commercial strategy 4 ®strategy pricing negotiating Pricing Strategies Andrew Bailey                               copyrig...
commercial strategy 4 ®strategy pricing negotiating “Price is an extremely effective profit driver. Price can generate hug...
commercial strategy 4 ®strategy pricing negotiating Agenda Why you should take Pricing seriously Some insights and myths D...
commercial strategy 4 ®strategy pricing negotiating Agenda Why you should take Pricing seriously Some insights and myths D...
commercial strategy 4 ®strategy pricing negotiating       – THE most powerful Profit lever       – Perception and influenc...
commercial strategy 4 ®strategy pricing negotiating Profit                    Increase in                                 ...
commercial strategy 4 ®strategy pricing negotiating Pricing is the most DANGEROUS profit destroyer Profit                 ...
commercial strategy 4 ®strategy pricing negotiating Perception & influence       Perception       Power       Value       ...
commercial strategy 4 ®strategy pricing negotiating Communication       Expectation       Signals to the market       Prod...
commercial strategy 4 ®strategy pricing negotiating Agenda Why you should take Pricing seriously Some insights and myths D...
commercial strategy 4 ®strategy pricing negotiating Pricing Myths •Raising prices loses customers •Customers are only inte...
commercial strategy 4 ®strategy pricing negotiating Issues companies have with Pricing ….        – 65% of companies are no...
commercial strategy 4 ®strategy pricing negotiating The benefits of a structured, disciplined pricing strategy Customers  ...
commercial strategy 4 ®strategy pricing negotiating The benefits of a structured and well disciplined pricing strategy Cus...
commercial strategy 4 ®strategy pricing negotiating Agenda Why you should take Pricing seriously Some insights and myths D...
commercial strategy 4 ® strategy pricing negotiatingPricing Strategy Development                    Pricing Strategy & Exe...
commercial strategy 4 ®    strategy pricing negotiating      Strategic Issues        Strategy & Goals are crucial inputs t...
commercial strategy 4 ®     strategy pricing negotiating       Strategic Issues         Depending on your position in the ...
commercial strategy 4 ®strategy pricing negotiating Agenda Why you should take Pricing seriously Some insights and myths D...
commercial strategy 4 ®strategy pricing negotiating What do we mean by Price?                                             ...
commercial strategy 4 ®strategy pricing negotiating What do we mean by Price?                                             ...
commercial strategy 4 ®strategy pricing negotiating Agenda Why you should take Pricing seriously Some insights and myths D...
commercial strategy 4 ®strategy pricing negotiating Cost Based Pricing       – Pricing relates to the internal costs of th...
commercial strategy 4 ®strategy pricing negotiating Cost Plus Pricing                                                     ...
commercial strategy 4 ®strategy pricing negotiating Market/Competition Driven Pricing Definition: Competition Driven Prici...
commercial strategy 4 ®strategy pricing negotiating Market/Competition Driven Pricing                                     ...
commercial strategy 4 ®strategy pricing negotiating Competition Driven Pricing Assumptions (wrong) Products are difficult...
commercial strategy 4 ®strategy pricing negotiating Value Based Pricing       – Based on the price that customers are will...
commercial strategy 4 ®strategy pricing negotiating Value Based Pricing                                Customer value is t...
commercial strategy 4 ®strategy pricing negotiating Insight • No relationship between Production Costs and Willingness to ...
commercial strategy 4 ®strategy pricing negotiating                                                     Value             ...
commercial strategy 4 ®strategy pricing negotiating Agenda Why you should take Pricing seriously Some insights and myths D...
commercial strategy 4 ®strategy pricing negotiating Structuring your Pricing Bundled pricing       • Getting value from cu...
commercial strategy 4 ®strategy pricing negotiating Value Mapping – Price & Value                                         ...
commercial strategy 4 ®  strategy pricing negotiating        Product and Price Differentiation        Products/services c...
commercial strategy 4 ®strategy pricing negotiating Agenda Why you should take Pricing seriously Some insights and myths D...
