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How to Boost Profits through Power Pricing Bogota, March 17, 2011 Prof. Dr. Dr. h.c. Hermann Simon Bonn Office Haydnstrasse 36, 53115 Bonn , Germany Phone +49/228/9843-115, Fax +49/228/9843-380 e-mail: firstname.lastname@example.org Internet: www.simon-kucher.com www.hermannsimon.com Expomarketing 2011
There Are Only Three Profit Drivers 1H01X007 - - Profit = Price x Volume - Cost
1H01X007 - - Case: Powerstar – Electric Tool Price: $ 100 Variable Cost: $ 60 Fixed Cost: $ 30 million Units Sold: 1 million Revenue: $ 100 million Profit: $ 10 million
Price as the Most Effective Profit Driver 1H01X007 - - To be read as follows: A 5% improvement in price brings price up to $105, everything else unchanged, this increases profit by 50% to $15 million. A 5% i ncrease in ... Profit Driver Profit Price ... leads to a profit increase of ... 50% 40% Old New New Old $10m $12m 1.05m 1m $10m $15m $ 105 $ 100 Sales Volume 2 0%
Price as the Most Effective Profit Driver 1H01X007 - - To be read as follows: A 5 % cut in price brings price down to $ 95 , everything else unchanged, this reduce s profit by 5 0% to $ 5 million. A 5% cut in ... Profit Driver Profit Price ... leads to a profit de crease of ... -5 0% -20 % Old New New Old $10m $ 8 m 0 . 95 m 1m $10m $ 5 m $95 $ 100 Sales Volume
Leverage of Profit Drivers 1H01X007 - - If the profit driver improves by 5%… … profit changes by… Source: Hermann Simon, Beat the Crisis - 33 Quick Solutions for Your Company, New York: Springer 2009. Price Variable unit costs Sales volume Fixed costs
“ Fixed costs are extremely high in our in-dustry. We realized that in a crisis we fare better with low prices than by reducing volume. After all, in contrast to some competi-tors, we still make money with this strategy.”
Richard Wagoner, CEO General Motors
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Porsche 1H01X007 - - “ We have a policy of keeping prices stable to protect our brand and to prevent a drop in prices for used cars. When demand goes down we reduce production but don’t lower our prices.” Wendelin Wiedeking, CEO Porsche
Good and Bad Market Share 1H01X007 - - Market Share Good Bad earned by performance, quality, innovation, value, adequate prices conquered by aggressive low prices without corresponding low costs good margins, high profits margins ruined, low profits, losses
“ Manage for Profit, not for Share” is perceived as a provocation by many managers. It calls for a fundamental attitude change. In pricing, profit should and must be the first goal. Profit is the cost of survival.
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Value Extraction: Get More out of It 1H01X007 - - ? ? Value Delivery (Welchen Wert liefern wir den Kunden?) Value Delivery (What value do we deliver to the customer?) Value Extraction (Wie holen wir uns den Gegenwert?) Value Extraction (How do we get the counter-value?) + + - / o / +
It is possible to be successful with low costs and prices. But only a few companies rise to this challenge. If you want to make money with low prices you must trim your entire strategy chain (production, marketing, culture) to frugality.
