Pricing Strategy Workshop

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This is a presentation used for conducting a pricing workshop for your organization or a client's. It covers, among others, the following:
- Pricing framework & Implementation
- OEM pricing
- Distributor pricing
- New product pricing
- Bundle pricing

The presentation has 130 slides.

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Pricing Strategy Workshop

  1. 1. Pricing Strategy Workshop “It’s not just about the price”
  2. 2. 4 I. General Discussion:I. General Discussion: Pricing FrameworkPricing Framework This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  3. 3. 7 Characteristic #2: Focus on the Value They Provide to Customers Successful pricers focus on understanding what the customer values Assess potential pricing levels Assess potential pricing levels Understand what customers value Understand what customers value Develop, re-vamp, re-position products Develop, re-vamp, re-position products Create marketing and communi- cations materials Create marketing and communi- cations materials Set pricing to capture customer value Set pricing to capture customer value Train & incentivize customer- facing personnel to sell value Train & incentivize customer- facing personnel to sell value Sample Approach for Capitalizing on Customer Value Encouraging and training sales reps to break old habits and sell on value will be facilitated by accompanying sales force incentives Encouraging and training sales reps to break old habits and sell on value will be facilitated by accompanying sales force incentives Several mechanisms can be used: Conducting surveys Assessing past customer spending patterns Analyzing future direction of customer markets Several mechanisms can be used: Conducting surveys Assessing past customer spending patterns Analyzing future direction of customer markets At these points, Industrial Manufacturer will begin to decide what type of contribution margin could potentially be captured At these points, Industrial Manufacturer will begin to decide what type of contribution margin could potentially be capturedThis document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  4. 4. 10 Characteristic #5: Support everything they do with structured, repeatable and supported processes They accomplish this by adopting a structured pricing approach like the following six-step process Pricing ExecutionPricing Execution Step 3. Identify Required Analyses Step 4. Gather Data & Perform Analyses Step 5. Determine Price & Verify Strategy Step 6. Execute Price Decision & Monitor Impact Pricing StrategyPricing Strategy Step 1. Identify Scope of Pricing Step 2. Determine Strategy/ Change in Strategy Company/Environment Enablers: Organizational Structures and Control Internal incentives Information Technology Communication Systems Influencing factors: Customers Competitors Costs Legislative environment The next several pages describe each of these steps plus the enablers and influencing factors in detail This process should be viewed conceptually. It is not implied that these steps should be taken every time a pricing decision must be made, rather that this type of pricing thought process should be institutionalized at Industrial Manufacturer This process should be viewed conceptually. It is not implied that these steps should be taken every time a pricing decision must be made, rather that this type of pricing thought process should be institutionalized at Industrial Manufacturer This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  5. 5. 13 Process Step 3: Identify Required Analysis Key QuestionsKey QuestionsKey Questions Pricing Execution Identify Required Analyses Gather Data & Perform Analyses Determine Price & Verify Strategy Execute Price Decision & Monitor Impact Pricing Strategy Identify Scope of Pricing Determine Strategy/ Change in Strategy Pricing Enablers Once a preliminary pricing strategy has been determined, pricing execution begins with selection of analyses required for pricing determination AnalysisAnalysis CategoryCategory Analysis TypesAnalysis Types DescriptionDescription Customer Segmentation Segment Profiles Prospective Customer Value Mapping Contribution margin Lifetime Value Conjoint Understanding the differentiated groups of the market Building a comprehensive view of each segment Identifying prospects with greatest potential Determining mix/configuration of products desired by customer Determining ROI for each customer Calculating the NPV of customer over life of relationship Determining customer preferences Competitor Benchmarking Scenario Market Penetration Establishing relative performance vs. competition Simulating competitive response and impact Understanding ability of market players to gain share Costing Product Pricing Financial Modeling Activity Based Modeling Calculating the realized revenue for products and services Simulations to understand the impact of various product and scenarios Allocating costs based on value added throughout the manufacturing process How can we determine customer requirements? What products are possible substitutes for our product? How much will each attribute add to product cost? How can we determine customer requirements? What products are possible substitutes for our product? How much will each attribute add to product cost? This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  6. 6. 16 Process Step 5: Determine Price & Verify Strategy Key QuestionsKey QuestionsKey Questions What is our short-term pricing strategy? What is our long-term pricing strategy? How can we introduce our product pricing without affecting long-term prices? Is our pricing strategy in line with our product strategy? Is the overall financial input of the price/strategy acceptable to the corporation? If not is there an alternative pricing strategy that is more appropriate for this situation? What is our short-term pricing strategy? What is our long-term pricing strategy? How can we introduce our product pricing without affecting long-term prices? Is our pricing strategy in line with our product strategy? Is the overall financial input of the price/strategy acceptable to the corporation? If not is there an alternative pricing strategy that is more appropriate for this situation? Pricing Execution Identify Required Analyses Gather Data & Perform Analyses Determine Price & Verify Strategy Execute Price Decision & Monitor Impact Pricing Strategy Identify Scope of Pricing Determine Strategy/ Change in Strategy Pricing Enablers A price is then set, based on the original pricing strategy, the market analyses, and utilizing tactical pricing aids Preliminary Price Determination CustomerCustomer CostCost Com petitor Com petitor If upon comparison the preliminary strategy is determined to have been incorrect, a change in strategy is adopted and additional analyses are undertaken as required If upon comparison the preliminary strategy is determined to have been incorrect, a change in strategy is adopted and additional analyses are undertaken as required This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  7. 