Pricing Presentation@Singapore

Making Informed Pricing Decisions… Peshwa Acharya Presentation given @ Marcus Event Pricing Conference @ Singapore

Old Indian Saying

Customer – Supplier Relationship Incentive systems are typically focused on pricing/cost issues instead of achieving maximum value for both
Tendencies on customer's side
Continuous pressure on supplier to lower prices
Frequent negotiations and multi-sourcing strategy in order to achieve price transparency
Trend to material standardiza- tion to reduce switching costs
(Sometimes) reluctance to share technological insights
Tendencies on supplier's side
Ongoing attempts to increase margins
Tendency to reduce price transparency by introducing complex terms of payment
Attempts to increase switching costs via specialties
Tactic of problem avoidance instead of problem solving
Source: McKinsey TYPICALLY, CUSTOMER AND SUPPLIER HAVE “WIN-LOSE” RELATIONSHIPS FOCUSED ON PRICE

CVM…..Customer Value Management
From. . .
To. . .
Standard offer which is identical for all customers
Tailored offer that is based on individual customer needs and modified on an ongoing basis
Key decisions are judgement based and driven by Purchase/Sales
Fact-based decisions with cross-functional input where required
Multiple relationship owners for customer needs
Single point of contact to manage relationship and handle all queries
Trust-based relationship with emphasis on
Knowing each other better
Joint efforts to meet end-customer needs
Transactional relationship
THE MAIN AIM OF CVM IS TO CREATE “WIN-WIN” RELATIONSHIPS FOCUSED ON VALUE Mutually Beneficial partnership with key accounts

Shifts in Pricing Approach

Costing…. Usage Cost Down time Parts and Supplies Training User Labour Product Longevity Replacement Disposal

Essar Steel Case Study Concept of Contribution Analysis

Essar Steel Does High Net Sales Realization mean high Contribution? Contribution per hour “ An approach to analyze contribution with time / period dimension”.

Essar Steel
OBJECTIVE
To maximize profitability by
Facilitating profitable order acceptance
Optimizing production planning & scheduling

Essar Steel
Contribution (Two Approaches for analysis)
Contribution per ton : A very common approach
Contribution per hour : takes care of plant capacities and time frame.
Based on above approaches, product, region, customers’ wise detailed analysis can be worked out to identify highest & lowest contributor in respective categories.

Essar Steel What is Contribution? Most Common Concept of the Contribution is “ Absolute Contribution per ton” i.e [Sales Price] – [Cost of Production] = [Contribution] It is simple to understand and reflects business profits in commercial terms. But it ignores plant capacities and productivity. What is Plant Productivity? Plant capacities to produce output on tons/hr basis. Contribution/ton and Productivity/ton-hr provides Contribution in “Rs earned per hour”

Essar Steel
Contd..
Advantages:
It factors plant capacities and productivity.
Mandatory requirements:
Sales data, Cost and Yield data
“ Contribution per hour is a dynamic approach which varies with time. It is a function of three major factors viz., NSR, Cost and Productivity. All these change with Markets, Cost of production and Plant capacities respectively.”

Essar Steel Case Study : Contribution Rs per ton: (Hypothetical Case) Contribution Rs / Hour: Particulars Customer X Customer Y Order in tons 1000 1000 NSR 23000 24000 Cost 17000 17000 Contribution Rs / ton 8000 9000 Particulars Customer X Customer Y Order in tons 1000 1000 NSR 23000 24000 Cost 17000 17000 Contribution Rs / ton 8000 9000 Productivity tons / hr 350 300 Contribution Rs / hr 2.8 Mn 2.7 Mn

The Model
Usage
Predictive purpose
Actual post production analysis of order performance based on actual cost, yield and related data
Benefits
Identifies highest and lowest profitable product range & customer
Enables decision making and optimizing marketing strategies.
Essar Steel

How predictive model looks like?
Essar Steel The model identifies bottlenecks; Today it might be Caster; Tomorrow it can shift to HSM.