Rectangle vs. Triangle 1H01X007 - - "The Profit Potential is always a Triangle" Sales Price Unit Cost Profit Potential
Rectangle vs. Triangle 1H01X007 - - Sales Price Unit Cost Our Profit Our Sales Our Price "Money Left on the Table" "Passed-up Profit" With uniform price the profit is a rectangle, the profit potential is a triangle
Price Differentiation of Coca-Cola 1H01X007 - - 0.32 0.34 0.40 0.45 0.60 0.75 1.80 1.00 1.10 Big supermarket Grocery Store Bakery Vending machine- university Gas station Vending machine - street Newsstand - street Newsstand - airport Newsstand - train/bus station € 0.33 l-can Example
Value and Price Differences are Huge between Countries 1H01X007 - - 100 1137 282 100 260 188 100 328 133 100 2420 233 100 700 465 Mineral water Coca-Cola Red Bull Milka Feodora Lindt No name Mövenpick Häagen-Dazs WMF Riedel Swarowski Elite (Kaufhof private label) Staedtler Faber-Castell 9000 Softdrinks (1 litre) Chocolate (1 bar 100g) Ice cream (1 litre) Crystal glasses (2 glasses) Pencils (Sixpack) Product Brand Prices (Index) Source: Survey Grey Global Group, November 2004
Changing the Business Model: Coca Cola 1H01X007 - -
Coca Cola recently toyed with the idea to vary prices for soft drinks of its vending machines with the outside temperature.
The warmer it gets, the higher the price goes.
These ideas were put on hold (for a while) due to consumer pressure and bad press during a time when its stock price was already low.
+30 -10 0 +10 +20
Value Difference by Industry/Application 1H01X007 - - Value of 1 kg Aramid
Two-Dimensional Pricing - BahnCard (Railcard) 1H01X007 - - Total Price with/without BC Realised Discount appr. 1 900 km Total total km per year With BahnCard Without BahnCard Full Fare = 100 140 € total km per year actual discount end of 1990s: 28%
Actual prices paid depending on usage rate per 50 liters.
1H01X007 - - Usage in days 1 25 50 100 Actual price per 50 l gas $ 10.25 $ 16.25 $ 22.25 $ 35.00
Bundling: McDonalds 1H01X007 - - Bundling is ‘state-of-the-art’ pricing - extracting value from customers for products they have a lower willingness-to-pay for by bundling them with key value elements customers want. World Champions of Bundling They’re lovin’ it! Thirsty? Buy a Burger! Hungry? Buy a Coke! Example
Lesson 5 1H01X007 - - Price differentiation, multidimensional, non-linear pricing, and bundling schemes are extremely effective pricing tools. Highly accurate information is required for these schemes.
1H01X007 - - *multiple responses possible Prof. Oliver Heil, “Price Wars: Issues and Prelimiary Results”, May 1996 Reason for a price war Excess capacities Commodity product Small market growth Price reduction in % due to price war Snacks, USA, 1991 Tires, Europe 1990 Cigarettes, Germany,1992 Airline tickets, USA, 1992 Passenger bus service, Eastern USA, 1993 % of cases factor was responsible for price war 80 55 25 17 15 Industry structure
“ The Honda Wave α has achieved a low price, yet high quality and dependability, through using cost-reduced, locally-made parts as well as parts obtained through Honda’s global purchasing network.”
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How to Avoid Price Wars 1H01X007 - - … .companies that successfully avoid price wars consistently write and speak publicly about the horrors of price competition and virtues of value competition. They do this “jawboning” in articles, in their in-house publications, at industry association meetings and in every available public forum. Jawbone on pricing! … .price communication should be designed to minimize the likelihood that customers or competitors will misread your price levels or the reasons behind your actions. Having your own prices misread by competitors can be just as damaging as you misreading theirs; both can start a price war. Also consider using temporary price moves. Communicate your price effectively!
Lesson 6 1H01X007 - - If possible, avoid price wars. Enter into a price war only if you have sustainably lower costs and/or greater financial strength. Signaling is the most effective way to prevent or to end price wars.
Profit Improvement through More Effective Pricing Processes
Typically, the margin is improved by 2%-points and project payback is less than one month.
