Executive | Pricing Power | 130408 | Presentatie | Onno Oldeman
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  • 1. Achieving Pricing Power Flevum Onno Oldeman, Partner Amsterdam, 8 April 2013 Amsterdam Office Barbara Strozzilaan 380 1083 HN Amsterdam, The Netherlands Tel: +31 (0)20 753 1253, Fax: +31 (0)20 753 1277 e-mail: onno.oldeman@simon-kucher.com Internet: www.simon-kucher.com
  • 2. Agenda 1. About Simon-Kucher & Partners 2. Top of Mind 2013 3. Achieving Pricing Power Flevum_Achieving Pricing Power -1-
  • 3. Simon-Kucher & Partners Global strategy consultants Focus on marketing, pricing, sales Track record of > 25 years on Smart Profit GrowthTM Source: Simon-Kucher Flevum_Achieving Pricing Power -2-
  • 4. Simon-Kucher growth # Employees from 1985 to 2012 650 585 500 436 446 354 283 248 2012 2011 2010 2009 2008 2007 2006 2005 2004 187 2003 165 2002 147 2001 130 2000 112 1999 90 1998 71 1997 1996 1995 1994 1988 1993 1987 1992 1986 1991 5 1990 4 1989 3 56 35 46 22 27 7 13 18 19 1985 220 Source: Simon-Kucher Flevum_Achieving Pricing Power -3-
  • 5. Global presence with 25 offices São Paulo Santiago de Chile Americas Europe/Middle East USA, Boston USA, Miami USA, New York USA, San Francisco Brazil, São Paulo Chile, Santiago de Chile Austria, Vienna Belgium, Brussels Denmark, Copenhagen France, Paris Germany, Bonn Germany, Cologne Germany, Frankfurt Germany, Munich New offices in 2013 Asia/South Pacific Italy, Milan Luxembourg, Luxembourg Poland, Warsaw Spain, Madrid Switzerland, Zurich The Netherlands, Amsterdam Turkey, Istanbul United Kingdom, London UAE, Dubai Australia, Sydney China, Beijing Japan, Tokyo Singapore, Singapore Source: Simon-Kucher Flevum_Achieving Pricing Power -4-
  • 6. Leading the pack in marketing & sales Best Consultancies in "Marketing & Sales" Rank Consultancy 1 Boston Consulting Group 3 McKinsey & Company 4 Bain & Company 5 Roland Berger 401 Simon-Kucher & Partners 2 Score* 370 346 344 338 * Maximum 500; Source: manager-magazin August 2007/IMB & 2011 (Institute for Management & Consulting); Survey of 264 Top Managers Flevum_Achieving Pricing Power -5-
  • 7. Clear focus: Smart Profit Growth Commercial strategy Marketing Market strategy Brand portfolio management Brand and assortment strategy Assortment optimization Channel strategy Innovation management Pricing strategy Segmentation Marketing Competitive strategy Strategy Smart Profit Growth Pricing Marketing efficiency Sales & CRM Sales & CRM Pricing Value-based pricing Key account management Pricing process and organization Sales force effectiveness Innovative pricing models Management of distributors Price architecture and trade terms Promotion management Price communication KPI’s & incentive systems Price increase programs Negotiation training Source: Simon-Kucher Flevum_Achieving Pricing Power -6-
  • 8. How others describe Simon-Kucher "…world leader in giving advice to companies on how to sell their products…" "…the world's leading pricing consultancy…" "Simon-Kucher is the world’s leading pricing consulting firm." "…world market leader on pricing…" Source: Simon-Kucher Flevum_Achieving Pricing Power -7-
  • 9. Simon-Kucher thought leadership Books (selection) Articles (selection) USA Brazil France USA Spain UK USA NL Hungary Japan Korea Germany China NL Germany Source: Simon-Kucher Flevum_Achieving Pricing Power -8-
  • 10. Simon-Kucher works side by side with industry leaders Automotive Retail/CG Financial Services Life Sciences Industrial Goods Software / Technology Logistics / Travel Media Source: Selection of Simon-Kucher references Flevum_Achieving Pricing Power -9-
  • 11. Industry specific pricing challenges we encounter (1/3) Wholesale / Retail: How to influence, measure and capture the value per product category? Consumer Goods: How to optimize pricing & trade terms across customers, channels and countries? Source: Simon-Kucher Flevum_Achieving Pricing Power - 10 -
  • 12. Industry specific pricing challenges we encounter (2/3) Industrial Goods: How to optimize list prices and discounts for >100,000 products and >3,000 customers? Ingredients: How to structure product management and key account management? Source: Simon-Kucher Flevum_Achieving Pricing Power - 11 -