7. 19 Process Enabling Environment OrganizationalOrganizational Structure & ControlsStructure & Controls Information SystemsInformation SystemsIncentive SystemsIncentive Systems Controls to ensure corporate pricing standards Decision making structures to guide the sales force in pricing decisions Processes for resolving pricing issues Defined structures to communicate corporate pricing objectives Feedback mechanisms Information systems that can ensure that information about the markets, the customers, the costs, etc. is readily/quickly available to the pricing decision makers Information that is regularly updated and responsibilities clearly assigned Controlled access to information Clearly understood capabilities or limitations with respect to information systems Incentives that are aligned with corporate goals Clear, uncomplicated incentive structures External NetworkExternal Network Synergistic distributors relationships that will help carry out our pricing objectives Collaboration with supply chain partners Participation in new channels of distribution (B2B exchanges, brokers, distributors, direct to consumer, etc.) Though the presence of these enablers does not ensure optimal pricing, absence of them can severely reduce its likelihood Though the presence of these enablers does not ensure optimal pricing, absence of them can severely reduce its likelihood In addition to the individual pricing process steps, there are several key organizational enablers which can help to achieve pricing strategy. These enablers fall into four main categories Pricing Execution Identify Required Analyses Gather Data & Perform Analyses Determine Price & Verify Strategy Execute Price Decision & Monitor Impact Pricing Strategy Identify Scope of Pricing Determine Strategy/ Change in Strategy Pricing Enablers This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  8. 8. 22 Pricing ImplementationPricing Implementation This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  9. 9. 25 Channel Guidelines Refrigeration Pricing Game Plan Retail – Price bands to be developed by Product Management – $X assumption at estimated retail ranges over $1000 – Retail Op Managers to develop operational pricing to achieve margin $ and margin % objectives Contract – Price to support profitability packaging sales (x% minimum required) – ABD pricing to be tied to “C” band NAC on marketing calendar – Other prices to be set by Region Managers; margin $, margin %, and unit objectives must be met Private Label – Pricing to be consistent with established brand roles – No price below brand roles without agreement of Product Management – Sears organization will manage price to obtain margin $, margin %, and unit objectives Minimum Mgn% Price Band at Est. Retail Target Customer “A” x% Telesales and region FAD accounts “C” y% Premier Plus and region M/C “D” z% Key Accounts and National Accounts “E” zz% Brand Central, Montgomery Ward, Circuit City This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  10. 10. 28 Pricing Process Primary Inputs Output Vehicle Lead Support Timing Lead Time Step 4 Account Planning Margin Objectives Competitive pricing for individual customers (account planning) Special price for individual system Electronic M/C system Region Mgrs Nat’l Accounts Mgr MDMs Quarterly 60 – 90 Days Step 5 Review Process Nat'l price plan Region price sheets Nat’l Accounts / group prices Meet comp prices Region/account net price realization Adjustments of national, regional & customer prices if needed MDM meetings “A" band exception rept "D" band exception rept "D" band exception rept Price variance report MDMs Mktg Mgrs Mktg Mgrs MDMs Mktg Mgrs Mktg Mgrs MDMs MDMs Mktg Mgrs MDMs Every 2 mos. Quarterly Quarterly Quarterly Monthly -- This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  11. 11. 31 Embedding the Process in Today’s Discussion The next four topics outline some of the challenges faced in pricing. The description of each challenge includes an assessment as to the degree which each step in the process is applicable to the challenge ChallengesChallenges TacticsTactics Degree of applicability to each step inDegree of applicability to each step in the pricing processthe pricing process StrategyStrategy ExecutionExecution 11 22 33 44 55 66 Pricing ExecutionPricing Execution 3. Identify Required Analyses 4. Gather Data & Perform Analyses 5. Determine Price & Verify Strategy 6. Execute Price Decision & Monitor Impact Pricing PlanningPricing Planning 1. Identify Scope of Pricing 2. Determine Strategy/ Change in Strategy Template of Tables Used in the Four Pricing Modules Legend Low applicability High applicability This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  12. 12. 34 OEM Pricing: Section Overview I. Background II. Discussion Topics 1. Managing price when OEMs appear to have the leverage 2. Negotiating long term agreements III. Case Studies This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  13. 13. 37 OEM Background (Representative discussion on Automotive industry) – cont’d Strategic partnership with OEM Focuses on creating value in the value chain as a leader Influences product specifications and are integrated Integrates into OEM processes – “easy to work with” partner Gains leadership by controlling complex processes and superior competency Strategic partnership with OEM Focuses on creating value in the value chain as a leader Influences product specifications and are integrated Integrates into OEM processes – “easy to work with” partner Gains leadership by controlling complex processes and superior competency Transactional relationship with OEM Focuses on getting the most value for own product Responds to sourcing requests from OEM Possesses value-propositions for true skimming strategies – Typically niche players with market power in their area Gains leadership through superior products/engineering Transactional relationship with OEM Focuses on getting the most value for own product Responds to sourcing requests from OEM Possesses value-propositions for true skimming strategies – Typically niche players with market power in their area Gains leadership through superior products/engineering OEM PartnerOEM Partner Product SpecialistProduct Specialist Suppliers will have to choose whether they will be OEM Partners or Product Specialists; Tier-1s are likely to end up being OEM Partners A supplier who is neither a strategic partner nor a specialist will become a price-takerA supplier who is neither a strategic partner nor a specialist will become a price-taker This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  14. 