1H01X007 - - 2.0 - Classifying customer and product groups based on price elasticities - Anti-discount incentives for the sales force 1-5 bil Wholesaler 0.8 - Systematic quantification of value-to-customer - More comprehensive and reliable competitive intelligence 5-10 bil Engineering 1.1 - Value-to-customer based price setting - Systematic estimation/determination of price elasticity 5-10 bil Consumer products 2.2 - For innovations: Using value-pricing instead of cost-plus - Better forecasting of cost developments for long term contracts 5-10 bil Electronics 2.5 Reduction of over engineering through target valuing/target costing Standardisation of processes, especially for limited/small run series 100-500 mil Machinery 8.0 - Reorganisation of the selling process and guidelines - Stronger centralisation 100-500 mil Software 1.5 - Introduction of new elements to the price structure - Invoicing of additional services 0.1-0.5 bil Automotive supplier 1.6 - More strongly differentiated price structure - Indicator- supported identification of opportunities with profit potential 5-10 bil Tourism 1.6 - Better exploitation of brand equity - Enhancing the pricing competence of the customer representatives 1-5 bil Bank Increase in ROS in % Main thrust of SKP pricing improvement project Company revenue (US$) Industry
Case: Tour Operator 1H01X007 - - Margin up 1.6% points Project payback < 1 month Result: Focus on 50,000 most relevant decisions, automatic identification New Process: 1 million price decisions per season Situation:
Case: DHL 1H01X007 - - Margin up 1.5 percentage points Project payback < 1month Result: Central pricing and discount system Continuous monitoring New Process: Decentralized pricing in 200 countries Large price inconsistencies Situation:
Case: World Leader in Assembly Products 1H01X007 - - Very quick win: Average discount down from 16% to 14% Margin up 2 percentage points Result: Anti-discount incentive for sales force Better information on price elasticity New Process: 40,000 articles Prices are negotiated Situation:
The "price defense commission" rewards sales force performance in terms of their pricing achievements.
1H01X007 - - Special 80% 100% 3,0% 9,0% Commission Price
Sales force with broad price authority
Primarily sales commission, only partly linked to margins
Strong price decline during the last years; most of transactions were closed at maximum discount
Strong margin drop
Source: SKP project database
Case: Private Banking 1H01X007 - - Result: Profit increase of €60 million = 4% - points Clear pricing guidelines and responsibilities Better information for account managers New Process: No clear pricing guidelines No information on price elasticities Situation:
1H01X007 - - Reports directly to Division CEO Rigorous implementation Considerably stronger pricing discipline Improved preparation: Price argumentation, defence Source: GE Management, personal discussion with Jeff Immelt
Lesson 7 1H01X007 - - The improvement of value and pricing processes typically leads to margin increases of 2 percentage points. The cases show that quick wins and high profit increases were achieved. You can develop the best strategy in the world, implementation is 90% of its success.
World Leader in Price Consulting 1H01X007 “ Simon-Kucher is world leader in giving advice to companies on how to price their products.” Business Week “ Simon-Kucher is the worlds’ leading pricing consultancy.” The Economist “ In pricing you offer something nobody else does.” Professor Peter Drucker “ No one knows more about pricing than Simon-Kucher.” Professor Philip Kotler “ No firm has spearheaded the professionalization of pricing more than Simon-Kucher & Partners.” William Poundstone ( Priceless, Hill and Wang, 2010) - -
Employees and Revenue 1H01X007 Revenue in 2010: $141 million - -
Global Presence 1H01X007 Germany, Bonn Switzerland, Zurich England, London Italy, Milan Spain, Madrid USA, San Francisco Germany Munich Japan, Tokyo Poland, Warsaw Germany, Frankfurt USA, New York Germany, Cologne USA, Boston Luxem- bourg Austria Vienna Belgium, Brussels USA, Miami Denmark, Copenhagen Netherlands, Amsterdam France, Paris China, Beijing Singa- pore Australia, Sydney - -
SKP has carried out over 100 projects in Latin America and has a deep understanding of the regional markets.