  • 13. Industry specific pricing challenges we encounter (3/3) Media: How to counter the discounting magnet in cross-media advertising? Financial services: How to structure and monetize your products and services? Source: Simon-Kucher Flevum_Achieving Pricing Power - 12 -
  • 14. Agenda 1. About Simon-Kucher & Partners 2. Top of Mind 2013 3. Achieving Pricing Power Flevum_Achieving Pricing Power - 13 -
  • 15. Achieving profitable growth: Top of Mind 2013 Pricing power Dedicated pricing function C-level involvement Flevum_Achieving Pricing Power - 14 -
  • 16. The dilemma Profit = Price Volume Not yet optimized Limited possibilities - Cost Largely exhausted Source: Global Pricing Survey 2012 Flevum_Achieving Pricing Power - 15 -
  • 17. What is the most effective profit lever? Case example Price €100 Variable unit costs €60 Sales volume 1m Fixed costs €30 m Source: Simon-Kucher Flevum_Achieving Pricing Power - 16 -
  • 18. Price as the most effective profit lever A 5% improvement of … Profit driver ... leads to a profit increase of … Profit Old New New Price €100 €105 €15 m Variable unit cost €60 €57 €13 m Sales volume 1m 1.05 m €12 m €30 m €28.5 m €11.5 m Fixed costs +50% +30% +20% +15% * Assuming ceteris paribus; Source: Simon-Kucher Flevum_Achieving Pricing Power - 17 -
  • 19. Obtaining pricing power Pricing power is the ability of a company to get the price it deserves for the value it delivers. Source: Simon-Kucher Flevum_Achieving Pricing Power - 18 -
  • 20. Pricing power Credit Suisse: Pricing Power Ranking Warren Buffet "The single most important decision in evaluating a business is pricing power." Source: Simon-Kucher research Flevum_Achieving Pricing Power - 19 -
  • 21. Pricing power: Strong impact on profits Average profit margin of last three years (index) Companies with high pricing power All others 75 100 Low pricing power reduces profits by 25% Source: Global Pricing Survey 2012 Flevum_Achieving Pricing Power - 20 -
  • 22. (Reported) reasons for low pricing power 1. "We are a commodity" 2. "We are a distress – purchase / low involvement product" 3. "Our competitors are stupid" Source: Global Pricing Survey 2012 Flevum_Achieving Pricing Power - 21 -
  • 23. "We are a commodity"… so? ₤0.01/litre ₤0.50/litre ₤1.55/litre ₤4.52/litre Source: Simon-Kucher research Flevum_Achieving Pricing Power - 22 -
  • 24. "We are a low involvement product"… so? Sensor Excel "1G" Sensor 3 "2G" 2 Electric – – – Trimmer – – – 3 €7.99 €9.99 €9.99 €14.99 Fusion "5G" 4 Fusion Power "6G" – at launch 3 M3 Power "4G" Blades Price 3 Mach 3 "3G" 4 – €15.99 €19.99 Source: Simon-Kucher research Flevum_Achieving Pricing Power - 23 -
  • 25. "Our competitors are stupid"… really? Is your company currently engaged in a price war? Who started the price war? No - there is a price war, but we are not affected 19% 22% Yes 58% 88% No - there is no price war 7% 5% We did – intentionally We did – unintentionally Source: Simon-Kucher & Partners Global Pricing Study 2012 Flevum_Achieving Pricing Power - 24 -
  • 26. Real reasons for lack of pricing power 1. No systematic pricing approach 2. Strategy and leadership deficits 3. Insufficient pricing know-how (methods, people, "real" value pricing) Source: Simon-Kucher Flevum_Achieving Pricing Power - 25 -
  • 27. Achieving profitable growth: Top of Mind 2013 Pricing power Dedicated pricing function C-level involvement Flevum_Achieving Pricing Power - 26 -
  • 28. No clear pricing ownership = chaos Sales Finance "I know what our competitors charge" "I know what our costs are" Low prices Target margins Pricing complexity is a fact of life, because it almost always involves: … too many people … too many opinions … too many interactions Marketing Product "I know what our customers say" "I know how great our product really is" Value pricing Brand premium … too much data … too little time Source: Simon-Kucher Flevum_Achieving Pricing Power - 27 -
  • 29. Dedicated pricing function improves price performance Companies with dedicated pricing function are/have… Pricing power Others 100 With pricing function Price increases Others 127 100 With pricing function Price implementation Others 115 100 With pricing function Profitable growth expectations (increase) Others With pricing function 111 100 114 …27% more often "high pricing power" …15% more often successful price increases …11% higher price implementation success …14% more often optimistic EBITDA expectations Source: Simon-Kucher & Partners Global Pricing Study 2012 Flevum_Achieving Pricing Power - 28 -