14. 40 Topic OEM.1: Managing Price When OEMs Appear to Have the Leverage ChallengesChallenges TacticsTactics Degree of applicability to each step inDegree of applicability to each step in the pricing processthe pricing process StrategyStrategy ExecutionExecution 11 22 33 44 55 66 1. Differentiating offerings is difficult Identify unique characteristics of offerings by emphasizing product attributes and service features rather than price* 2. Once identified, selling the value to customers can present issues Communicate the value of the product offering and train the sales force on how to enforce the messages* 3. Increased use of Auctions reduces all commodities to “lowest common denominator” The only way to do well in these auctions is by either differentiating the product prior to the auction or by going to the auction with a very clear strategy* 4. Buyers armed with significant purchasing power are on a program to commoditize all the supplier’s products Products that cannot be differentiated will be relegated to commodity status and will compete purely on price 5. Factors such as delivery, quality, favorable payment terms, etc. that were differentiating tools have become table stakes now Clearly understand what are differentiating characteristics – segmented by customer, and product * Detail on this topic follows this slide Legend Low applicability High applicability This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  15. 15. 43 Challenge OEM.1.3: Being Successful in an Auction Understand requirements Obtain answers Know their own costs and absolute bottom line Have a clear understanding of the buyer’s decision criteria or process Understand response options (e.g. ability to submit alternative proposals) Develop strategy based on auction format Strategically bid on the right “bundles” Avoid bidding wars Understand requirements Obtain answers Know their own costs and absolute bottom line Have a clear understanding of the buyer’s decision criteria or process Understand response options (e.g. ability to submit alternative proposals) Develop strategy based on auction format Strategically bid on the right “bundles” Avoid bidding wars Successful Tier One suppliers arm themselves with as much information as possible and develop clear bidding strategies At a minimum, the most successfulAt a minimum, the most successful bidders exhibit the followingbidders exhibit the following Avoid being “commoditized” into an auction, if you can: – Differentiate the offerings – Influence OEM engineering, purchasing or whomever influences the decision If you have to be in auction, come prepared with: – Information – Strategies – Scenario plans – A practiced approach Avoid being “commoditized” into an auction, if you can: – Differentiate the offerings – Influence OEM engineering, purchasing or whomever influences the decision If you have to be in auction, come prepared with: – Information – Strategies – Scenario plans – A practiced approach Developing an auction strategyDeveloping an auction strategy This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  16. 16. 46 Challenge OEM.2.1: Information, Analyses, Walk Away Position Factors of Negotiation (goal is to use several degrees of freedom to trade) – Lifetime value of customer – Lifetime value of product – Aftermarket supply and support – Warranty support – Experience curves, economies of scale, Production Volumes – End-customer experience and value – Strategies for Managing Change Orders Information and Analyses – Intelligence on customer organization (incentives for purchasing negotiators, customer “pain-points”, switching costs, ….) – Competitor cost structures, price behavior, historical strengths, anticipated behavior Establishing Tactics – “Walkaway position” – Targets – Negotiating strategies – Plan A, B, C, … ; How to leverage the factors of negotiation; what to appeal on, to whom to appeal In any negotiation emphasis should be on understanding the factors for negotiation, gathering information, and establishing tactics This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  17. 17. 49 Challenge OEM.2.3: Assessing and Utilizing Lifetime Customer Value In this example we consider five years worth (just for this example) of discounted contribution margin impact by summing the following factors – Customer acquisition cost (cost to write proposals and other sales investments) – Revenue (at proposed pricing levels) – Variable costs (e.g., materials, direct labor, attributable sales costs, etc.) – Cost of incentives/promotions The customer lifetime value is not profit; it is the net cash flow from the customer relationship that will contribute to covering fixed costs and establishing profit. These numbers can help the organization make certain decisions, however: – If the total number is negative, the organization loses money on every unit – The number can be compared to the value of other customers to decide how to allocate scarce resources such as capacity or technical experts At a very simplistic level, assessing the Lifetime Value of a customer is about measuring how much money comes in to the company and how much goes out as a result of doing business with this customer Year Net Revenues Customer Acquisition Cost Variable Costs Cost of Incentives /Promotions Impact on contribution margin Discounted contibution margin (5%) 2001 $250,000 ($200,000) ($130,000) ($10,000) ($90,000) ($90,000) 2002 $500,000 ($215,000) ($18,000) $267,000 $254,286 2003 $515,000 ($220,000) ($20,000) $275,000 $249,433 2004 $531,000 ($225,000) ($20,000) $286,000 $247,058 2005 $550,000 ($230,000) ($20,000) $300,000 $246,811 Customer Lifetime Value $907,587.12 Customer Lifetime Value Example Calculation for Customer X This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  18. 