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    Pricing workshop Pricing workshop Presentation Transcript

    • AFC Pricing Workshop
      Basics of pricing put into practice
      24 November 2010
      Check our website: http://www.thehouseofmarketing.be
      Follow us on Twitter. LinkedIn or Facebook
    • 2
      Agenda
      18h00-18h15 Intro
      18h15-19h15 Basics of pricing
      19h15-20h00Continental Courier Case
    • AFC and The House of Marketing: a win-win partnership
      3
      Marketing expertise and support to AFC customer projects
      Workshops to AFC members
    • The House of Marketing: a strong concept fueling continuous growth
      Concept
      Bridging
      the Knowing-
      Doing gap
      • Founded in 1994 and growing
      • Privately owned, Belgium based company
      • 50+ marketing consultants / experts
      • Pool of experienced freelancers
      History & Size
      • 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
      Geography & Nationality
      4
    • Located in Mechelen
      5
    • Marketing expertise delivered in both strategic and operational areas
      I. Strategic Marketing
      • Market Intelligence & assessment
      • Segmentation
      • Branding & Positioning
      • Business & Marketing Planning
      • Innovation
      • Sustainability
      II. Go-to-Market
      • Pricing
      • Product/ Brand/ Category/Services Management
      • Communication
      • Online marketing
      • Sales & Channel Management
      • Customer Relationship Management
      • Customer Experience
      III. Organization capabilities
      • Customer Process Management
      • Organizational design & Change Management
      • Marketing Audit
      • Marketing Coaching & Training
      • Employer Branding
      IV. Performance Management
      • Marketing Audit
      • Marketing Dashboards & KPI’s
      • Customer Lifetime Value & Return on Marketing Investments (ROMI)
      6
    • Clients across many different sectors
      ICT & Media
      Utilities & Resources
      Financial & Other Services
      Consumer Goods & Retail
      Healthcare & Public Sector
      Transport & Logistics
      7
    • 8
      Agenda
      18h00-18h15 Intro
      18h15-19h15 Basics of pricing
      19h15-20h00Continental Courier Case
    • Who am I?
      Name: Maarten Bosschem
      Working @ THoM since 2007
      Education:
      Commercial engineering
      Master 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.…
      9
    • 10
      Pricing in The News
      Increasing price
      InBev & AlkenMaes increase beer prices*
      23/08/2010, De Tijd
      NMBS increases tariffs*
      16/08/2010, deredactie.be
      $
      Lowering price
      or price image
      Delhaize decreased prices of 1000 products
      01/04/2010, De Tijd
      Danone launches discount range of yoghurt
      12/09/2008, Le Figaro
      $
      Cutting Costs
      Solvay keeps on cutting costs in 2010
      18/02/2010, De Standaard
      VW stops its production for a week
      23/02/2009, De Tijd
      * Note: Common reasons given are increased costs of raw materials and other resources., reduced sales and high inflation
    • Pricing is a huge lever to increase profit
      11
      Profit + 13%
      Improve Price by 5%
      Profit increase
      Profit + 50%
      Total Revenue = 100
      Fixed Cost
      = 65
      Profit
      = 10
      Variable
      Cost
      = 25
      Reduce Variable Costs by 5%
      Improved price realization of 5% generates
      50% profit improvement*
      * Note: Assuming Average Fortune 500 Company
      • 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
      Source: THOM Pricing Survey 2009 – preliminary results of 700 participants
      12
    • 13
      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
      Failure to drive and sustain value differential
      4
      Not effectively communicating value to change customer’s perceptions
      5
      From our experience, companies face many barriers to achieving higher price realization
      Target price
      Price realized
      Value based pricing is about addressing these
      gaps to increase profitability
    • 1
      Organizational misalignment around pricingDiffering, and at times conflicting goals, relating to pricing within same company can limit the effectiveness of pricing strategies
      “Get me both higher market share and profit . . . now”
      President
      Marketing
      Finance
      R&D
      Sales
      BU General Manager
      Operations
      “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
      14
    • Outliers
      Acceptable
      line
      Outliers
      2
      Price execution gaps: Unwarranted variance across pricingSophisticated customers use your discounting policies to gain unwarranted discounts
      Results
      50%
      45%
      40%
      35%
      30%
      Actual discount
      25%
      20%
      15%
      10%
      5%
      €0
      €100.000
      €200.000
      €300.000
      €400.000
      €500.000
      €600.000
      €700.000
      €800.000
      €1.000.000
      €900.000
      Sales revenues
      15
    • 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
      2
      Price execution gaps: Unwarranted variance across pricing Companies can decrease these gaps by managing pricing proactively
      Reactive, exception-based price management, drives prices down
      Example:
      • End-of-quarter discounts
      • Meeting competition
      16
    • 3
      Offer is not aligned to different segments, value requirements or desired customer behaviors
      ….leaves money on the table for these customers and communicates that value does not have to be paid for…
      2
      High
      1
      Setting price here
      Received Value
      A
      B
      C
      D
      Low
      Segment Size
      ….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
      17
      17
    • Example Carbon Black Producer
      4
      Failure to sustain and drive differential value
      Sustain differential advantage
      Drive differential advantage
      Traditional way
      Value-based way
      Less Freight
      €0.03
      Product
      Product
      Less Defective
      €0.08
      Cost
      Cost
      Positive
      differentiation
      Less WIP Scrap
      €0.07
      Price
      Price
      Fewer
      Material Rejection
      €0.05
      Value
      Value
      Customers
      Customers
      Reference
      Value
      € 0.85 / kg
      Next best
      competitive
      Alternative
      internal
      mixing costs
      Change approach for new product
      development to ensure delivered value
      e.g. IKEA
      Innovations sustain and expand differential value
      18
    • Example
      Carbon black particles
      Better product dispersability creates more complete mixing that...