Roll out
Offline Model (Spreadsheet based)
Ready to use
Provides cost extra for all existing grades & products
Caster / HSM productivity to calculate Contribution / Hr.
Contribution / Hr for Annealed & Gal products –
Apr-06 onwards
Online Model (SAP based)
Being Developed with IT support.

Management support
Outsource Packages viz. – Maxager Technology’s Profit Velocity solution provides -
Price optimization
Product & Customer mix
Sales planning
Profitability/Contribution analysis

Conclusion:
High NSR does not necessarily mean high contribution.
Contribution per hour is better analytical tool and reflects correct picture of profitability.

Pricing Research Models
“ Peter Van Westendorp” Model
PRICE CONJOINT
BPTO ( Brand Price Trade off )

“ Peter Van Westendorp” Model Question : At what price would you find this brand to be : cheap, too cheap, expensive and too expensive?

The Van Westerndrop price sensitivity model was developed in 1970 by the Dutch economist
The objective of the model was to ascertain the range of acceptable prices
The range will run from the price at which the preponderance of the respondents start to doubt the quality of the product to the point of preponderance of respondents consider the product or service too expensive

In this model, price sensitivity relates not to absolute price, rather to perceived value of the product and service.
Consumer price expectations and tolerances are measured by asking a set of price perception questions.
These questions are the key to the model – the price at which the product or service is

So cheap that the product quality is questionable
A bargain (inexpensive)
Beginning to seem too expensive (expensive)
Too expensive to consider
Once graphed the point at which the inexpensive and expensive responses intersect is considered the Indifference Price Point

Babool toothpaste .. 50 gms SKU Price Range : Rs. 9.00 to Rs.12.50

Price Conjoint Question : If you were to buy 100 bags of cement from these brands at the prices shown, how many of each brand would you buy?  REPEAT FOR EACH CARD PRICE Rs / Bag of 50Kgs CONJOINT CARDS A B C D E F Birla Rs 175 /- Rs 175 /- Rs 180 /- Rs 180 /- Rs 185 /- Rs 190 /- Ambuja Rs 175 /- Rs 180 /- Rs 180 /- Rs 185 /- Rs 190 /- Rs 190 /- ACC Rs 175 /- Rs 180 /- Rs 185 /- Rs 185 /- Rs 185 /- Rs 190 /- L&T – Ultra Tech Rs 175 /- Rs 180 /- Rs 180 /- Rs 185 /- Rs 190 /- Rs 190 /- JK Rs 175 /- Rs 175 /- Rs 180 /- Rs 180 /- Rs 180 /- Rs 185 /- JP Rs 175 /- Rs 175 /- Rs 175 /- Rs 175 /- Rs 180 /- Rs 185 /- Prism Rs 175 /- Rs 175 /- Rs 175 /- Rs 175 /- Rs 180 /- Rs 185 /- Maihar Rs 175 /- Rs 175 /- Rs 175 /- Rs 180 /- Rs 180 /- Rs 185 /- Satna Rs 175 /- Rs 175 /- Rs 175 /- Rs 180 /- Rs 180 /- Rs 185 /- Lafarge Rs 175 /- Rs 175 /- Rs 180 /- Rs 180 /- Rs 185 /- Rs 185 /-

Trade off analysis to understand what is important /unimportant to consumers
Aims to capture individual preferences by ranking product options incorporating multiple attributes
Infers importance of each attribute and level of attribute most desirable.
Also allows for simulation of different market scenarios to arrive at market shares of the client’s offering under different market scenarios.

Market Shares at each “Pricing Card”
Birla Cement was relatively more inelastic compared to Ambuja and ACC
Local brands ( Others ) were most sensitive to pricing changes

Conjoint Analysis of Babool 50 gms

Scenario Building - 50 gms A/ Price Increase from Rs. 8 to Rs. 10 : Utility drop : -0.8 B/ Price Increase from Rs. 8 to Rs. 9 : Utility drop : -0.4 C/ Price Increase from Rs. 8 to Rs. 8.50 : Utility drop : -0.2 Can be offset by offering 25% extra (0.8) Can be offset by offering toothbrush free (0.7) D/ Price decrease from Rs. 8 to Rs. 6 : Utility gain : 0.1