18. 52 OEM Case 1 SituationSituation OEM wants to outsource - system design and sourcing of component sub assembly to Tier 1 supplier Client is competing to win a bid for an OEM that wants to outsource design and construction of a sub-assembly component Client’s pricing strategy is manufacture cost plus design and testing Competitor pricing is manufacturing cost plus 25% of total design and testing costs Objective: Support client’s cost reduction effort for winning the bid ApproachApproach Understand differences in cost structure between client and competitive bidder Reduce design and development costs through process redesign and simulation technologies Study factors of negotiation such as warranty costs, aftermarket support, etc. Develop competitor cost structure intelligence Develop price negotiation tactics – “walk-away” position, targets, appeal plans, etc. Results and KeyResults and Key LearningsLearnings Supplier-2 wins the bid Identified innovative ways of reducing costs to the bare-minimum Developed a clear understanding of the requirements and Decision-Making criteria of your customer A differentiation strategy based on “systems” or “benefits” selling can help realize better margins Learned that proper management of internal incentive issues is the key to the success of the bundling or systems strategy This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  19. 19. 55 Results/Learnings Key Learnings Know True Costs – It is important to have accurate understanding of variable costs (and fixed costs), and the impact of different cost structures on pricing options – Establish threshold contribution margin is for different bidding scenarios to determine economic feasibility Clearly Understand What the Customer Values and Exercise any Ability to Influence the Customer – Focus on delivering what is valued provides opportunity for differentiation from competition. It also enables “clouding” of price structures and possibly higher prices. Examples include: • Warranty support • Aftermarket support • Etc. Aggressively Avoid Auction Situations Properly Plan Bidding Strategy – Have a predetermined plan that outlines minimum price offerings, contract terms, service levels, and any other items that impact the overall cost or profitability of the job. These information points will ensure that you have a clear “walk away” point in the auction process The client made significant improvements to the process of reducing costs and managing a program, but did not win the bid This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  20. 20. 58 III. Distributor PricingIII. Distributor Pricing This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  21. 21. 61 Background on Distributor Pricing … in exchange distributors charge customers a premium over what the distributors pay manufacturers Potential Manufacturer Contribution Margin Manufacturer Variable Costs List price IndividualProductPriceRange Customer Sale Price Distributor Price “Real” Price Incentives (e.g. rebates) Distributor Gross Margin Manufacturer Contribution margin This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  22. 22. 64 Challenge Distributor.1.1: Measuring Distributor Value The first step is to understand what distributors offer… Cost to manufacturer if it had to conduct the activities itself The value of the distributor’s relationships with customers (i.e. ability to reach more customers) The quality with which the distributor is able to conduct activities (e.g., Utilizing a distributor’s higher quality customer service may help retain customers better) Market pricing for distribution in similar product, geography, service situations The estimated volume of products to be sold to the distributor The negative impact of adding one more link in the chain between the manufacturer and the customer Factors to consider when assessing the valueFactors to consider when assessing the value a distributor providesa distributor provides This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  23. 23. 67 Challenge Distributor.1.1: Measuring Distributor Value (continued) … then decide what to do Current capacity considerations Competitive environment for distributors Overall relationships with customers (especially relevant with larger distributors in multiple markets) Factors that influence what to doFactors that influence what to do Push prices higher with distributors to get acceptable contribution margin levels Compare contribution margins of options to other potential uses of capacity Select distributor options Analyze scenarios with adding and removing Do not do business in this particular market Possible optionsPossible options This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  24. 24. 70 Topic Distributor.3: Enabling and Incenting Distributors to Achieve Desired Volumes ChallengesChallenges TacticsTactics Degree of applicability to each step in theDegree of applicability to each step in the pricing processpricing process StrategyStrategy ExecutionExecution 11 22 33 44 55 66 1. Aligning distributor goals with manufacturer goals Many tactics are possible. For products with lower than desired volume provide higher margins/promotions or conduct promotions. However, be careful not to reward poor selling products 2. Accessing information in the value chain: – Customer behaviors/ values. It is difficult to sell on value if manufacturers do not have direct access to customers – Distributor behavior. Unacceptable distributor interactions with customers cannot be addressed if they are not known Institute processes, incentives, and IT tools to facilitate information. Work with end-consumers and distributors to collect information that will drive better value delivery to distributors and end- consumers Tools include: interviews, focus groups, studies of distributors and customers* 3. Educating distributors (so that they can educate customers) on the value proposition of various products One possibility is to communicate the value of the product offering and train the distributor sales force on how to enforce the messages Another is to conduct educational seminars with distributors * Detail on this topic follows this slide Legend Low applicability High applicability This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  25. 25. 