  • 30. Pricing organization: Where should it sit? Signaling Distance to customer Decision competence Long decision flow High hierarchy level Bundling of pricing concepts Focus on total company goals Distance to customer Missing flexibility D e c e n t r a l C e n t r a l Customer proximity Flexibility Missing co-ordination Inconsistencies Low hierarchy level Customer proximity Flexibility Missing decision competence Source: Simon-Kucher Flevum_Achieving Pricing Power - 29 -
  • 31. What is the right type of pricing organization? It depends Central pricing Hybrid Divisional/regional pricing Central price control important for brand image Brand assures same quality everywhere Easy for consumers to buy products elsewhere High standardization degree of pricing processes to ensure consistency Local inputs to differentiate local willingness to pay Heterogeneous business units (e.g., healthcare vs. office) Low level of standardization possible High international transparency of prices Central pricing competence center within marketing Regional pricing units in contact with national sales Pharmaceutical wholesaler Different health systems by country, high need for local differentiation Need for standardization of processes to increase pricing quality Market differences/regulations between decentralized units too different for standardized pricing High arbitrage risk Strong, global brands, transparent prices High risk of arbitrage Source: Simon-Kucher Flevum_Achieving Pricing Power Local inputs to capture different local willingness to pay - 30 -
  • 32. Achieving profitable growth: Top of Mind 2013 Pricing power Dedicated pricing function C-level involvement Flevum_Achieving Pricing Power - 31 -
  • 33. C-level involvement drives pricing performance Companies with increased C-level involvement in pricing are/have… Pricing power Others 100 C-level Price increases Others 135 100 C-level Price implementation Others Profitable growth expectations (increase) Others C-level …18% more often successful price increases 118 100 C-level …35% more often "high pricing power" …7% higher implementation success 107 100 130 …30% more often optimistic EBITDA expectations Source: Simon-Kucher & Partners Global Pricing Study 2012 Flevum_Achieving Pricing Power - 32 -
  • 34. Porsche & General Motors: different leaders, different strategies "We have a policy of keeping prices stable to protect our brand. When demand goes down we reduce production but don’t lower our prices." Wendelin Wiedeking, CEO Porsche 1992-2009 Operating margin %* 20% 15% 10% 5% Year 0% "Fixed costs are extremely high in our industry. We realized that in a crisis we are better off with lowering prices than reducing volume." '00 '01 '02 '03 '04 '05 '06 '07 '08 -5% -10% -15% Richard Wagoner, CEO GM 2000-2009 * for Porsche partly estimated Flevum_Achieving Pricing Power - 33 -
  • 35. Clear direction from top management "In terms of size and market share we are where we want to be. Therefore our strategy changes: From 'growing faster than the market' to 'grow in line with the market'. We hope that our competitors are also satisfied with their position. If that is not the case, we will defend our position with all means." FTD, March 2012 Søren Skou, CEO Maersk Line Source: Simon-Kucher Flevum_Achieving Pricing Power - 34 -
  • 36. Maersk: Turn around after change of top management HARPEX (charter rates) 1000 900 Entire board of Maersk exchanged 800 700 "Back to black" program: Stop market share growth goal 600 Capacity reduction 500 Systematic price increases 400 300 Clear communication of new strategy 200 100 0 16-8-2010 16-2-2011 16-8-2011 16-2-2012 Source: Bloomberg April 25, 2012 Flevum_Achieving Pricing Power - 35 -
  • 37. Leaders' task: Sales can't always be "nice" How should your customer react ... ... when he sees your service offer? ... when he sees your price? You have to get what you deserve! Source: Simon-Kucher Flevum_Achieving Pricing Power - 36 -