Market Simulations (50 gms) Current Prices Babool : price drop Brands Price (Rs.) Promotions Share of preferences (%) Colgate 15.50 - 45 Babool 8 - 26 Anchor 13 - 14 Cibaca 8 - 15 Brands Price (Rs.) Promotions Share of preferences (%) Colgate 15.50 - 43 Babool 6 - 31 Anchor 13 - 13 Cibaca 8 - 14

Market Simulations (50 gms) Babool : Price increase Babool gains from Colgate, as Babool starts getting considered by Colgate users as a relevant alternative At the same time, Babool loses share to Cibaca because of the price offered by the brand (Rs.8) Brands Price (Rs.) Promotions Share of preferences (%) Colgate 15.50 - 41 Babool 10.50 - 19 Anchor 13 - 13 Cibaca 8 - 27

Market Simulations (50 gms) Babool : Toothbrush free Babool : 25% extra No major difference in terms of offering either promotions to gain share. Cheaper alternative should be adopted. Brands Price (Rs.) Promotions Share of preferences (%) Colgate 15.50 - 43 Babool 8 Toothbrush free 33 Anchor 13 - 11 Cibaca 8 - 13 Brands Price (Rs.) Promotions Share of preferences (%) Colgate 15.50 - 43 Babool 8 25% extra 31 Anchor 13 - 13 Cibaca 8 - 14

Market Simulations (50 gms) Interpolations Share of preference Current Price (Rs. 8) Babool at Rs. 8.50 Babool at Rs. 9.00 Babool at Rs. 10.50 Colgate 45 44 43 41 Babool 26 24 23 19 Anchor 14 14 13 13 Cibaca 15 17 22 27

BPTO EXPOSE BASE PRICING LEVEL. ASK : Which brand would you buy at these prices? INCREASE PRICE OF CHOSEN BRAND TO NEXT LEVEL. REPEAT QUESTION. CONTINUE TILL RESPONDENT REACHES HIGHEST PRICING LEVEL FOR ANY BRAND OR SAYS HE WON’T BUY ANYTHING AT SUCH PRICES Consideration Set PRICE Rs / Bag of 50Kgs Birla Rs 175 /- Rs 180 /- Rs 185 /- Rs 190 /- Ambuja Rs 175 /- Rs 180 /- Rs 185 /- Rs 190 /- ACC Rs 175 /- Rs 180 /- Rs 185 /- Rs 190 /- L&T – Ultra Tech Rs 175 /- Rs 180 /- Rs 185 /- Rs 190 /- JK Rs 170 /- Rs 175 /- Rs 180 /- Rs 185 /- Prism Rs 165 /- Rs 170 /- Rs 175 /- Rs 180 /- Maihar Rs 170 /- Rs 175 /- Rs 180 /- Rs 185 /- Satna Rs 165 /- Rs 170 /- Rs 175 /- Rs 180 /-

Price Tracking Mechanism
AC Nielsen FMCG Store Audit
Brand & Price Track : Telecom, FMCG
Tariff Tracking of all Service Operators : Telecom
Steel : International Price Track , Domestic Street Price Tracking Mechanism

Case Study - Babool Toothpaste 2003-05
of Balsara Home Products Ltd ,India

Babool …..
SKU and Price Rationalisation
Marketing Challenge :- Babool Toothpaste an economy toothpaste brand faced a big challenge when new brands were launched at 30% lesser prices (Rs.7/- 50g) than Babool (Rs. 10/- 50gm).
Babool, which was the lowest brand till date suddenly, became expensive in the eyes of the consumer and market dynamics had changed.
Possible Solution : Reduce the price and bring Babool at par with the competition.
Pitfall : Reduction in prices would mean reduction in Gross Contribution, which was not acceptable for an economy brand like Babool .

Decision Making Process
Insight : Consumer do not remember prices and SKUs, however at the time of purchase they evaluate the price on the basis of ‘Price Value Equation’.
Hypothesis : Instead of reducing prices can we look at possible SKU price combinations which will provide equally good price value equation as a 50gm at Rs.7/-.