commercial strategy 4 ®strategy pricing negotiating Case Study 1                  Established business – new product Objec...
commercial strategy 4 ®     strategy pricing negotiating        High     Competitive         Alarm             Reliability...
commercial strategy 4 ®strategy pricing negotiating Case Study 2                   Start up technology business Objective ...
commercial strategy 4 ®strategy pricing negotiating  Value CreationAfter                                                  ...
commercial strategy 4 ®strategy pricing negotiating Case Study 3                   Service business – new product Objectiv...
commercial strategy 4 ®strategy pricing negotiating Case Study 4                   Business to Business Objective         ...
commercial strategy 4 ®strategy pricing negotiating                                                    Product sector     ...
commercial strategy 4 ®strategy pricing negotiating Case Study 5                   Consumer Goods Objective          Grow ...
commercial strategy 4 ®strategy pricing negotiating Questions?                               copyright Commercial Strategy...
commercial strategy 4 ®strategy pricing negotiating Closing remarks                               copyright Commercial Str...
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Andrew Bailey - WBS Entrepreneurship Mentoring Programme - Final Workshop

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Pricing strategies: Are you
pricing yourself into or out of the market?

Andrew Bailey, Director, Negotiating Mentor

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Andrew Bailey - WBS Entrepreneurship Mentoring Programme - Final Workshop

  1. 1. commercial strategy 4 ®strategy pricing negotiating Pricing Strategies Andrew Bailey copyright Commercial Strategy and Business Support Ltd 2012
  2. 2. commercial strategy 4 ®strategy pricing negotiating “Price is an extremely effective profit driver. Price can generate huge profits or destroy margins”. (Simon Kucher & Partners 2009) copyright Commercial Strategy and Business Support Ltd 2012
  3. 3. commercial strategy 4 ®strategy pricing negotiating Agenda Why you should take Pricing seriously Some insights and myths Developing your Pricing approach  Process  Define your Pricing  Pricing methods  Practical steps you can take  Case studies copyright Commercial Strategy and Business Support Ltd 2012
  4. 4. commercial strategy 4 ®strategy pricing negotiating Agenda Why you should take Pricing seriously Some insights and myths Developing your Pricing approach  Process  Define your Pricing  Pricing methods  Practical steps you can take  Case studies copyright Commercial Strategy and Business Support Ltd 2012
  5. 5. commercial strategy 4 ®strategy pricing negotiating – THE most powerful Profit lever – Perception and influence – Communication – The impact of Pricing decisions IS huge copyright Commercial Strategy and Business Support Ltd 2012
  6. 6. commercial strategy 4 ®strategy pricing negotiating Profit Increase in Profit Driver performance (£M) Achieving a 10% improvement, Current of profit New New measure driver delivers an increase measure in profits of …. Price £100 10% £110 £20m 100% Price Sales 1m 10% 1.1m £16m 60% Volume 50% 40% Volume Fixed costs Fixed £50m 10% £45m £15m Variable costs costs Variable £40m 10% £36m £14m unit costs copyright Commercial Strategy and Business Support Ltd 2012
  7. 7. commercial strategy 4 ®strategy pricing negotiating Pricing is the most DANGEROUS profit destroyer Profit Increase in Profit A 5% deterioration in Driver performance (£M) Pricing or Sales reduces profit by …. Current of profit New New measure driver measure -30% -50% Price £100 -5% £95 £5m Sales Price Sales 1m -5% 0.95m £7m Volume Fixed £50m £50m costs Variable £40m £40M unit costs With a 10% price decrease, to achieve a 50% gross margin, sales volume would have to increase by 25%
  8. 8. commercial strategy 4 ®strategy pricing negotiating Perception & influence Perception Power Value Control copyright Commercial Strategy and Business Support Ltd 2012
  9. 9. commercial strategy 4 ®strategy pricing negotiating Communication Expectation Signals to the market Product and service management Competitive intelligence copyright Commercial Strategy and Business Support Ltd 2012