73 Topic Distributor.5: Managing Distributor Contracts ChallengesChallenges TacticsTactics Degree of applicability to each step in theDegree of applicability to each step in the pricing processpricing process StrategyStrategy ExecutionExecution 11 22 33 44 55 66 1. Complex contracts can be the cause of pricing errors at the time of order entry and may require multiple people to manage them Build information systems that: – Enable capture of contract information at the source (single entry) – Provide all information from the contracting system to the order entry and billing systems to minimize the possibility that prices will be entered onto orders incorrectly (which results in contribution margin losses) * Detail on this topic follows this slide Legend Low applicability High applicability This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  26. 26. 76 Large Industrial Manufacturer Significant amount of product sales through distributor channel Large number of SKUs – 7,000+ Current pricing strategy did not differentiate pricing for distributors Rebating used significantly Management perceived that the organization was “Leaving money on the table” Significant amount of product sales through distributor channel Large number of SKUs – 7,000+ Current pricing strategy did not differentiate pricing for distributors Rebating used significantly Management perceived that the organization was “Leaving money on the table” SituationSituation Perform high level analysis to determine potential improvement areas and develop preliminary recommendations. The analysis looked at: – Distributor data to understand effect of rebates – Product data to understand price performance of individual products Perform high level analysis to determine potential improvement areas and develop preliminary recommendations. The analysis looked at: – Distributor data to understand effect of rebates – Product data to understand price performance of individual products ApproachApproach Additional study needed in three key areas: 1. Rebate Policy – client should do deeper analysis of current practices and develop clear structured ways of allocating resources 2. Product rationalization – an analysis should be done to evaluate product contribution margin and criteria for maintaining unprofitable SKUs 3. Distributor relationship management – criteria for differentiating and measuring distributor performance need to be developed Additional study needed in three key areas: 1. Rebate Policy – client should do deeper analysis of current practices and develop clear structured ways of allocating resources 2. Product rationalization – an analysis should be done to evaluate product contribution margin and criteria for maintaining unprofitable SKUs 3. Distributor relationship management – criteria for differentiating and measuring distributor performance need to be developed Results and KeyResults and Key LearningsLearnings This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  27. 27. 79 Distributor Analysis $800K Average Contribution Margin/ Distributor After Rebates $600K Rebates reduced average contribution margin/distributor by $200K $200K Analysis of distributor data showed that there was a significant amount of profit allocated to incentives AnalysisAnalysis Preliminary Findings Rebates were approximately 25% of reported contribution margin Questions to be Asked Are these strategic distributors? What criteria are used to determine rebate allocations for distributors? What is the effect of reducing rebates? Key Take- Away Rebate strategy should reflect product strategy and have clear, measurable methods of allocation Average Contribution Margin/ Distributor Before Rebates This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  28. 28. 82 Mid-Size Manufacturer of Bundled Technology Solutions SituationSituation Manufacturer sells technology solutions in which they bundle their hardware and software with other manufacturers’ computers Product pricing and configuration errors were eroding contribution margin The compensation system did not tie price performance with compensation Sales reps had difficulty understanding how discounting different products affected their compensation Sales reps spent hours creating quotations 120+ order-entry clerks were required to enter hand- written or faxed orders into the order entry system ApproachApproach Designed very simple approaches and supporting processes for aligned configuration, pricing and compensation Developed change management program Enabled processes with technology from Trilogy given to sales reps on laptops Integrated the sales rep laptops with the order entry system to eliminate the need for order-entry clerks Started with simple products and customers, then moved on to more complicated scenarios Results and KeyResults and Key LearningsLearnings Increased revenue significantly (multiple millions) by aligning and giving visibility to the relationship between pricing and incentives Eliminated 60 – 80% of the 120+ order takers for an annual savings of roughly $2 – 3 million Reduced pricing and configuration errors resulting in annual savings in the millions of dollars/year Reduced the total number of sales reps required to service the market (by increasing remaining sales reps’ quotas) Keys to Success: Well defined/communicated business case, Strong executive sponsorship, Holistic approach, Kept it simple This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  29. 29. 85 IV. New Product PricingIV. New Product Pricing This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  30. 30. 88 Pricing Structures Sample ModelsSample Models ExampleExample Flat prices for discrete product $400 for a television Flat access charge $30/month for cable TV Usage-based $10 for a single pay-per-view movie Embedded services 90-day warranty included with product purchase Pre-paid products Pre-paid phone card with 90-minutes of usage Deferred payment 90-days, same as cash Smoothed payment Electric bill of $80-90/month all year Pricing for these products can be modeled in many ways While many of these models may not outwardly appear to fit with Industrial Manufacturer’s business, there may be opportunities to leverage these techniques to provide customer value and improve contribution margin While many of these models may not outwardly appear to fit with Industrial Manufacturer’s business, there may be opportunities to leverage these techniques to provide customer value and improve contribution margin Sample Pricing Models (can be used in combination with each other) This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  31. 