  • 38. Summary Obtaining pricing power brings you higher profits. Look for the real reasons of missing pricing power and develop the solutions. A dedicated pricing function significantly improves price performance. Setting the right pricing organization depends on your ambitions, culture and strategy (e.g. on hierarchy and customer proximity). C-level involvement severely increases the ability to successfully implement pricing improvements. C-level should provide direction and set the example (e.g. Porsche, Maersk). Flevum_Achieving Pricing Power - 37 -
  • 39. Agenda 1. About Simon-Kucher & Partners 2. Top of Mind 2013 3. Achieving Pricing Power Flevum_Achieving Pricing Power - 38 -
  • 40. Where does it go wrong in daily practice? "With our stupid competitors attacking us, we end up in a price war" "We don’t really know what premium we deserve" "Our prices are costplus and mainly historically grown" "Do we charge for everything we deliver?" "We communicate and sell too much on price, instead of on value" Source: Simon-Kucher Flevum_Achieving Pricing Power - 39 -
  • 41. Building Pricing Power calls for action on three core disciplines Typical deficiencies and leakages What the customer is willing-to-pay… … and what we actually get Portfolio & pricing strategy Value based pricing Value selling Product offerings that do not fit the market requirements Prices which are either too high or too low Value not defended, discounts based on gut-feel and ‘fear’ Source: Simon-Kucher Flevum_Achieving Pricing Power - 40 -
  • 42. Pricing Power Framework Simon-Kucher & Partner’s Pricing Power framework Pricing & portfolio strategy Value based pricing 1 Segment market and 4 Develop value based customer base, clarify price strategy 2 Determine value drivers per segment and willingness-to-pay pricing approach, tools and rules 5 (Un)bundle portfolio to maximize willingness-to-pay 3 Differentiate offering, 6 Reinvent your price pricing & sales approach model and metric Value selling 7 Optimize value selling competence, from gut-feel to structured decisions 8 Optimize value communication, set anchor prices 9 Improve pricing control, setup KPIs and monitoring framework Value pricing awareness and capability development Source: Simon-Kucher Flevum_Achieving Pricing Power - 41 -
  • 43. Know the value: Understand your premium and brand strength Project example New filter innovation Structured value-driver analysis Price increase in prices in 3 steps by 36% Marginal loss of market share Source: Simon-Kucher Flevum_Achieving Pricing Power - 42 -
  • 44. Identify the key value drivers and evaluate performance Project example Identify value drivers Rank on importance Quality of content 4,2 Search engine usability 4,1 Archive function Assess performance 4,1 Content depth 3,7 Author reputation 3,5 Price level 3,1 Flexibility of offering 2,6 After sales process 1,6 … 1,6 … 1,6 … 1,1 Customer X Competition Source: Simon-Kucher Flevum_Achieving Pricing Power - 43 -
  • 45. Use customer insights to challenge internal beliefs Project example Strategic Disadvantages Customer perspective High High Internal perspective Strategic Advantages 10 4 12 1 8 14 10 4 8 Importance Importance 11 2 11 3 5 1 13 Low 6 Relative Performance 5 7 7 Consistency Low Low Consistency 14 6 3 OverPerforming Strategic Advantages 2 9 9 6 Strategic Disadvantages High Low OverPerforming Relative Performance High Price Source: Simon-Kucher Flevum_Achieving Pricing Power - 44 -
  • 46. Assess premium and brand strength per segment Project example Relative importance of value driver Size of customer segment 40% Want price only 23% 30% Want no risk 9% Want it now 39% Want the best 29% 20% 10% % of sales 0% On-press End-use Service performance performance programs Technical support Speed of delivery On-time delivery Price Source: Simon-Kucher Flevum_Achieving Pricing Power - 45 -
  • 47. Develop a differentiated proposition for each client segment ‘One-size-fits-all’price One-size fits all Price Differentiated Prices Differentiated price Volume Volume Customers not reached yet! Super Eco Eco Willingness-topay not exploited! Differentiation = from rectangle to triangle Standard Premium Super Premium Price Flevum_Achieving Pricing Power Price - 46 -
  • 48. Differentiation works! www.klm.de: €492 per seat DUS  BAR Private tariffs www.klm.nl: €284 per seat SIM-only 50: €2.95/month + 6 ct/min. (incl. 50 min.) SIM-only 500: €17.95/month + 4 ct/min. (incl. 500 min.) B2B: €4.10 / consignment < 10kg, Germany C2X: €8.90 / consignment Airport: €3.45 per liter Bottle of water Supermarket: €0.50 per liter Source: Simon-Kucher Flevum_Achieving Pricing Power - 47 -
