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Profit Starts with Pricing on Purpose<br />Ron Baker, Founder<br />VeraSage Institute<br />
“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices wit...
Innovate for growth.<br />Price for Profit.<br />
The default purpose of marketing is not to increase sales.<br />It’s to increase profits.<br />
Profit is a marketer’s ultimate objective.<br />Profit is driven mostly by price.<br />Price is driven mostly by brand per...
Harvard Business Review<br />“If Brands Are Built Over Years, Why Are They Managed Over Quarters?” <br />By Leonard Lodish...
	What are your customers really buying?<br />	What are you really selling?<br />
“The customer never buys a product. By definition the customer buys the satisfaction of a want. He buys value.”<br />- Pet...
The wrong practices: Time tracking software<br />	Paradigms drive practices<br />The wrong theory: Time worked equals valu...
The Subjective Theory of Value<br />A Tale of Two Theories<br />The Labor Theory of Value<br />
Value<br />created<br />Value<br />captured<br />Value creation and capture<br />Customer’s Gain<br />Price<br />Costs<br />
Service     Cost     Price     Value    Customer<br />Customer    Value     Price     Cost     Service<br />Value-Based Pr...
Seven Steps to Implementing Value Pricing<br />
Implementing Value Pricing<br />1. Conversation with customer <br />Not:<br />“What do you need?”<br />But rather:<br />“W...
Implementing Value Pricing<br />1. Conversation with customer <br />Listen > Talk<br />Opening: “Mr. Customer, we will onl...
Implementing Value Pricing<br />2. Form a Value Council and appoint a CVO <br />Role of the Value Council<br />Ensuring th...
Implementing Value Pricing<br />2. Form a Value Council and appoint a CVO <br />Role of the Value Council (continued)<br /...
AAAA PRICING PRACTICES SURVEY<br />CVO<br />CFO<br />=<br />Pricing<br />Costing<br />
How often do agencies track the following?<br />
Chief Compensation Officer<br />Neal Grossman<br />
	“We have as many compensation approaches as we do clients.”<br />Jeff Hicks, CEO<br />
	“All of our compensation agreements are experiments in value.”<br />Carl Johnson, Partner<br />
“We don’t believe we’re in the business of selling time.”<br />John Minty<br />Chief Value Officer<br />
Value Council<br />Ken Whyte, Glen Drummond, Bob Wilbur, Mandy Moote, Tony Mohr<br />
“At innovation consultancy Fahrenheit 212, we put up to two-thirds of our potential revenue at risk, subject to achieving ...
Implementing Value Pricing<br />3. Determine the optimal pricing method (fixed, results, usage)<br />Not:<br />“What do yo...
34 Sources of Client Value<br />
Intangible Value<br /><ul><li>Specialist expertise/knowledge
Unique social capital
Brand/reputation
Unique result––creativity & innovation
Reducing risk
Excellent experience
Relationship
What else?</li></li></ul><li>Equity<br />Outcome-based agreements<br />Royalties<br />Risk reserves<br />Ownership of inte...
Implementing Value Pricing<br />4. Develop Options<br />
Rational vs. Irrational<br />
Behavioral Economics<br />
Anchoring<br />
Options<br />Options factors to consider:<br /><ul><li>Timing
Scope
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Baker -- 4P Value Pricing

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  • This links back to our feeling of self-worth, our self-confidence.
  • No one wants to hear about the labour pains they just want to see the baby; they just want to see the returns. Justify price by giving reasons like cost of labour increases, but the client doesn’t care as long as value is there. Price is only an issue in the absence of value. In our clients’ case, that value is provided to their clients in between transactions.
  • It wasn’t until physicians became convinced of germ theory that they started finding ways to create sterile environments. First, they had to change their paradigm about what caused infections (until Joseph Lister came along in the 1870s, infections were thought to be caused by stale air); then they couldn’t help but change their practices (washing their hands, cleaning their instruments).
  • If you focus more on the outputs, your client will focus less on the inputs
  • Chiat/Day’s recently appointment of Neal Grossman as Chief Compensation Officer is designed to remedy this.