      Our cleaner product creates output reliability which...
      … allows you to target supply – sensitive segments. generating improved revenue of
      … reduces total raw materials used. decreasing input cost by
      € 0.06 / kg
      € 0.10 / kg
      Example Carbon Black Producer
      5
      Not effectively communicating value to change customer’s perceptions
      Concept
      Product Focus
      “What do we offer?”
      Features
      Features
      Application Focus
      “Why should the
      customer care?”
      Benefits
      Benefits
      Revenue
      Drivers
      Cost
      Drivers
      Customer Focus
      “What is that worth?”
      € Value
      Better articulating value helps to change price perceptions and justifying price points
      19
    • A classic example of value selling…
      5
    • Three elements need to be considered to pricing
      21
      Determine value needs, perceptions and price sensitivities of customers or segment
      Understand cost to serve and how these change over time
      Costs
      Customers
      Competition
      Identify how your offer compares to competition and develop
      competitive scenarios
    • Determine contribution margin
      1
      Identify incremental costs
      2
      3
      Identify volume/price trade-offs
      Evaluate the market context to understand profit implications
      4
      Cost
      Cust
      Costing: deciding on the most profitable activities
      Comp
      22
    • Contribution margin: variable & fixed costs
      1
      Cost
      Cust
      Comp
      Company XYZ:
      Price
      Ex. € 10
      Total Contribution
      =3.000
      (Per Unit = € 3)
      .......................................
      Unit
      variable cost
      Ex. € 7
      Fixed
      Costs
      Ex. 1.500
      Contribution
      Margin
      = 3.000/10.000
      = 30%
      Profits
      = 1.500
      Unit Sales
      Ex. 1.000
      Total Contribution = Sales revenue – Total Variable Cost
      Contribution Margin (%) = Total Contribution / Sales Revenue
      23
    • Cost
      Cust
      2
      Identifying The Incremental Costs
      Comp
      Incremental costs: Cost of production for one additional unit
      Variable cost: Cost of last produced unit NOTaverage variable cost
      Fixed costs: Most seen as incrementalBUT be careful of step changes…
      Opportunity costs: The contribution foregone when an asset is used for one purpose instead of another
      24
    • Full cost
      € 9,3
      € 6.9
      € 0.93
      € 0.47
      € 8.3
      € 1.0
      Cost
      Cust
      2
      Identify relevant costs for pricing decision:
      Comp
      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….
      Total Euros
      Euros per unit
      Units
      1,000
      = 1,500
      + 500
      1,000
      +500 (Incremental)
      Revenues
      € 10,000
      € 4,000
      € 10
      € 14,000
      Revenues
      € 10,000
      € 8
      Costs
      Costs
      • Direct Var. Costs
      € 7,000
      € 10,350
      € 3,350
      € 7
      € 6.7
      • Direct Fixed Costs
      € 1,000
      € 1,400
      € 400
      € 1
      € 0.8
      - General & admin costs
      € 500
      € 700
      € 200
      € 0.5
      € 0.4
      Total
      Costs
      € 8,500
      € 12,450
      € 8.5
      € 7.9
      Profits
      € 1,500
      € 1,550
      € 1.5
      € 0.1
      25
    • Identify volume/price trade-offs: Breakeven analysis
      - (-10)
      %BE =
      (30+(-10))
      = 50%
      -Δ Price
      %BE =
      (CM +Δ Price)
      Cost
      Cust
      3
      Comp
      Unit Breakeven Sales
      % Breakeven sales change
      Price
      Ex. 10
      Total Contribution
      Per Unit = 3
      .........................
      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?