  • 49. Combine three pricing methods Cost-plus Competition-oriented € 160 % mark up Competitor product A Value-based Volume Our product € 100 Costs Competitor product B High elasticity Low elasticity Competitor product C € 40 Challenge: just costs are high or low, the perceived value is not Challenge: determine your main competitor and benchmark Price level Challenge: understand willingnessto-pay and price elasticity Source: Simon-Kucher Flevum_Achieving Pricing Power - 48 -
  • 50. Pitfall of cost-plus pricing, potential of value pricing Power/Value Pricing Willingness to pay Non-metallic paint 770 € Profit potential Cost-Plus Metallic paint Cost 20 € If the automotive industry sets prices according to the cost-plus approach, metallic paint would cost €30 – but the automotive industry does not! Source: Simon-Kucher Flevum_Achieving Pricing Power - 49 -
  • 51. Issue with competitive pricing: price wars Culture of market share "We have to defend our volumes at all costs." "They are aggressive and want to steal market share!" Vicious cycle of price decreases Crisis leads demand to drop Fear of market leader to loose volume Company Company A B Flevum_Achieving Pricing Power Aggressive price behavior of market leader Vicious cycle Followers feel threatened Price reactions by followers to defend market share - 50 -
  • 52. Price the value: Do real value pricing Project example 911 €83,000 Success factors: "Don't follow the crowd!" Know and quantify the value drivers! - Design €60,300 Cayman S Boxster S €54,700 - More power (15hp) - Handling Source: Simon-Kucher Flevum_Achieving Pricing Power - 51 -
  • 53. Measure willingness-to-pay, use multiple sources and methods Data analysis Benchmarks: SKP project experience Gabor Granger/ Neuropricing PriceStrat/ ComStrat Expert knowledge (PriceStrat) Methods Merchant questionnaires Sources van Westendorp Available competitor information Indirect Conjoint analysis Historical transaction data Source: Simon-Kucher Flevum_Achieving Pricing Power - 52 -
  • 54. Re-invent your price model Change of price model: from price per tire to price per km Customer perspective: costs are aligned with revenue basis (per km) Customer gets stable price per km Source: Simon-Kucher Flevum_Achieving Pricing Power - 53 -
  • 55. Value-based price metric: Enercon charges for the yield Founded in 1984; Revenue: $ 4 billion; 42% of patents world wide in this field. Enercon partner concept: Price of service contract depends on yield of wind park; 86% of customers sign 12-year service contract. Price for wind tower depends on wind situation in specific region. Flevum_Achieving Pricing Power - 54 -
  • 56. Use pricing to differentiate or to redefine revenue models Pay per use Buckets p p Bucket + PPU Min Min p Pure flat fee Min Progressive / declining PPU PPU with max. charge Min Examples simple PPU: Price per min. / MB Examples innovative PPU: Price per session Price per workplace Influencing factors p PPU w/ or w/o MRC p Flat fees Min Bucket + PPU w/ max charge p p Fair-use flat fee Min Min Competitive intensity Product comparability Price structure differentiation p p Incremental buckets Adaptive flat fee Periods Min Examples: Minute buckets GB buckets Increment buckets Customer's (wrong) estimation of usage Product life cycle stage Examples: Full flat Adaptive flat Company flat P = total price; Min = minutes; PPU = pay per use; MRC = monthly recurring cost Source: Simon-Kucher project experience and analysis Flevum_Achieving Pricing Power - 55 -
  • 57. And create clever bundles to boost earnings per customers 120 € 50 € Dinner Hotel room 150 € Room & dinner Win-Win situation Customer has a price advantage of nearly 12% Budget 150 € € Hotel’s profit increases by 25% Bundle € € WtP WtP WtP* Profit Profit VC Profit VC** VC Quantity Quantity Quantity * WtP: Willingness-to-pay, ** VC: Variable cost Flevum_Achieving Pricing Power - 56 -