  • And a few progressive midsize firms like Canadian agency Quarry Communications have formalized responsibilities for compensation in a Value Council, composed of key members of the management team.
  • *I love the idea of a client compensation portfolio.* In a financial portfolio, you would never consider just one kind of investment.*Likewise, agencies have an opportunity to create a portfolio of different compensation agreements by approaching each new prospect as an opportunity to try something new and better.
  • *Because of the psychology of anchoring, the more you ask for the more you get.*This has been demonstrated in almost 50 years of experiments by behavioral psychologist, many of which are featured in the new book, Priceless.
  • *Have you ever noticed how at stores like Prada, the item featured in the main window is usually carries an extravagant price. *Among pricing professionals, this is called an anchor.*The anchor is foAnchoring Have you ever noticed how at stores like Prada, the item featured in the main window is usually carries an extravagant price. Among pricing professionals, this is called an anchor.The anchor is for sale, but it’s OK if no one buys it.Ron has a clip about The Economist by Dan Ariely to supportRelates to options and how we make choices r sale, but it’s OK if no one buys it.
  • Transcript of "Baker -- 4P Value Pricing"

    1. 1. Profit Starts with Pricing on Purpose<br />Ron Baker, Founder<br />VeraSage Institute<br />
    2. 2. “The single most important decision in evaluating a business is pricing power. 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 10 percent, then you’ve got a terrible business.”<br />- Warren Buffet<br />
    3. 3. Innovate for growth.<br />Price for Profit.<br />
    4. 4. The default purpose of marketing is not to increase sales.<br />It’s to increase profits.<br />
    5. 5. Profit is a marketer’s ultimate objective.<br />Profit is driven mostly by price.<br />Price is driven mostly by brand perception.<br />Brand perception is driven mostly by what agencies do for their clients.<br />The value of agencies<br />
    6. 6. Harvard Business Review<br />“If Brands Are Built Over Years, Why Are They Managed Over Quarters?” <br />By Leonard Lodish and Carl Mela<br />“Even campaigns that don’t do much <br />to boost sales can increase margins <br />by differentiating brands and thus allowing companies to raise prices.”<br />
    7. 7. What are your customers really buying?<br /> What are you really selling?<br />
    8. 8. “The customer never buys a product. By definition the customer buys the satisfaction of a want. He buys value.”<br />- Peter Drucker<br />
    9. 9.
    10. 10. The wrong practices: Time tracking software<br /> Paradigms drive practices<br />The wrong theory: Time worked equals value created<br />
    11. 11. The Subjective Theory of Value<br />A Tale of Two Theories<br />The Labor Theory of Value<br />
    12. 12. Value<br />created<br />Value<br />captured<br />Value creation and capture<br />Customer’s Gain<br />Price<br />Costs<br />
    13. 13. Service Cost Price Value Customer<br />Customer Value Price Cost Service<br />Value-Based Pricing<br />Cost-Plus Pricing<br />
    14. 14. Seven Steps to Implementing Value Pricing<br />
    15. 15. Implementing Value Pricing<br />1. Conversation with customer <br />Not:<br />“What do you need?”<br />But rather:<br />“What are you trying to accomplish?”<br />
    16. 16. Implementing Value Pricing<br />1. Conversation with customer <br />Listen > Talk<br />Opening: “Mr. Customer, we will only undertake this engagement if we can agree, to our mutual satisfaction, that the value we are creating is greater than the price we are charging you. Is that acceptable?”<br />
    17. 17. Implementing Value Pricing<br />2. Form a Value Council and appoint a CVO <br />Role of the Value Council<br />Ensuring that the agency prices on purpose.<br />Constructing and experimenting with various value-based compensation agreements. <br />Assuring continuous learning and teaching every team member the importance of pricing for value.<br />Dealing with price objections from clients. <br />
    18. 18. Implementing Value Pricing<br />2. Form a Value Council and appoint a CVO <br />Role of the Value Council (continued)<br />Keeping the agency focused on tracking client results instead of agency inputs.<br />Establishing client selection/deselection criteria. <br />Conducting “after action reviews” at the end of major assignments. <br />
    19. 19. AAAA PRICING PRACTICES SURVEY<br />CVO<br />CFO<br />=<br />Pricing<br />Costing<br />
    20. 20. How often do agencies track the following?<br />
    21. 21. Chief Compensation Officer<br />Neal Grossman<br />
    22. 22. “We have as many compensation approaches as we do clients.”<br />Jeff Hicks, CEO<br />
    23. 23. “All of our compensation agreements are experiments in value.”<br />Carl Johnson, Partner<br />
    24. 24. “We don’t believe we’re in the business of selling time.”<br />John Minty<br />Chief Value Officer<br />
    25. 25. Value Council<br />Ken Whyte, Glen Drummond, Bob Wilbur, Mandy Moote, Tony Mohr<br />
    26. 26. “At innovation consultancy Fahrenheit 212, we put up to two-thirds of our potential revenue at risk, subject to achieving agreed commercial milestones on a project.”<br />
    27. 27.