  10. 10. commercial strategy 4 ®strategy pricing negotiating Agenda Why you should take Pricing seriously Some insights and myths Developing your Pricing approach  Process  Define your Pricing  Pricing methods  Practical steps you can take  Case studies copyright Commercial Strategy and Business Support Ltd 2012
  11. 11. commercial strategy 4 ®strategy pricing negotiating Pricing Myths •Raising prices loses customers •Customers are only interested in price •Price elasticity is necessary for price optimisation •Pricing is a big event to set and manage •This customer is different •Discounts are bad •There exists an optimal price number •Better to be safe than sorry •You need complex systems/lots of data to manage pricing •Marketing set prices, sales execute them, finance control them •Once you set the price, job done copyright Commercial Strategy and Business Support Ltd 2012
  12. 12. commercial strategy 4 ®strategy pricing negotiating Issues companies have with Pricing …. – 65% of companies are not able to charge the prices they deserve. • Low pricing cuts profit by 25%. – 46% of companies think they are in a price war. • 83% blame competitors for starting it. – Companies only get 50% of what they expect when they raise prices. • 30% achieve 75% of a planned increase. – Better the pricing „know how‟, higher the pricing power and the higher the profits. • Focus ion profit not market share. • Invest in expertise. • Improve execution. Source: Simon Kucher & Partners study published in the Professional Pricing Society Journal Jan 2012. copyright Commercial Strategy and Business Support Ltd 2012
  13. 13. commercial strategy 4 ®strategy pricing negotiating The benefits of a structured, disciplined pricing strategy Customers  Product/Brands/Service  People  Revenue  copyright Commercial Strategy and Business Support Ltd 2012
  14. 14. commercial strategy 4 ®strategy pricing negotiating The benefits of a structured and well disciplined pricing strategy Customers  •More motivational for customers to access greater value through transparent structure •Promotes collaboration and information sharing •Rewards growth activity  Product/Brands/Service •Ensures Investment is aligned to Brand Strategy/objectives and to execution •Improves trade spend efficiency People  •Provides clarity, consistency, focus & guidance in a complex area •Enables building capability •Confidence & structure to negotiations •Commercial skills Revenue •Optimal Pricing across the market place and channels •Aligned and consistent promotional pricing  •Increase in promotional sales through better execution •More efficient conditional discounts •More efficient and effective Trade Funds management •More efficient supply chain •Reduced invoice queries •Improved operational cash flow through reduced overdue debt
  15. 15. commercial strategy 4 ®strategy pricing negotiating Agenda Why you should take Pricing seriously Some insights and myths Developing your Pricing approach  Process  Define your Pricing  Pricing methods  Practical steps you can take  Case studies copyright Commercial Strategy and Business Support Ltd 2012
  16. 16. commercial strategy 4 ® strategy pricing negotiatingPricing Strategy Development Pricing Strategy & Execution Process Price Price Enablers – Price PriceStrategy Organisational Implementation Performance Capability (execution) Measurement (enforcement) Strategy Controlling •Objectives Infrastructure Execution •Trends •Approach Organisation •IT Price •Discounts •Performance •Competition and People •Processes Decision •Incentives indicators •Value •People •Systems •Architecture •Deals •Time series •Structure •Culture •Tools •Price Levels •Negotiation analysis •Optimisation •Structure •Framework •Negotiation •Roles •Profit •Segmentation •Accountability performance •Differentiation •Elasticity Copyright Commercial Strategy and Business Support Ltd 2012
  17. 17. commercial strategy 4 ® strategy pricing negotiating Strategic Issues Strategy & Goals are crucial inputs to developing Pricing Strategy High Use Business Goals as input to the process Trade off – ‘Dream Position’ Which customers Depending on Goals there are different Pricing strategies to prepared not to do adopt business with Recognised a Trade-off betweenProfitability Profit and Volume Growth Dream Position can be achieved, Trade off – however not by Pricing alone ? Volume growth at the expense of Pricing has to be part of the Profit overall Business strategy and integral and aligned to it Low Low Volume Growth High copyright Commercial Strategy and Business Support Ltd 2012
