Francois Delvaux (THOM) on Pricing In Downturn

Pricing in times of economic crisis February 25th, 2009 Vlerick Alumni Event

Objective

Today’s environment

Common Pitfalls of Pricing

Proactive Pricing in Down Turn

Pricing in The News

InBev increases prices for third time this year *

07/01/2009, Het Laatste Nieuws

NMBS increases tariffs * 01/02/2009, De Standaard

Kinepolis: Compensé par une augmentation du prix moyen des tickets ... 21/02/2009, L’Echo

Increasing price Delhaize launches concept “low cost” store red market 21/01/2009, De Tijd Danone launches discount range of yoghurt 12/09/2008, Le Figaro Punch management will work four fifths 10/02/2009, De Standaard VW stops its production for a week 23/02/2009 * Note: Common reasons given are increased costs of raw materials and other resources, reduced sales and large inflation Lowering price or price image Cutting Costs $ $

THOM Pricing Survey: Pricing is top of mind & perceived as difficult to change in market

50% of marketeers 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

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

Source: THOM Pricing Survey 2009 – preliminary results of 700 participants

Objective

Common Pitfall: “Our price levels is the root cause of our problems… Price Level … and is, therefore, the only way to overcome it.”

Is this your company? PITFALLS LIKELY OUTCOMES Creating higher (or unrealistic) goals for the direct or indirect sales teams Defending prices by offering free value-added services Offering better price to customers who ask for a lower price

Higher pressure in market to gain or defend market share/volume

Increased risk of price wars

Reduces the perception of value of the company’s services

Lowers margins because of increased costs to serve

Rewards a customer’s aggressive price behavior

Encourages suppliers to compete against one another

1 2 3

Is this your company? Discounting a high-value offering to attract the price sensitive customers Systematic lowering of prices in market to boost sales volume Price levels based mainly on costs and adjusting price when cost changes

Decline in margins

Destruction of value in the market

Jeopardize current brand position

Encourage competitive activity

Possibly reducing margin pool

Risk future price setting efforts

Creates missed opportunities to align price to value

More price conscious customers

4 5 6 PITFALLS LIKELY OUTCOMES

Putting everything together, pricing’s success in reality depends on many elements … Reality: Pricing is only the tip of the iceberg, Price Level And many elements are part of pricing’s success Value Communication Price and Offer Structure Value Creation Pricing Policy Organizational Alignment + Sound Value & Price Management

Objective

Your Chess board… Price Paid Value Received high low low medium high medium Price relative to Value C Missed Opportunities B Unharvested Value A

Proactive pricing activities you can do in times of economic downturn

Reinforce the value you provide in the market

Prevent your value to become commoditized

1

Adapt offer to grow among different targets

Change aspects of cost or value to profitably serve target

2

Have good controls on discounts and incentives

Ensure when you flex done proactively & organization disciplined

3

Make choices on which customers to invest in

Wisely allocate your scare resources and have real “partners”

4

Prepare organization and make price adjustments

Enable organization to implement price changes in market

5

Symptoms

Organization does not understand the differential value it provides in market

Feature -> Benefit -> value

Sales does not have the ability (skills, tools, etc.) to explain differential value to customers

Not effectively communicating value to change customer’s perceptions

Pricing of new products not aligned with the differential value created

Reference Value € 0,85 / kg Next best competitive Alternative internal mixing costs Less Defective € 0,08 Less WIP Scrap € 0,07 Your positive differentiation Less Freight € 0,03 Fewer Material Rejection € 0,05 Goal: Sell on value not on price

1

Goal: Frame the reference

1

2 High Low Received Value Segment and Size A B C D Setting price here … leaves money on the table and communicates that value does not have to be paid for… 1 2 … .and misses volume growth opportunities by over pricing these customers out of the market 3

2

Goal:

Capitalize on segment differences

Create flexible offer - with different levels of value and price

Facilitate choices

Sell high value/high cost services a la carte

INDEPENDENT CHOICE ACTIVE CHOICE PROFESSIONAL CHOICE PRICING ORDERING FULFILLMENT HANDLING FEE FREIGHT PRE-SALES TECH SUPPORT POST SALES TECH SUPPORT FINANCING SALES SUPPORT Must order on - line Can use any method of ordering Can use any method of ordering Within two business days Within one business day Same day For orders less than € 1000 For orders less than € 500 For orders less than € 100 All freight expenses charged Free freight for orders more than € 2000* Free freight for orders more than € 1500* Not Included Requires minimum purchase of € 50k per quarter Requires minimum purchase of € 30k per quarter Not Included Not Included Requires minimum purchase of € 30k per quarter 10 - day net terms 30 - day net terms 30 day net terms Available for complex orders only Available for placement pricing, availability, and order verification Available for placement pricing, availability, and order verification Receive most aggressive pricing Receive aggressive pricing Receive less aggressive pricing

