that creates natural fences between segments
Cost
Comp
Cust
Presentation1
– Draft –
Tiered offerings are creating fencesdemonstrating value and increasing profits
Marriott – Consumer choices
Dell – Consumer ChoicesDuracell
BMW - series
Cost
Comp
Cust
Presentation1
– Draft –
Reinforce & communicate the value you provide in the market
Goal: Frame the reference
Cost
Comp
Cust
Presentation1
– Draft –
Evaluating the 3 C’s as a first step towards strategic pricing
33
Costs Customers
Step 1: Determine contribution margin
Step 2: Identify incremental costs
Incremental costs = Cost of production for one additional unit
Variable cost of last produced unitNOT average variable cost
Most fixed costs are incrementalBUT be careful of step changes
Do not overlook opportunity costs= The contribution foregone when an asset is used for one purpose instead of another
Step 3: Identify volume/price trade-offs
Step 4: Evaluate the market context to understand profit implications
Competition
Sports Competition:
• The more intense, the better
• Play as hard as you can
• Goal is to win, regardless of the cost
Price Competition:
• The more intense, the worse
• Weigh the cost of each confrontation
• Goal is to profit, considering all costs
Pric
e P
aid
Value Received
high
low
low medium high
medium
Missed Opportunities
UnharvestedValue
Price =
Value
Align value and price by:• Adapt price according to value for
customer
• Create offering aligned with segment needs
• Improve perception through communication and marketing actions
Presentation1
– Draft –
34
Agenda
18h00-18h15 Intro
18h15-19h15 Basics of pricing
19h15-20h00 Continental Courier Case
Presentation1
– Draft –
Common opportunity areas we see that can result in enhanced price realization
35
Price Opportunity # 1:
COLLECT MORE ON ALL OFFERINGS BY REDUCING
PRICING VARIABILITY
Price Opportunity # 2:
MAKE MORE MONEY ON DIFFERENTIATED SERVICES
Price Opportunity # 3:
IMPROVE BUSINESS MIX TO IMPROVE PROFITS
Presentation1
– Draft –
Continental Courier Case: explanation
Company profile
Continental Couriers, the international division of a postal incumbent, was established in 1937 and is a small player within the European business mail market.
• Revenues in 2010: € 97 million• Estimated marketing budget for 2010: $1.5 million• Goals for 2011: increase sales by 20% and increase margins realized
Questions
1. Are there types of customers which are more/less profitable than others?2. Are there account managers with lower or higher margins?3. What does price band analysis tell us?
Presentation1
– Draft –
Some customer types seem to be more profitable than others. All account managers set on average higher prices than expected (negative avg discount)
ValuesRow Labels Average of EBIT Average of MarginsCustomer 68.479 € 11%DM Handler 55.361 € 9%Postal Operator 63.846 € 14%Grand Total 67.375 € 11%
ValuesRow Labels Average of EBIT Average of Margins Average of Total DiscountYves 74.723 € 13%- 64.283 € Antoine 59.922 € 11%- 44.169 € Bart 71.136 € 10%- 46.486 € Frederik 59.462 € 10%- 32.899 € Ludovic 48.899 € 9%- 24.819 € Eva 57.634 € 9%- 24.407 € Emily 105.666 € 8%- 27.630 € Grand Total 67.375 € 11% -46741,88983
1. Are there types of customers which are more/less profitable than others?
2. Are there account managers with lower or higher margins?
Solutions case
Presentation1
– Draft –
Step by step how to price band
Plottingdiscounts
over volume
• Select discount and volume columns• Click: insert – scatter plot• Look at the created graph
Analyzing foundresults
• Is a correlation present between volume and discount given? If so, that’s a good thing.
• Are there a lot of outliers or is everything scattered across a single band?
• Outliers mean that policies are not always adhered to. Every outlier would need to be checked and evaluated individually.
Price banding can help identify customers with a too high or too low discount
1
2
Presentation1
– Draft –
Very small positive correlation shows too many unwarranted price variances3. What does price band analysis tell us?