  18. 18. commercial strategy 4 ® strategy pricing negotiating Strategic Issues Depending on your position in the market you will have a different set of products/service goals and therefore Pricing Strategies Decrease Price Attack Follower/ Invader Introductory Pricing Pricing Differentiation PriceDifferentiation Value Pricing Market Market Position Leader/ Competing Strategies Defender Increase Increase Price/Value strength Decrease copyright Commercial Strategy and Business Support Ltd 2012
  19. 19. commercial strategy 4 ®strategy pricing negotiating Agenda Why you should take Pricing seriously Some insights and myths Developing your Pricing approach  Process  Define your Pricing  Pricing methods  Practical steps you can take  Case studies copyright Commercial Strategy and Business Support Ltd 2012
  20. 20. commercial strategy 4 ®strategy pricing negotiating What do we mean by Price?  Pricing & Investment covers all these areas and should be considered holistically.  The pocket price waterfall shows the true profitability of customers  Individually, each item in the pocket price waterfall may be small, but together they have a significant impact on profitability List Invoice Pocket price/ price price Gross Price copyright Commercial Strategy and Business Support Ltd 2012
  21. 21. commercial strategy 4 ®strategy pricing negotiating What do we mean by Price?  Basic price attracts customers  Customers can choose what they want to pay Business strategy based on overall revenue generation Basic Pocket price price copyright Commercial Strategy and Business Support Ltd 2012
  22. 22. commercial strategy 4 ®strategy pricing negotiating Agenda Why you should take Pricing seriously Some insights and myths Developing your Pricing approach  Process  Define your Pricing  Pricing methods  Practical steps you can take  Case studies copyright Commercial Strategy and Business Support Ltd 2012
  23. 23. commercial strategy 4 ®strategy pricing negotiating Cost Based Pricing – Pricing relates to the internal costs of the business – It is easy to do, assuming you know the true costs of doing business – Is better for businesses that deal with large volumes, lower margins or operate in markets dominated by price – Does not take account of what the customer actually values in the product or service – Can be less competitive if your costs are not competitive copyright Commercial Strategy and Business Support Ltd 2012
  24. 24. commercial strategy 4 ®strategy pricing negotiating Cost Plus Pricing Dependent on accuracy of cost measurement Improvements in cost are passed through to the customers Competitor improvement in costs Std Profit margin impacts your competitive position Variable costs Cost + price may be lower than R&D, Fixed costs Value delivered to customers and willingness to pay copyright Commercial Strategy and Business Support Ltd 2012
  25. 25. commercial strategy 4 ®strategy pricing negotiating Market/Competition Driven Pricing Definition: Competition Driven Pricing is where Pricing decisions are influenced primarily by observed or anticipated actions of actual or potentials competitors Motivated by: A fear of being unable to sell if prices are not aligned with competitor price levels Objective of maintaining/increasing market share or sales copyright Commercial Strategy and Business Support Ltd 2012
  26. 26. commercial strategy 4 ®strategy pricing negotiating Market/Competition Driven Pricing  Taking competitor Pricing as the Standard.  Product could be perceived as being expensive against the competition. You need to know about the competition and the value you Price Comp A Comp B Comp C Comp D create compared to them. copyright Commercial Strategy and Business Support Ltd 2012
  27. 27. commercial strategy 4 ®strategy pricing negotiating Competition Driven Pricing Assumptions (wrong) Products are difficult to differentiate High volume = High Mkt Share = High Profits Price is THE most important purchase criteria Risk Price wars, undifferentiated products Customer needs neglected Reactive approach Chasing unprofitable volume
  28. 28. commercial strategy 4 ®strategy pricing negotiating Value Based Pricing – Based on the price that customers are willing to pay and the benefits the business and product offers them – Therefore you need to know – Benefits – Value – Buying decisions – You need to consider – The strength of the benefits – Competitive products, price, offering, points of difference – Customer perception
