4A’s Transformation 2013 - March 10 - MPF - Deloitte - Scott Lippstreu
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4A’s Transformation 2013 - March 10 - MPF - Deloitte - Scott Lippstreu

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Celebrate – Pricing Power ...

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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4A’s Transformation 2013 - March 10 - MPF - Deloitte - Scott Lippstreu 4A’s Transformation 2013 - March 10 - MPF - Deloitte - Scott Lippstreu Presentation Transcript

  • Celebrate Pricing PowerPricing principles that capture value and enhance profitabilityScott LippstreuDeloitte Monitor Consulting LLPslippstreu@deloitte.comMarch 10, 2013
  • Overview of today’s discussionI. Evolution of Pricing  Moving from Labor-Based Pricing to Performance-Based PricingII. Fundamentals of Performance Pricing  Components, Execution, and Obstacles to Effective Pricing Strategies 1
  • Evolution of PricingIncreased pressure on rates and margins are causing ad agencies towork more for the same total fees Total Ad Spend & Ad Agency Revenue Growth 2006-2012 400 10% % Revenue Growth Total Ad Spend $B 300 5% 200 0% 100 -5% 0 -10% 2006 2007 2008 2009 2010 2011 2012 Ad Spend Agency Revenue Growth Drivers of Rate Pressure • 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… Source: IBISWorld Advertising Agency in the US Industry Report; Yahoo Finance 2
  • Evolution of PricingRate pressure has evolved new pricing strategies to take hold acrossservice industriesDeloitte Consulting’s Challenge Response & Capabilities  Designated Value Pricing Experts: Dedicated senior resources who look at deals and manage a portfolio Clients asked us to put our fees at  Investment Approach: Take real risks that represent an investment portfolio, rather than a risk, tied to the series of one-sided offers outcome  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 We are the world’s leader in the performance-base services model, looking at hundreds of deals a year 3
  • Evolution of PricingGuiding Principles of Performance Pricing at Deloitte Consulting 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 4
  • Evolution of PricingWhy Performance Pricing is Difficult to Replicate…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 5
  • Evolution of PricingCornerstone of any performance fee structure is making sure theclient understands and believes the value 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 6
  • Evolution of PricingRecent research suggests selling on value how companies survivein the long term The Three Rules: How Exceptional Companies Think By Michael Raynor & Mumtaz Ahmed 1 Prioritize better value over cheaper prices Prioritize revenue over cost side of profitability 2 equation 3 The only rules are 1 & 2Source: “The Three Rules: How Exceptional Companies Think” by Michael Raynor and Mumtaz Ahmed; Available May 30th, 2013 7
  • Fundamentals of PricingWhether it is performance or fixed pricing, it is important to hit thefundamentals 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 8
  • Fundamentals of PricingThis is a visualization of transactional data Overall Transactional Database Waterfall Needs to be built at the customer and transactional level 100 20 Revenue Cost to Allocated Costs 80 10 Elements Serve 10 60 5 100 5 5 40 3 6 2 55 5 20 6 39 4 26 11 0 4 List Invoice Net Pocket Margin Price Price Price Price Common Challenges and Obstacles to Data  Lack of proper Rate Card use  Services delivered, yet not tracked  Omission of oft-missed discounts  No transactional cost analysis  Lack of data management and  Use of allocations pricing processes to improve revenue 9
  • Fundamentals of PricingThis is a price bands visualization of price variability 600% Realized Price by Customer Size Key Analytics 500% Realized Target  Bands can be run by product or 400% Mean customer segmentPrice (% to Mean) 300%  The goal is for the bands to be tight, or little variability 200%  It is important to differentiate between mature and new products 100% 0% 0 6 Affiliate Mega Large Small Medium Opportunistic 10
  • Fundamentals of Pricing24 Years of Pricing Transformations – Lessons Learned: 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) Closing Thought: An organization that “never loses on price” probably does 11
  • Questions?Scott Lippstreuslippstreu@deloitte.com 12
  • Copyright © 2012 Deloitte Development LLC. All rights reserved. 13
  • A balanced approach across six core competencies enables thejourney to a value-based pricing strategy Foundational Price Execution Executing defined policies and processes that govern profitable decision making on a daily operational level Pricing Strategy Organizational Alignment & Defines a pricing framework that supports Governance Competitive Advantage business objectives by understanding and Effectively managing the people and cultural capturing the value of an offering relative to dimensions of an organization so that it can Sustainability competitive alternatives and customer demands sustain pricing excellence Advanced Analytics & Price Pricing Technology & Data Setting Management Determining profit-maximizing prices for products Designing and deploying pricing analytics, and/or services optimization and execution tools to enable effective pricing decisions and to enhance quality and consistency of pricing processes Tax & Regulatory Effectiveness Proactively managing the tax, regulatory compliance and governance issues related to pricing decisions Profit Retention 14