How to overcome floccinaucinihilipilification

How to Overcome
Floccinaucinihilipilification
[pronounced: FLOX-in-OX-in-ai-hil-i-pil-i-fic-ay-shun]

© Sans Prix Pty Ltd, 2015
© PricingProphets.com, 2021
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How to Overcome Floccinaucinihilipilification
Today’s Agenda
q Ten Pricing Myths
q Pricing Models, Pricing Methodologies & the Importance of Pricing
q The Value-based Pricing Canvas
q Four Value-based Pricing Methodologies

Slide 3
1. The myth of the perfect price
2. The myth of full price
3. The myth of stealth price increases
4. The myth of a world first pricing
model
5. The myth of ‘markets’, and ‘the
invisible hand’
Pricing Myths
6. The myths of traditional
economic theory
7. The myth that pricing models are
for life
8. The myth of the spreadsheet
9. The myth of procurement
10.The myth of cost-plus pricing

Slide 4
No More Stealth Price Increases
BUSINESS
MODEL

Pricing Models are not for Life
Slide 5

Slide 6
Business Model vs. Pricing Model
BUSINESS
MODEL

Pricing Methodologies
Dynamic
Variable
Fixed

Why is Pricing so important?
2.3%
3.3%
7.8%
11.1%
Fixed Costs Volume Variable Costs Price
Slide 8
Impact on Operating Profit of a 1% improvement in…

50.0%
40.0%
32.0%
28.0%
26.0%
18.0%
8.0%
2.0%
Packard Other Compaq HP IBM Gateway Dell Apple
Source: Docters, R et al (2004) Winning the Profit Game: Smarter Branding, Smarter Pricing, McGraw-Hill, p40
The Importance of Price
As the Primary Selection Criteria, by brand – PC Industry
Who’s a fan…of this Brand?
Slide 9

The Myth of Cost-Plus Pricing
Slide 10

Slide 11
Percentage of Australian companies that have changed workforce
arrangements
Why Value-Based Pricing?
50%
38%
38%
29%
24%
Percentage of Australian companies that have changed methods
of delivery
Percentage of Australian companies that have, or are in the
process of, renegotiating rent/lease arrangements
Percentage of Australian companies reporting difficulties
sourcing raw materials
Percentage of Australian companies that have deferred a loan
repayment

The Business Model Canvas

The Value-Based Pricing Canvas

Value-Based Pricing Methodologies

q Four questions
Ø At what price does the product look cheap?
Ø At what price does the product look expensive?
Ø At what price does the product look too
expensive?
Ø At what price does the product look too cheap
q Likelihood of buying?
Ø Definitely, Probably, Maybe, Probably Not,
Definitely Not?
► Advantages
q Cheap
q Simple
q Easy
► Disadvantages
q Identifies a range of prices
q No propensity to buy
q Results can vary
q Misleading answers
q Doesn’t consider competitive products
q Sequencing of the questions and the inclusion
or exclusion of price points has not been
‘validated’
The Price Sensitivity Meter
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Point of Marginal Expensiveness │Point of Marginal Cheapness │Indifference Price Point │ Optimal Price Point
Also note the slope of the curve:
Steep: greater risk of the wrong price and losing customers │ Shallow: more scope to increase price without losing sales
0%
25%
50%
75%
100%
$100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000
PSM Output
Cheap Expensive Too Cheap Too Expensive
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0%
25%
50%
75%
$100 $200 $300 $400 $500 $600 $700
Modified PSM Output
Acceptable Expensive Too Expensive
-50%
-25%
0%
25%
50%
75%
$100 $200 $300 $400 $500 $600 $700
Net Acceptability PSM Output
Acceptable Net Acceptable
Slide 18

q Identify the value attributes /features of the products
Ø From the customers perspective
q Get customers to weight the product value attributes / features
Ø For weightings, S = 100%
q Get customers to assess product value attributes / features
Ø One a scale of 0 – 10 or 0 – 100
q Benchmark one product against another, or one company against another
Ø Price relativity between two products on a ladder may be inappropriate
Ø A competitor may offer more value at a cheaper price
q Plot findings on a Value Map
What does Customer Value Analysis look like?
Customer Value Analysis (CVA)
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Slide 20