Project experience Selected clients in the region
Contact for Latin America: Manuel Osorio Partner Head of Latin American Practice Miami phone: +1 617 319 9584 fax: +1 617 231 4576 e-mail: manuel.osorio @simon-kucher.com Manuel has been working in marketing & strategy consulting for over 10 years. His activities focus on developing marketing strategies and improving pricing processes for global corporations in the US and Latin America. He has worked in projects in more than fifteen countries in the Americas, Europe and Asia with clients such as Pepsi, Kimberly-Clark, Johnson & Johnson, Intel, HSBC, Google, Mastercard, Bose, Texas Instruments, Holcim, Assa Abloy, Comex, Arauco, iBasis, Constant Contact, Software AG, and TeleCheck. Manuel is the leader of Simon-Kucher’s Latin American practice, with extensive work experience in Brazil, Mexico, Chile, Colombia, and Argentina, among others. He regularly speaks on conferences on the particular issues of Latin American markets. Manuel received an MBA degree from the MIT Sloan School of Management. Prior to MIT, he worked for four years as a senior internal consultant for Copec, a Latin American conglomerate. His experience included corporate strategy, business development and corporate marketing. At the same time, he taught Introduction to Economics as a part-time professor for three years at the engineering school of the Catholic University of Chile. Manuel received a Master in Engineering degree and an Industrial Engineering degree from the Catholic University in Chile. Manuel grew up in Brazil and Chile so he is fluent in English, Spanish and Portuguese.
Books by Hermann Simon 1H01X007 www.hermannsimon.com - -
Most Influential Management Thinkers in German-speaking Countries 2005-2010 1H01X007 Source: www.managementdenker.de, Internet Surveys, n = 2526, 2005 – 2010 - - 1. Peter F. Drucker † 40.1% 2. Hermann Simon 14.4% 3. Fredmund Malik 14.1% 4. Michael E. Porter 6.6%
Hermann Simon 1H01X007 Professor Simon has published over 30 books in 25 languages, including the worldwide bestsellers Hidden Champions (Boston 1996, cover story of BusinessWeek in January 2004) and Power Pricing (New York 1997), as well as Strategy for Competition (New Delhi 2003). Manage for Profit, Not for Market Share (Boston 2006) takes a critical look at the widespread focus on volume and market share and calls for a conscious shift of focus towards profit. His book Hidden Champions of the 21st Century, Success Strategies of Unknown World Market Leaders (New York 2009) investigates the strategies of little known market leaders. His most recent book Beat the Crisis (New York 2010) provides companies with practical advice against the crisis and for a quick recovery. Simon was and is a member of the editorial boards of numerous business journals, including the International Journal of Research in Marketing, Management Science, Recherche et Applications en Marketing, Décisions Marketing, European Management Journal as well as several German journals. Since 1988 regularly writes columns for the business monthly Manager Magazin. As a board member of numerous foundations and corporations, Professor Simon has gained substantial experience in corporate governance. From 1984 to 1986 he was the president of the European Marketing Academy (EMAC). A native of Germany, he studied economics and business administration at the universities of Bonn and Cologne. He received his diploma (1973) and his doctorate (1976) from the University of Bonn. Simon holds an honorary doctorate from IECD Business School of Bled, Slovenia. Hermann Simon is chairman of Simon-Kucher & Partners Strategy & Marketing Consultants with offices in Amsterdam, Beijing, Bonn, Boston, Brussels, Cologne, Copenhagen, Frankfurt, London, Luxembourg, Madrid, Miami, Milan, Munich, New York, Paris, San Francisco, Singapore, Sydney, Tokyo, Vienna, Warsaw and Zurich. Simon is an expert in strategy, marketing and pricing. He has an extensive global range of clients. In the German language area he was voted the most influential management thinker after the late Peter Drucker. Before committing himself entirely to management consulting, Simon was a professor of business administration and marketing at the Universities of Mainz (1989-1995) and Bielefeld (1979-1989). He was also a visiting professor at Harvard Business School, Stanford, London Business School, INSEAD, Keio University in Tokyo and the Massachusetts Institute of Technology. From April 1995 to May 2009 he was CEO of Simon-Kucher & Partners. - -