Strategy
We worked out various SKU possibilities, which were not regular category SKUs like 50,100 and 200gm. E.g. 60gm (positioned as 50+10gm) @ Rs. 10/-, 90+35gm (125gm) @ Rs. 18/-, 190+190gm etc..@ Rs.40/-
Additional volumes in a toothpaste does not increase the RM and PM cost proportionately
Hence, you end up making slightly lesser or similar profitability and also provide good price value equation to consumers.
Also consumers does not have the time to equate a non standard SKU with a standard SKU at the time of purchase hence differentiation at SKU level works.
Trade too cannot complain about reduction in prices by competition as the SKUs are different.

Outcome
By rationalizing the SKUs and prices Babool not only prevented any share loss but actually gained share in the fierce market.

Babool…
Rs. 5/- SKU
Marketing Challenge :- Inspite of increase in advertising budgets and also increasing awareness the brands distribution was less than 1mn outlets i.e. around 25%. While competitive brands like Colgate were well entrenched at around 70% distribution. To gain market share increase in distribution was necessary.
Possible Solution : Invest in direct distribution by increasing the number of distributors and investing direct distribution techniques like Van Promo etc..
Pitfall : Distribution is a heavy investment process and hence needs deep pockets .

Decision Making Process
Insight : Consumers at the lower end of the spectrum in Small Towns and Rural markets do not go in for a monthly purchase as they do not have the money to do so. Such consumers rely more on daily purchase.
Hypothesis : To increase trials among a large gamut of such consumers it is necessary to have the lowest possible put down price but yet good enough to last few days.

Strategy :
We wanted to launch an SKU that must give a feel of an almost 50gm SKU and hence perceived value should be higher.
But at the same the SKU must be profitable. However it can make a lesser GC than regular SKU.
Hence we worked on various SKUs like 20g, 30g and 35g in both sachets as well as carton and tubes.
Worked out the profitability of each of them at various ‘Lower Put Down Price Points’ between Rs. 1 – Rs.6/-.
30gm SKU in a carton and tube format at Rs.5/- emerged as most profitable.
One of the reasons behind Rs.5/- selection was also the fact that its easily available coin.
In consumer research too this combination came across as a winner.
Hence, 30gm@Rs.5/- was launched across India.

Outcome
Babool’s distribution grew from less than 1mn outlets to 1.3 mn outlets and so did its market share soared. Instead of cannibalizing the 60gm SKU share it actually added volumes and hence market share, which soared to around 6% post the launch.

Shampoo Revolution …
Shampoo Usage & Penetration increased from less than 5 % to around 50 % in less than a decade

Sachets have come to account for nearly 70 per cent of the total shampoo market
70 per cent of the Unilever’s sales
65 per cent of Cavincare ‘s sales
Case 1 - Simply Sachets

Shampoo is a high-margin product, but given the costs of raw material, packaging, advertising, etc., huge volumes are required to make it profitable.
Cavincare fired the first salvo with a 4-ml sachet of Chic (0.50 paise), and its marketshare has since jumped from 5% to 13 %

To reach a larger populace, especially in rural areas where people are usually daily wage earners, selling products in lower-priced small packs is the best way to get a share of their wallets
From shampoos, toothpastes and detergents to food products like jams, ketchup and coffee, everything comes in sachets and costs as little as 2.3 cents to 4.6 cents

Case Study – Durables
CTV +Refrigerator + WM = 24000 Rs = 540 USD $ = EMI of Rs 999/- Rs = 22 USD $ per month , with exchange offer .
Market 999/- Rs per month not 24000/- Rs.
Similarly in Mobikes
Concepts : Bundling, Exchange Offer, Loan, EMI .

Case Study – India Mobile 100 Mn +
Tariffs down to Rs 1 per minute ( 3 cents )
Every 25 % tariff drop , increases MOU by 20 % and Sub base by 25 % , overall revenue grows by 35 % . However ARPU goes down , now ARPU stands as low as 200 Rs/Month ie 5 USD $ .
Manage Revenue through Voice ( local , STD, ISD ) & Data & VAS .

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Pricing Presentation@Singapore

by PESHWA ACHARYA on Mar 19, 2010

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