31. 91 Moving Forward with New Product Pricing 1. Identifying and quantifying market appetite for new products 2. Assessing internal implications of creating new products 3. Developing a pricing strategy that meets short-term and long-term needs New Product Pricing can be divided into three major topics The next several pages describe some of the challenges associated with each of these areasThe next several pages describe some of the challenges associated with each of these areas This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  32. 32. 94 Attribute A Attribute B Attribute C Profile A1 B2 C3 Level A1, A2 or A3 Level B1, B2 or B3 Level C1, C2 or C3 Challenge New Product Pricing.1.2: Conjoint Analysis (continued) Terms used in Conjoint Analysis: – Profile: a combination of one arbitrarily selected level for each of the attributes. – Attributes: key dimensions (features) of products or services. – Levels: specific points along the key dimension, measured by level utility (part-worth). Conjoint Analysis has two objectives [according to Hair (1995)] – To determine the contributions of predictor variables (levels) and their respective values (utilities) to the determination of consumer preferences – To establish a valid model of consumer judgments useful in predicting the consumer acceptance of any combination of attributes, even those not original evaluated by consumers Algorithm: – Coefficient called “utilities (or part-worth)” among different levels of attributes are estimated – “Relative importance” among attributes and “profile utilities” are developed to quantitatively measure preferences in consumer decisions Use: segmentation can be developed based on groups having the same preferences Conjoint Analysis is not a simple statistical analysis, but a combination of several analysis This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  33. 33. 97 Topic New Product Pricing.3: Developing a Pricing Strategy That Meets Short Term and Long Term Needs ChallengesChallenges TacticsTactics Degree of applicability to each step in theDegree of applicability to each step in the pricing processpricing process StrategyStrategy ExecutionExecution 11 22 33 44 55 66 1. Camouflaging cost-structure to OEMs and distributors so that value pricing can be used Emphasize value elements. Collaborate to capture value from the end-consumer, and establish valuing-sharing arrangements. Use tools such as Product lifecycle analysis, value-mapping and contribution margin analyses 2. Positioning the product pricing appropriately by segment There are several important points here: – Consider each segment separately and position the product with different options depending on each segment – For each segment assess whether low pricing (for penetration) or high pricing (for brand and retaining long term options) is appropriate – Conduct price sensitivity analysis and assess contribution margin objectives for each segment – Evaluate use of promotions for short-term penetration rather than introducing product with a low price 3. Anticipating competitor reactions. Reacting to the market after introduction Prepare through multiple scenario analyses. Competitor/market analysis should be critical. Build competitor defenses into design, and pricing strategy. Build business processes monitoring and quick reaction * Detail on this topic follows this slide Legend Low applicability High applicability This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  34. 34. 100 UPS was experiencing intense price competition The business model was based on low margins and lean operations The company wanted to expand business offerings to increase revenue from each customer UPS was experiencing intense price competition The business model was based on low margins and lean operations The company wanted to expand business offerings to increase revenue from each customer SituationSituation Created offering that increased their own profitability and revenue stream, yet still saved customers money Integrated air & ground transportation for single packages, which saves their customers money Created an advanced tracking system that distributes a notice of arrival to the sender when the package reaches its destination Enhanced business model by adding consulting services in the form of transportation and warehouse services management, services that customers value and competitors do not offer Created offering that increased their own profitability and revenue stream, yet still saved customers money Integrated air & ground transportation for single packages, which saves their customers money Created an advanced tracking system that distributes a notice of arrival to the sender when the package reaches its destination Enhanced business model by adding consulting services in the form of transportation and warehouse services management, services that customers value and competitors do not offer ApproachApproach Expanded same-client-revenue potential by increasing services that it provides to its customers Avoided trying to make difficult gains in market share Achieved revenue and profit goals through service enhancements Expanded same-client-revenue potential by increasing services that it provides to its customers Avoided trying to make difficult gains in market share Achieved revenue and profit goals through service enhancements Results and KeyResults and Key LearningsLearnings UPS Source: ValueSpace, Mittal and Sheth, McGraw-Hill © 2001 This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  35. 35. 103 New Product Pricing: Break-out Form Issues • __________________________ • __________________________ • __________________________ • __________________________ • __________________________ • __________________________ • __________________________ Focus on Customer •_______________________________ •_______________________________ •_______________________________ •_______________________________ •_______________________________ •_______________________________ •_______________________________ Process Changes 1. ______________________________________________________________ 2. ______________________________________________________________ 3. ______________________________________________________________ 4. ______________________________________________________________ 5. ______________________________________________________________ 6. ______________________________________________________________ 7. ______________________________________________________________ This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  36. 