    28. 28. Implementing Value Pricing<br />3. Determine the optimal pricing method (fixed, results, usage)<br />Not:<br />“What do you need?”<br />But rather:<br />“What are you trying to accomplish?”<br />
    29. 29. 34 Sources of Client Value<br />
    30. 30. Intangible Value<br /><ul><li>Specialist expertise/knowledge
    31. 31. Unique social capital
    32. 32. Brand/reputation
    33. 33. Unique result––creativity & innovation
    34. 34. Reducing risk
    35. 35. Excellent experience
    36. 36. Relationship
    37. 37. What else?</li></li></ul><li>Equity<br />Outcome-based agreements<br />Royalties<br />Risk reserves<br />Ownership of intellectual property<br />Licensing<br />Usage fees<br />Fixed value price<br />
    38. 38. Implementing Value Pricing<br />4. Develop Options<br />
    39. 39. Rational vs. Irrational<br />
    40. 40. Behavioral Economics<br />
    41. 41.
    42. 42. Anchoring<br />
    43. 43. Options<br />Options factors to consider:<br /><ul><li>Timing
    44. 44. Scope
    45. 45. Number of deliverables
    46. 46. Degree of customization
    47. 47. Level of service or access
    48. 48. Data archiving
    49. 49. Payment terms</li></li></ul><li>Implementing Value Pricing<br />5. Effectively present your pricing<br />Presenting your pricing<br />Present your most expensive option first; this is your “anchor price.”<br />After stating your price(s), shut up.<br />Use the word “price” instead of “fee.”<br />Use the word “agreement” instead of “contract.”<br />Use the word “fair,” as in “Is this a fair price to you?”<br />Remember to negotiate value, not price.<br />Place a timeline on proposals; no price should last forever.<br />
    50. 50. Implementing Value Pricing<br />6. Engage in superior scope management<br />
    51. 51. Implementing Value Pricing<br />6. Engage in superior scope management<br />Elements of an effective scope document<br />Scope statement<br />Objectives<br />Constraints<br />Project structure<br />Role definition<br />Assumptions<br />Deliverables<br />Functional requirements<br />Project change control<br />Approval process<br />
    52. 52. Implementing Value Pricing<br />7. Conduct an “After-Action Review”<br />After-Action Review Questions<br /><ul><li>How could we have enhanced our client’s perception of value?
    53. 53. What were the business results and performance against key metrics?
    54. 54. Did we have the right team on this assignment?
    55. 55. How high were the costs to serve?
    56. 56. Did we stay within time and budget parameters?
    57. 57. Could we have captured more value through higher price?
    58. 58. If we were doing this type of assignment again how would we do it?
    59. 59. What are the implications for the way we design and deliver our services?
    60. 60. What could we do better next time?</li></li></ul><li> Cycle of Change<br />HOPE<br />CONFIDENTCOMPETENCE <br />PERFORMANCE<br />Insight<br />TIME<br />
    61. 61. Pricing is an art and a skill, requiring…<br />Patience<br />Wisdom<br />
    62. 62. Thank You!<br />Versage website/blog<br />www.verasage.com<br />Ron@verasage.com<br />Twitter @ronaldbaker<br />Phone 707.769.0965<br />
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