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Pricing workshop

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  • 1. 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. 2
    Agenda
    18h00-18h15 Intro
    18h15-19h15 Basics of pricing
    19h15-20h00Continental Courier Case
  • 3. AFC and The House of Marketing: a win-win partnership
    3
    Marketing expertise and support to AFC customer projects
    Workshops to AFC members
  • 4. The House of Marketing: a strong concept fueling continuous growth
    Concept
    Bridging
    the Knowing-
    Doing gap
    • Founded in 1994 and growing
    • 5. Privately owned, Belgium based company
    • 6. 50+ marketing consultants / experts
    • 7. Pool of experienced freelancers
    History & Size
    • Serving clients based in Europe, Middle East and Africa
    • 8. 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
  • 9. Located in Mechelen
    5
  • 10. Marketing expertise delivered in both strategic and operational areas
    I. Strategic Marketing
    • Market Intelligence & assessment
    • 11. Segmentation
    • 12. Branding & Positioning
    • 13. Business & Marketing Planning
    • 14. Innovation
    • 15. Sustainability
    II. Go-to-Market
    • Pricing
    • 16. Product/ Brand/ Category/Services Management
    • 17. Communication
    • 18. Online marketing
    • 19. Sales & Channel Management
    • 20. Customer Relationship Management
    • 21. Customer Experience
    III. Organization capabilities
    • Customer Process Management
    • 22. Organizational design & Change Management
    • 23. Marketing Audit
    • 24. Marketing Coaching & Training
    • 25. Employer Branding
    IV. Performance Management
    • Marketing Audit
    • 26. Marketing Dashboards & KPI’s
    • 27. Customer Lifetime Value & Return on Marketing Investments (ROMI)
    6
  • 28. Clients across many different sectors
    ICT & Media
    Utilities & Resources
    Financial & Other Services
    Consumer Goods & Retail
    Healthcare & Public Sector
    Transport & Logistics
    7
  • 29. 8
    Agenda
    18h00-18h15 Intro
    18h15-19h15 Basics of pricing
    19h15-20h00Continental Courier Case
  • 30. 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
    • 31. Assisted Electrabel with their websites, pricing & channels
    • 32. Analyzed and installed new pricing levels @ The House of Marketing
    • 33. Designed and integrated new websites for Zoo Antwerp
    • 34. 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
  • 35. 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
  • 36. 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
  • 37.
    • 48% agree that it is hard for them to introduce price increases
    • 38. 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
    • 39. 32% said prices will definitely have to be lowered in coming year
    • 40. 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
    • 41. 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
  • 42. 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
  • 43. 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
  • 44. 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
  • 45. Proactive, policy-based price management ties pricing to value
    Example:
    • “Loyalty” discounts for high store share
    • 46. “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
    • 47. Meeting competition
    16
  • 48. 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
    • 49. Differences in value can be captured with product variations or service
    augmentation that creates natural fences between segments
    17
    17
  • 50. 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
  • 51. 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
  • 52. A classic example of value selling…
    5
  • 53. 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
  • 54. 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
  • 55. 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
  • 56. 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
  • 57. 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
  • 58. 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
  • 59. 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. …
  • 60. 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
    • 61. The more intense, the worse
    • 62. Play as hard as you can
    • 63. Weigh the cost of each confrontation
    • 64. Goal is to win, regardless of the cost
    • 65. 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
  • 66. 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
    • 67. Differences in value can be captured with product variations or service
    augmentation that creates natural fences between segments
    30
    30
  • 68. Cost
    Cust
    Tiered offerings are creating fencesdemonstrating value and increasing profits
    Comp
    Dell – Consumer Choices
    Duracell
    Marriott – Consumer choices
    BMW - series
  • 69. Cost
    Cust
    Reinforce & communicate the value you provide in the market
    Comp
    Goal: Frame the reference
  • 70. 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
    • 71. Play as hard as you can
    • 72. Goal is to win, regardless of the cost
    Price Competition:
    • The more intense, the worse
    • 73. Weigh the cost of each confrontation
    • 74. 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
    • 75. Create offering aligned with segment needs
    • 76. Improve perception through communication and marketing actions
    low
    low
    medium
    high
    Value Received
  • 77. 34
    Agenda
    18h00-18h15 Intro
    18h15-19h15 Basics of pricing
    19h15-20h00Continental Courier Case
  • 78. 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
  • 79. 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
    • 80. Estimated marketing budget for 2010: $1.5 million
    • 81. 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?
  • 82. 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?
  • 83. Step by step how to price band
    1
    Plotting
    discounts
    over volume
    • Select discount and volume columns
    • 84. Click: insert – scatter plot
    • 85. Look at the created graph
    2
    • Is a correlation present between volume and discount given? If so, that’s a good thing.
    • 86. Are there a lot of outliers or is everything scattered across a single band?
    • 87. 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
  • 88. 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
    • 89. 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
    • 90. Missed Profit Opportunity Accounts: 299
    = A Customer Account
    40
  • 91. (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)
    • 92. The actual revenues realized
    Price (Euros)
    41
  • 93. Waterfall analysis is usually based on data and input from interviews
    Interviews
    Check correlation volume - discount
    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
  • 102. 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
    • 103. 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
    • 104. 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
    • 105. Target customers (or jobs) that most value capabilities for profitable growth and focus your resource investments of service to those segments
    • 106. Anticipate and plan for changes in competitor and customer behavior that could threaten your competitive position in your target segments
    • 107. Collect and communicate competitive information to minimize the impact of negative-sum competitive confrontations
    • 108. 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
    • 109. Sell “value delivered”. not features. and grow markets by educating more customers on the value that your company can deliver
    • 110. 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