36. 106 Bundle Pricing Overview A bundle is an offering that combines products, services and/or channels designed to deliver more value to the customer relative to individual offerings TypesTypes ExamplesExamples Value to customerValue to customer Product-Product Computers and Peripherals One-stop shopping, time-saving for the customer, possibly lower price than individual components Product –Channel Buying cars online Lower price and convenience for the customer Product-Service Jet engines and maintenance Peace of mind for the customer since the supplier knows the product best. Reduced search-cost to customer Service-Service Phone service and voice mail One-stop shopping, related services, and time- saving for the customer Service-Channel Paying Bills online Less expensive and more convenient for the customer Product-Service- Channel Computer with internet service sold online One-stop shopping for the customer at a lower price Sellers may outsource components/activities of the bundled offering, and can offer different bundles to different customer segments Sellers may outsource components/activities of the bundled offering, and can offer different bundles to different customer segments This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  37. 37. 109 Topic Bundle Pricing.1: Identifying and Quantifying Market Needs ChallengesChallenges TacticsTactics Degree of applicability to each step in theDegree of applicability to each step in the pricing processpricing process StrategyStrategy ExecutionExecution 11 22 33 44 55 66 1.Understanding potential customer segments, offerings and channels Investigate customer segments, offerings and channels outside of current situation. Example: Products from another industry that could be bundled with Industrial Manufacturer’s to add value 2. Establishing at a high level why the market will value bundled options Ascertain if the reason for bundling is lower cost for bundle over the components OR value of package. Use customer requests, customer surveys, market intelligence to assess bundled needs 3. Identifying which bundle to offer to which segment. Understanding differences in benefits and purchasing benefits of multiple segments Articulate a clear marketing strategy based on segmentation analysis, relative needs of the segment, and value mapping of products/offerings 4. Estimating value (or perceived value) to customer (segment) Evaluate alternate options and additional value. Techniques for assessing include: customer interviews (sales intelligence), focus groups, market research, surveys, discrete choice models, conjoint analysis, etc. 5. Assessing price sensitivity to the bundled offerings Create demand curves for the bundled options. Interview purchasing decision makers, focus groups, indirect sources such as historic market patterns and sales intelligence * Detail on this topic follows this slide Legend Low applicability High applicability This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  38. 38. 112 Bundle Pricing Summary CharacteristicsCharacteristics TakeTake--awayaway Rich Information Look outside of Industrial Manufacturer’s current situation for potential bundles Information about market needs and internal capabilities/options is essential to develop the bundle and price it Without knowing the cost impact of bundling, good decisions cannot be made Customer Value Focus It is critical to ascertain whether the customer values the bundle more highly than the separate offerings Contribution Margin Considerations Ensure focus and quantitative estimate of variable cost that provide accurate assessment of contribution margin Organizational Alignment Bundling is an activity that is likely to cross organizational lines Provide organizational structures and incentives that will enable cooperation between divisions in the organization and other partners Structured Processes Processes are essential to assess why you are bundling, what you are bundling, and how to price it It may require a great deal of support to create, sell and deliver bundles. Make sure that distributors, supply chain, and sales education re considered There are several important points to remember with respect to the five characteristics of successful pricing This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  39. 39. 115 Approach Overview A B G H C D I J E F K L Initial Filtering (reduced products for focus) “Deep-drill” analysis (Assessed them on several factors) 1.Identify base price of the product 2.Customer Segmentation 3.Customer Value 4.Competitive positioning 5.Price elasticity 10,000010,000 500 50 Product filtration 10,000 Products 10,000 Products Customer Purchasing patterns Customer Purchasing patterns Internal categorization Internal categorization External competitive level External competitive level PricingPricing recommendationrecommendation BundlingBundling recommendationrecommendation 1.Customer Segmentation 2.Commonality of customers 3.Customer needs 4.Value to customer 5.Internal capabilities We followed a two-step approach to drive to the pricing and bundling recommendations Generate Results Identifying priceIdentifying price change opportunitieschange opportunities Identifying bundlingIdentifying bundling opportunitiesopportunities This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  40. 40. 118 Approach - Deep Drill Analysis – (Bundling) We were able to provide methodologies, models and tools to support the redesign of key elements of the client’s business model and processes. This allowed them to optimize pricing and delivery of single products and product/service bundles Offerability Evaluation Process Do we have solution on the shelf? Do we have products or capabilities, but need to bundle? Do we have some but not all products or capabilities? No No No Bundle the solution Fill Operations or Product gaps Determine to bid or no-bid (Little to no capability or product breadth) Next Step Offer the solution Yes Yes Yes A B C D • Process to bundle • Internal transfer pricing • In-source or Outsource • Go/No Go decision• Pricing Major Considerations / Issues Offerability Evaluation Process Do we have solution on the shelf? Do we have products or capabilities, but need to bundle? Do we have some but not all products or capabilities? No No No Bundle the solution Fill Operations or Product gaps Determine to bid or no-bid (Little to no capability