      Unit variable cost
      Ex. 7
      Fixed
      Costs
      Ex. 1.500
      Break-Even
      Unit Sales
      = 1000
      Break-Even Sales = Fixed Costs / Total Contribution per unit
      26
    • 4
      Cost
      Cust
      Strategic guidelines when facing different cost types
      Comp
      Cost Type
      Cost Type
      Strategic Objective
      High Variable costs
      High Fixed Costs
      Opportunity Costs
      Drive Price
      Drive Volume
      Capacity Optimization
      Low Contribution Margin
      High Contribution Margin Contribution Margin foregone
      Example:
      Wholesale distribution
      Office supplies, Technology distribution
      Example
      Chemical plant, Pulp and paper. …
    • Price competition can be a very dangerous game Think before you step into prices wars…
      Cost
      Cust
      Comp
      Sports Competition
      Price Competition
      • The more intense, the better
      • The more intense, the worse
      • Play as hard as you can
      • Weigh the cost of each confrontation
      • Goal is to win, regardless of the cost
      • Goal is to profit, considering all costs
    • Cost
      Cust
      The value received and thus the willingness to pay is not the same across all customers
      Comp
      high
      Missed
      Opportunities
      medium
      Price relative to Value
      Price Paid
      Unharvested
      Value
      One size fits all
      low
      low
      medium
      high
      Value Received
    • Cost
      Cust
      Offer is not aligned to different segments, value requirements or desired customer behaviors
      Comp
      ….leaves money on the table for these customers and communicates that value does not have to be paid for…
      2
      High
      1
      Setting price here
      Received Value
      A
      B
      C
      D
      Low
      Segment Size
      ….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
      30
      30
    • Cost
      Cust
      Tiered offerings are creating fencesdemonstrating value and increasing profits
      Comp
      Dell – Consumer Choices
      Duracell
      Marriott – Consumer choices
      BMW - series
    • Cost
      Cust
      Reinforce & communicate the value you provide in the market
      Comp
      Goal: Frame the reference
    • Evaluating the 3 C’s as a first step towards strategic pricing
      33
      Costs
      Customers
      Competition
      Step 1:
      Determine contribution margin
      Step 2:
      Identify incremental costs
      Incremental costs = Cost of production for one additional unit
      Variable cost of last produced unit
      NOT average variable cost
      Most fixed costs are incremental
      BUT 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
      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
      high
      Missed
      Opportunities
      Price = Value
      Price Paid
      medium
      Unharvested
      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
      low
      low
      medium
      high
      Value Received
    • 34
      Agenda
      18h00-18h15 Intro
      18h15-19h15 Basics of pricing
      19h15-20h00Continental Courier Case
    • Common opportunity areas we see that can result in enhanced price realization
      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
      35
    • 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
      Are there types of customers which are more/less profitable than others?
      Are there account managers with lower or higher margins?
      What does price band analysis tell us?
    • Solutions case
      Some customer types seem to be more profitable than others. All account managers set on average higher prices than expected (negative avg discount)
      Are there types of customers which are more/less profitable than others?
      2. Are there account managers with lower or higher margins?
    • Step by step how to price band
      1
      Plotting
      discounts
      over volume
      • Select discount and volume columns
      • Click: insert – scatter plot
      • Look at the created graph
      2
      • 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.
      Analyzing found
      results
      Price banding can help identify customers with a too high or too low discount
    • Very small positive correlation shows too many unwarranted price variances
      3. What does price band analysis tell us?
      • 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
    • Looking for price misalignments relative to cost or value delivered
      What to do?
      1) Reduce Price
      2) Provide More Value
      3) Evaluate why these customers are willing to pay more
      H
      Missed Profit
      Opportunities
      PRICE
      Price = Value
      What to do?
      Communicate Value Better
      Increase Price
      Remove Some value
      Unharvested
      Value
      L
      VALUE
      L
      H
      • Unharvested Value Accounts: 160
      • Missed Profit Opportunity Accounts: 299
      = A Customer Account
      40
    • (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
      Pocket Price
      • The List Price net of all known adjustments (discounts etc)
      • The actual revenues realized
      Price (Euros)
      41
    • Waterfall analysis is usually based on data and input from interviews
      Interviews
      Check correlation volume - discount
      • Salespeople
      • Customers
      • Order size discount?
      • Competitive discount?
      • Payment term bonuses
      • Yearly bonuses
      • Promo’s
      Check correlation discount - country
      Identify possible leakages
      Correlation discount - salesperson
      Interviews for yearly rebates. promo’s.
      payment term discounts. etc.
      Data analysis
      Difference between list price and pocket price can sometimes
      even be so big that costs are no longer covered
    • 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.
    • Your personal point of contact
      Pricing:Maarten Bosschem
      Mobile: +32 (0)15 444 015
      E-Mail: maarten.bosschem@thom.eu
      Other:Pieter Lievyns
      Mobile: +32 (0)15 444 045
      E-Mail: pieter.lievyns@thom.eu
      The House of Marketing
      KardinaalMercierplein. 2
      B-2800 Mechelen
      Belgium
      Office +32 (0)15 444 000
      Fax +32 (0)15 444 044
      www.thehouseofmarketing.be
      Join us on LinkedIn
      Follow us on Twitter
      44