  29. 29. commercial strategy 4 ®strategy pricing negotiating Value Based Pricing Customer value is the price of the best alternative (reference value) +/- the value of whatever differentiates the offering from the alternative (differentiation value) The Higher the VALUE the greater the Willingness to Pay Differentiation Value Reference Total Customer Value Value
  30. 30. commercial strategy 4 ®strategy pricing negotiating Insight • No relationship between Production Costs and Willingness to Pay. • Cost Based Pricing can leave value on the table. • Competition/Market Based Pricing is based on assumptions and can be considered high risk. • Product Value allows Pricing to be higher (than the competition) and still gain high sales and market share. • Customers regard Product Attributes and Product Service as more important than Price. copyright Commercial Strategy and Business Support Ltd 2012
  31. 31. commercial strategy 4 ®strategy pricing negotiating Value Based Market Based Cost Plus copyright Commercial Strategy and Business Support Ltd 2012
  32. 32. commercial strategy 4 ®strategy pricing negotiating Agenda Why you should take Pricing seriously Some insights and myths Developing your Pricing approach  Process  Define your Pricing  Pricing methods  Practical steps you can take  Case studies copyright Commercial Strategy and Business Support Ltd 2012
  33. 33. commercial strategy 4 ®strategy pricing negotiating Structuring your Pricing Bundled pricing • Getting value from customers for products they have a lower willingness to pay for by bundling them with other product you know a customer wants e.g. McDonalds Reward customer behaviour • Behaviour that adds value to your business • Only pay for the behaviours that matter e.g. Consumer Goods Menu Pricing • Give customers options e.g. Cars, Insurance, subscriptions Discounting • Incentivise customers to drive the business in the way that you want them to e.g. sales volumes Rebates • To reward loyalty or to encourage longevity Portfolio • Offering a range of products at different value and price levels. • Packages can be created that ensure overall deal value. copyright Commercial Strategy and Business Support Ltd 2010
  34. 34. commercial strategy 4 ®strategy pricing negotiating Value Mapping – Price & Value The Value Equivalence Lose Market Share as Customers Line illustrates where receive < Value for customers get exactly what the Price they pay they ay for. On this line the perceived Price benefits match the price they pay for them Gain Market Share as Customers receive > Vlaue for the Price they pay Perceived Value Simon Kucher & Partners 2009 copyright Commercial Strategy and Business Support Ltd 2012
  35. 35. commercial strategy 4 ® strategy pricing negotiating Product and Price Differentiation Products/services can be differentiated to appeal to different customer segments. Consider how segments differ in what drives value and what drives cost to serve. Create a Price structure that charges more when a sale creates more value for the buyer or higher cost to the seller. Stimulate greater usageSales Sales Profit Profit Skim value Price Price copyright Commercial Strategy and Business Support Ltd 2012
  36. 36. commercial strategy 4 ®strategy pricing negotiating Agenda Why you should take Pricing seriously Some insights and myths Developing your Pricing approach  Process  Define your Pricing  Pricing methods  Practical steps you can take  Case studies copyright Commercial Strategy and Business Support Ltd 2012
  37. 37. commercial strategy 4 ®strategy pricing negotiating Case Study 1 Established business – new product Objective Introduce product with superior performance and features and drive higher and ongoing revenue than competition. Issue Tracking technology product being introduced to established market. Solution Identify competitor products. Map where the product out performs current products. Understand customer „willingness to pay‟. Create strong Value Proposition. Results Three variants of the product; •Basic – comparable to most competitors. •Medium – enhanced functionality, higher pricing. •Full – complete functionality, higher spec. than all rivals. Equipment was the same for all variants. Basic/Medium included options to upgrade functionality. All variants included; •One off payment. •Ongoing revenue driver. •Subscription options for added value services.