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Category Benefit Quantification
Improves
Revenue
►Increase volumes | Product sold
at higher prices/yield | Create
new revenue streams | Open up
new channels | Open up new
markets
► Measure Incremental Revenue attributable to the
product
► Measure Total Revenue attributable to the product
► Estimate the size of new revenue streams
► Are the benefits one-off or on-going?
Reduces Costs ►Reductions in one or more
categories of expenditure
► Reductions in Cost of Goods Sold: Savings in opening
or closing stock, raw material purchases,
ordering/lead time (JIT)
► Reductions in Other categories of expenses
Minimises Risk ►Time to market | Improved safety
& quality | Environmental
benefits | Legal compliance | On-
time deliveries | Improved
productivity | Innovation, R&D |
Wastage & Replacement | Life of
the product
► Measure ‘First-Mover’ or ‘First-to-Market’ benefit
► Costs avoided (e.g. litigation, carbon emissions)
► Costs reduced (wastage & spoilage, replacements)
► Provisions for future acquisitions or replacements
Economic Value Analysis (EVA)
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Rockwell Automation
q Value Word Equation for Power Reduction Cost Savings:
Ø = [kW spent x number of operating hours per year x $ per kW x number of years
solution in operation] Competitor Solution
Ø - [kW spent x number of operating hours per year x $ per kW x number of years
solution in operation] Rockwell Automation Solution
Economic Value Analysis (EVA)
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Subscriptions | SaaS
Step Description
Step 1: Architecture Number of product offerings | Use of a value metric | Duration
Step 2: Operative Product Features Stuff the product does
Step 3: Non-operative Product Features
T&C’s , talent & people, technology, customisation, timing, education &
training, support, content
Step 4: Optional Extras
Stuff that can be purchased now or later, must be consumed with the
core product offering (no use on its own) & can be added to more than
one product
Step 5: Segmentation, Value & WTP
• Anticipated differences in customers (is segmentation required?)
• Estimates of economic value
• Any indications around willingness to pay
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Operative (Core, Tangible, Quantitative) Features
Something you want to specifically charge for, or bundle in a
specific charge, and three versions of it can be created
Ø Set-Up Fee
Ø Subscription
Ø Data or Storage
Ø Users
Non-Operative (Core, Intangible, Qualitative) Features
Things that add differentiation to the options created
Ø Payment Terms
Ø Forms of Payment
Ø Cancellation Fees
Add-Ons or Optional Extras
Ø Can buy it now or later
Ø Consumers with a core product / not useful on
its own
Ø Can be added to more than one product
Create versions via
Ø Inclusion or Exclusion
Ø Talent or People
Ø Technology
Ø Customisation
Ø Timing
Ø Terms & Conditions
Ø Education & Training
Ø Support
Ø Content
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Product Feature Differentiation Best Better Good
Users Number Unlimited 50 (Max) 10 (max)
Feature 1 - Included Included Included
Feature 4 Inclusion / Duration Yes (Unrestricted) Yes (Restricted) Not Available
Support Time 24 hours (max.) 48 hrs (max.) 72 hrs (max.)
Content Modules 7 modules 4 modules 1 module
Cancellation Penalty % of Investment 20% of Investment 30% of Investment 50% of Investment
Deposit % of Investment 0% of Investment 25% of Investment 40% of Investment
Option A Included Included Included
Option B Included Included $$$
Option C Included $$$ $$$
Investment per month $A X,XXX $A X,XXX $A X,XXX
1.
Architecture
2.
Operative
Features
3.
Non-Operative
Features
4.
Optional Extras
5.
Segmentation,
Value & WTP
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Any Questions…?
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CONTACT & CONNECT: Jon Manning
+61 (0)405 629-141 (AU) +1 (408) 520-9450. (the)PricingProphets

How to overcome floccinaucinihilipilification

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