  • 58. Use multiple bundles to address differences in customer needs Project example Recommended Basic Standard Premium Bug fixing Correction of typographical errors Helpdesk (response time) 2 days 12 hours 2 hours Upgrades bi-annually quarterly as released Updates bi-annually quarterly as released Additional service fees/hour € 35 € 30 € 25 Remote technical support (localization) 100 hours 250 hours 500 hours Remote technical support (exploitation) 100 hours 250 hours Maintenance services bi-annually quarterly Monitoring systems logs Project Management of content activities Software training Software consultation Annual SLA payment € 50,000 € 70,000 € 90,000 Source: Simon-Kucher Flevum_Achieving Pricing Power - 57 -
  • 59. Sales reps will tell you: "Every deal tells its own story" Selection of responses from sales reps. … their purchaser was really tough. We had to give in a little… "Which factor had the biggest influence in determining the deal's final price?" … we had to lower the price because of increased competition… … it's a very small customer and from the pharmaceuticals industry where you can always get a little extra… Source: Simon-Kucher Flevum_Achieving Pricing Power - 58 -
  • 60. Peer Pricing: Definition of price drivers as basis for a structured price logic Target prices are calculated sequentially by applying mark-ups / discounts for defined price drivers. A defined price corridor serves as a negotiation space for the sales reps. Productspecific base price Project example Product 1 specific Customer 2 specific Customer size Specialty Customer potential … Format Thickness Flevum_Achieving Pricing Power Target price … Achiever price Payment terms Product price Basis Order 3 specific Customer price Order price Order volume Industry … Small order surcharge Differentiation of prices according to product, customer and order related factors Target price Realized prices as reference points for future price setting Min. price Expert judgment as reference for future price setting - 59 -
  • 61. To boost win rates a systematic pricing & value selling process is required Project example 1 Product specific price 2 3 Client price Order specific price 0 Base price Product Value List price e.g. - Thicker beams - Extra protection List price Client Discount Net Price e.g. - High volume client - Good payment terms Net Price Order Surcharge Final Price e.g. - Small orders - Specials requiring research Source: SKP Project Database Flevum_Achieving Pricing Power - 60 -
  • 62. Sell value: Anchor prices highly influence purchase decision Base scenario (print implicit) Alternative scenario (print explicit) 68% 16% 32% 0% 84% Source: Simon-Kucher Flevum_Achieving Pricing Power - 61 -
  • 63. Steer behavior through right value communication… Project example Price communication Changes in sales volume 1 month Before 3 months 6 months 29,95 € 59,85 € 95,85 € Volume distribution (%) Introduction of new price communication 60% 50% 1 month 6 months You save 33% You save 47% 29,95 € After 3 months 19,95 € 15,95 € per month per month per month 3 months 40% 30% 1 month 20% Select 1 month Select 3 months Select 6 months 10% 6 months 0% Time Source: Simon-Kucher Flevum_Achieving Pricing Power - 62 -
  • 64. …and value selling Project example Before… "If needed, could you also deliver on short notice the next day?" …after "No problem – this is covered in all of our service contracts." "Of course, it will cost €30 more for the added planning work." Customer Cost mindset: Value mindset: "This doesn’t cost us more, so the customer doesn’t have to pay more!" "Service is important to the customer, so he should be willing to pay extra for it." Source: Simon-Kucher Flevum_Achieving Pricing Power - 63 -
  • 65. Four steps to build Pricing Power Simon-Kucher & Partner’s Pricing Power framework Pricing & portfolio strategy Value based pricing 1 Segment market and 4 Develop value based customer base, clarify price strategy 2 Determine value drivers per segment and willingness-to-pay pricing approach, tools and rules 5 (Un)bundle portfolio to maximize willingness-to-pay 3 Differentiate offering, 6 Reinvent your price pricing & sales approach model and metric Value selling 7 Optimize value selling competence, from gut-feel to structured decisions 8 Optimize value communication, set anchor prices 9 Improve pricing control, setup KPIs and monitoring framework Value pricing awareness and capability development Source: Simon-Kucher Flevum_Achieving Pricing Power - 64 -
  • 66. Thank you! Flevum_Achieving Pricing Power - 65 -