  38. 38. commercial strategy 4 ® strategy pricing negotiating High Competitive Alarm Reliability Competitive Superior performance in Disadvantage functions Advantage the most important factors Reports Mapping to Pricing site (scale) Tracking visibility Acceptance of inferior Tracker design/usab performance in less ility important factors Data history RelativeImportance to Access to the customer multiple Internal and external view sites of the market ? Over Performing Markets where Price is Low less important are good Weaker Position vs. Competition Stronger places to be copyright Commercial Strategy and Business Support Ltd 2012
  39. 39. commercial strategy 4 ®strategy pricing negotiating Case Study 2 Start up technology business Objective Bring new product to market that delivers significant margin in the future and creates equity value. Issue Innovative technology in new area, some competition but unproven. Solution Develop pricing approach focused on the value the product brings to end users and hardware suppliers. Structured model that enables; •Initial cost recovery through one-off charge. •Ongoing revenue through yearly licence fee. •Per user charge on monthly basis. •Per application charge on monthly basis. •Additional revenue opportunities through support packages. Results Flexible pricing approach that allows revenue to be generated through a number of sources. Model can grow/contract with the user enabling them to manage costs. Contract basis allows business to project forward revenues. copyright Commercial Strategy and Business Support Ltd 2012
  40. 40. commercial strategy 4 ®strategy pricing negotiating Value CreationAfter Before How is the customer  Where do they have problemsrewarded for using our  How can we fill these gapsproduct  Do existing activates add What value do we create to sufficient valueensure repeat purchases After BeforeDuring Do our products help our Duringcustomers solve their problems What further activities can weprovide to add value Can we make our Customer valuemore things copyright Commercial Strategy and Business Support Ltd 2012
  41. 41. commercial strategy 4 ®strategy pricing negotiating Case Study 3 Service business – new product Objective Introduce new product to the public sector consulting market based on high value proposition. Issue Developing product offering and pricing approach that enables the companies to engage with the public sector to access services at an acceptable level, while at the same time generating revenue for the business. Solution Product offering with a range of attributes and price points. Service accessed virtually to enable high value – low cost – affordable pricing. Customers/Clients can move up/down product offerings depending on requirements and context. Results Price introduced successfully. Flexibility to evolve the service offering to cater for the requirements of public sector. copyright Commercial Strategy and Business Support Ltd 2012
  42. 42. commercial strategy 4 ®strategy pricing negotiating Case Study 4 Business to Business Objective To grow pricing and margins in line with financial requirements and brand positioning. Issue Continual pressure on pricing from customers/competitors. Low profitability from some customers. Lack of control over pricing. Risks of industry consolidation. Solution Identify and understand pricing architecture. Introduce pricing structure to link volume to price. Change customer pricing according to architecture. Implement sales processes and systems to ensure compliance. Improve sales skills and awareness of pricing issues. Results Improved overall margins delivered over period. Adverse customer reaction avoided through phased approach. Sales buy in achieved through re-aligned incentives. copyright Commercial Strategy and Business Support Ltd 2012
  43. 43. commercial strategy 4 ®strategy pricing negotiating Product sector 26.00 25.50 25.00 Net Price in £/t 24.50 24.00 23.50 23.00 22.50 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 Volume copyright Commercial Strategy and Business Support Ltd 2012
  44. 44. commercial strategy 4 ®strategy pricing negotiating Case Study 5 Consumer Goods Objective Grow pricing and margins and resist customer and competitor pressure. Issue Sales teams inability to withstand demands from customers to reduce prices and reacting weakly to competitor actions in the market. Solution Increase (recruit and train) capability in pricing knowledge and expertise. Identify the key issues for sales people. Improve value selling skills. Develop negotiating capability. Results Improved margin retention. Greater confidence in dealing with customers. Signals to competitors resulting in reduced levels of price competition. copyright Commercial Strategy and Business Support Ltd 2012
  45. 45. commercial strategy 4 ®strategy pricing negotiating Questions? copyright Commercial Strategy and Business Support Ltd 2012
  46. 46. commercial strategy 4 ®strategy pricing negotiating Closing remarks copyright Commercial Strategy and Business Support Ltd 2012
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