or product breadth) Next Step Offer the solution Yes Yes Yes A B C D • Process to bundle • Internal transfer pricing • In-source or Outsource • Go/No Go decision• Pricing Major Considerations / Issues Product discount process and potential package offerings Decision process for determining feasibility of developing a product or bundled offering LLHHHHCustomer #25 LLMMLMCustomer #5 MHHLLHCustomer #4 LMLLLLCustomer #3 MHHLHLCustomer #2 HHHLHHCustomer #1 Prod CProd BProd AProd CProd BProd A Model 2Model 1 2. Offer discounts to customer based on purchases for a given model 5. Offer discounts to a particular customer based on purchases of a specific product … Model X 1. Offer discounts to a particular customer based on total purchases 3. Offer discounts to all “premier” customers for a particular model 4. Offer discounts to all “premier” customers for a product across models Increase ‘Prices on Select Products Decrease Prices on Slow Moving Products Pricing Review Inventory Levels by Segment Assess Current Issues by Segment Inventory Minimize Negative Perception of Increases Advertise Price Reductions Marketing Address Key Competitor Reactions Identify Licensing Arrangements Other Key implementation activities for functional areas to implement pricing recommendations Below are examples of bundling analyses, including base pricing implementation, bundling offering identification, and bundling “operationalization” Note: Subject to review by legal department ILLUSTRATIVE EXAMPLE This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  41. 41. 121 Hospital and Medical Supply Manufacturer ApproachApproachApproachOverviewOverviewOverview Key LearningsKeyKey LearningsLearnings Large Manufacturer of hospital and medical supply products Many very successful mature products with the market share of 70% to 95%, but product line becoming increasingly commoditized Began losing price war and facing falling margins Large Manufacturer of hospital and medical supply products Many very successful mature products with the market share of 70% to 95%, but product line becoming increasingly commoditized Began losing price war and facing falling margins Researched customer value perceptions and how they relate to their relationship with the company Gained deeper understanding of how their products are used in different contexts Developed pre-assembled kits for various standard treatments and procedures Developed simple software tools for the sales force to estimate laboratory efficiency improvements and train clients in Return on Investment calculations Researched customer value perceptions and how they relate to their relationship with the company Gained deeper understanding of how their products are used in different contexts Developed pre-assembled kits for various standard treatments and procedures Developed simple software tools for the sales force to estimate laboratory efficiency improvements and train clients in Return on Investment calculations Increasing value of individual products was not enough to offset falling margins Bundle offering must have customer value above the sum of its individual parts (e.g. surgical procedure kits) Not all bundles create value for the customers, and may not command a premium Balancing of cross subsidies was hindered due to internal political setup Increasing value of individual products was not enough to offset falling margins Bundle offering must have customer value above the sum of its individual parts (e.g. surgical procedure kits) Not all bundles create value for the customers, and may not command a premium Balancing of cross subsidies was hindered due to internal political setup This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  42. 42. 124 VI. PilotVI. Pilot This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  43. 43. 127 Step 1. Establish Imperative Key ActivitiesKey ActivitiesKey Activities Create project/program description Highlight root causes of the current situation Estimate the high-level benefits/costs Establish project sponsor Select pilot business area Create communications materials Enroll key stakeholders Create project/program description Highlight root causes of the current situation Estimate the high-level benefits/costs Establish project sponsor Select pilot business area Create communications materials Enroll key stakeholders Step 1 focuses on positioning the project for success Selecting a pilot business areaSelecting a pilot business areaSelecting a pilot business area Ways to “slice” the business to pick a pilot area – Business unit – Product – Customer/market Key criteria for selecting – Quality of information available – Level of stability – Improvement potential – Potential risk / business disruption – Strength of potential sponsor – Perceived level of change management required Ways to “slice” the business to pick a pilot area – Business unit – Product – Customer/market Key criteria for selecting – Quality of information available – Level of stability – Improvement potential – Potential risk / business disruption – Strength of potential sponsor – Perceived level of change management required This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  44. 44. 130 Step 4. Build Key ActivitiesKey ActivitiesKey Activities Create training materials Create communications materials Build manual enablers (e.g. forms to complete) Build technology enablers* Create high-level program plan Establish detailed pilot implementation plan Create training materials Create communications materials Build manual enablers (e.g. forms to complete) Build technology enablers* Create high-level program plan Establish detailed pilot implementation plan Step 4 creates the enablers required to support the newly defined processes * For the pilot, simple, easy to build technology enablers such as Excel spreadsheets are preferable This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
  45. 45. 133 Next Steps 1. Identify candidate pricing process improvement pilots (28 September) 2. Establish high level scope and estimate size of the opportunity (28 September) 3. Present pilot proposals to business management teams including size, plan, resource requirements and expected results (5 October) 4. Incorporate resource requirements in operating plan (5 October) 5. Charter teams (12 October) 6. Launch pilots (12 October) This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/pricing-strategy-workshop-764
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