2

Goal:

Capitalize on segment differences

Create flexible offer - with different levels of value and price

Facilitate choices

Sell high value/high cost services a la carte

% Off list prices Volume Example of unwarranted variance

Symptoms

Silos and incentives in organization driving misalignment on pricing goals

High price variability leading to low Average Selling Prices (ASPs)

The number of “special” pricing deals higher than required

Price leakage larger than generally understood & from unexpected sources

A small % of transactions account for a significant share of price leakage

Discounting policies not reflecting all related costs

Goal: Address unwarranted variance and have proactive policies to drive desired behaviors

3

Goal: Manage your price waterfall

Identify “where” and “how much” money is being deducted from the list price

Linking quantified price “leaks” to specific points in the price management process

Pocket Price

The List Price net of all known adjustments (discounts etc)

The actual revenues realized

Price (Euros)

3

Make choices on which customers to invest in

Wisely allocate your scare resources and have real “partners”

4

Symptoms:

Winning a large share of complex, high cost-to-serve customers

True cost-to-serve & pricing not in line

Losing low cost-to-serve customers

Pricing decisions creating sub-optimal loading of capacity & use of resources

Price policies do not address high cost to serve behaviors

Not factoring in opportunity costs or impact of pricing decisions

Price Product Cost Service Costs Price levels & policies that discourages costly behaviors Price structure that aligns price with value & cost-to-serve cost Goal: Pricing, policies and structure that protects or discourages costly behaviors Goal: Manage behaviors Price

High VC: Low CM High FC: High CM Opportunity cost: CM foregone Drive Price Drive Volume Capacity Optimization Cost Type Strategic Objective

Goal:

Defining objectives and knowing sales break evens per pricing action

Understanding how your costs Change with changes in Sales

Having relevant checks and balances within organization

Evaluation of effectiveness of pricing actions

Symptoms:

Lack of pricing ownership and accountability in organization

Not understanding sales break even when change price

Not anticipating market responses

Not preparing ways customers can proactively adapt their behaviors to avoid price changes

Bad timing of raw material cost increase pass through

Prepare organization and make price adjustments

Enable organization to implement price changes in market

5

Take your own “pricing in downturn” diagnostic

Visit our web site to take part in survey

HTTP://WWW.THOM.EU

Complete 16 pricing in downturn quiz and see where price and margin realization opportunities exist

Leverage existing tools and THOM’s experiences

Share your learnings

THOM’s pricing practice and pricing team collaborates with companies to grow their top and bottom line and build value management capabilities

Helping the company make relevant strategic choices

Market assessments and finding growth opportunities

Segmentation and positioning strategy

Pricing opportunity assessment and design of pricing strategy

Employer branding strategy

I. Strategic Marketing II. Go-to-Market III. Organization capabilities

Building and activating the go-to-market strategies

Implementing go to market strategies across 4 Ps

Implement value based pricing & proactive price management

Customer experience and customer loyalty initiatives

Integrated marketing campaigns

Sales and marketing organization building

Organization and structure

Pricing and value management competencies development

Customer Process Management

Customer relationship management (CRM)

Senior coaching and change management

IV. Performance Management

Good execution of strategy and sound business decisions

Customer Life Time Value Management

Return on Marketing Investments or assets (ROMI/ROMA)

Performance metrics and marketing dashboards

How THoM Helps Companies Improve Profitability

Price opportunity assessments (POA):

Uncover drivers of missed price realization, potential price/value misalignments.

Identify quick wins & value capture growth opportunities. Provide business case and roadmap.

Diagnostic / find money Strategy Support Activate Strategy Enhance Capabilities

Policy: Develop proactive policies and actionable tactic to manage sources of price leakage and enhance price realization

Value understanding: Understanding and quantifying value created for customers and use these insights to launch a new product, evolve a current offer and tweak a price structure

Price menu for current or new products/ services: Develop or enhance customer offerings and price menu to more profitably serve and grow customers

Pilot and roll-out: Implementation of pricing strategy, pilots, coaching of market facing teams, ROI tracking

Account preparation: Work with sales teams to prepare for upcoming account renegotiations or major launches

Pricing process: Design and deploy price management processes, line of sight mechanisms

Program: Design and deploy capability programs to build internal price or value management capabilities

Train and codify: Coaching an organization about value based pricing principles (sales, product mgrs, marketing). Help organization deploy value-based price management skills (using tools, applied training, coaching, and change management)

Sample sectors we focus on when it comes to pricing and value management Logistics and distribution Financial Medical equipment Software and ICT