0 20000 40000 60000 80000 100000 120000
-250,000 €
-200,000 €
-150,000 €
-100,000 €
-50,000 €
- €
50,000 €
100,000 €
150,000 €
200,000 €
250,000 €
R² = 0.119067441202603
Discount vs Volume
Total DiscountLinear (Total Discount)
Volume
Discount
• Very small positive correlation between sold volume and offered discounts, which means discounts are given out without volume reasons
• Outliers should be investigated and pricing policies monitored
Presentation1
– Draft –
Looking for price misalignments relative to cost or value delivered
What to do?1) Reduce Price2) Provide More Value3) Evaluate why these
customers are willing to pay more
What to do?1) Communicate Value Better2) Increase Price3) Remove Some value
Unharvested Value Accounts: 160 Missed Profit Opportunity Accounts: 299
VALUE
0
1
2
3
4
5
6
7
8
9
10
0 2 4 6 8 10 12 14 16 18 20
PRICE
L
H
L H
UnharvestedValue
Missed Profit Opportunities
Price = Value
= A Customer Account
40
Presentation1
– Draft –
Pocket PricePocket Price
The List Price net of all known adjustments (discounts etc)
The actual revenues realized
The List Price net of all known adjustments (discounts etc)
The actual revenues realized
(2) About Waterfall Analysis
What it is:A price waterfall is an analytical tool that diagnoses the following:
• How much money is being deducted from the list price in the form of discounts and potential giveaways to arrive at a “Pocket Price” for a product. customer or segment
• Helps process improvement initiatives by linking quantified price “leaks” to specific points in the price management process
6.00 0.200.12
5.68 0.200.37
0.360.20
0.09 4.47
0
1
2
3
4
5
6
7
List Price Order SizeDiscount
CompetitiveDiscount
InvoicePrice
PaymentTerms
Discount
AnnualVolumeBonus
Off-InvoicePromo's
Coop Ad's Freight PocketPrice
Price (Euros)
41
Presentation1
– Draft –
Waterfall analysis is usually based on data and input from interviews
Interviews
Identify possible leakages
- Salespeople- Customers- …
- Order size discount?
- Competitive discount?
- Payment term bonuses
- Yearly bonuses- Promo’s- …
Data analysis
Check correlation volume - discount
Check correlation discount - country
Correlation discount - salesperson
Interviews for yearly rebates. promo’s.
payment term discounts. etc.
Difference between list price and pocket price can sometimes even be so big that costs are no longer covered
Presentation1
– Draft –
Closing Arguments: 3 C’s Best Practices
COSTING BEST PRACTICE
• Understand the incremental costs of product/service elements. enabling company to profitably offer multiple product/service offerings at different price levels
• Understand which sales drive incremental capacity costs and which do not. enabling company to price to profitably recover capacity cost from the former. while pricing to drive incremental contribution from the latter
• Adjust non-negotiable price levels based on the ability to improve contribution from all customers who would qualify for that price level. not based on the value of an individual deal
COMPETITION BEST PRACTICE
• Identify current/potential competitive advantages and capabilities that leverage those advantages
• Target customers (or jobs) that most value capabilities for profitable growth and focus your resource investments of service to those segments
• Anticipate and plan for changes in competitor and customer behavior that could threaten your competitive position in your target segments
• Collect and communicate competitive information to minimize the impact of negative-sum competitive confrontations
• Evaluate your competitive success by your ability to grow profits. not market share.
CUSTOMER BEST PRACTICE
• Understand how the products and services that you sell generate value for customers (revenues or cost savings). noting particularly differences between the value delivered by you and by the competition
• Sell “value delivered”. not features. and grow markets by educating more customers on the value that your company can deliver
• Segment your market for pricing by offering different product/service bundles at different price levels to reflect differences in the value that you deliver.
Presentation1
– Draft –
Your personal point of contact
44
Pricing: Maarten Bosschem
Mobile: +32 (0)15 444 015
E-Mail: [email protected]
Other: Pieter Lievyns
Mobile: +32 (0)15 444 045
E-Mail: [email protected]
The House of MarketingKardinaal Mercierplein. 2
B-2800 Mechelen
Belgium
Office +32 (0)15 444 000
Fax +32 (0)15 444 044
www.thehouseofmarketing.be
Join us on LinkedInFollow us on Twitter