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Value based pricing in the capital equipment aftermarket

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10th Copperberg aftermarket Conference, 2016, Weisbaden keynote presentation.
This presentation shows what is needed when you move to value-based pricing in the aftermarket. The move requires more structure in pricing than is the case with simple cost plus. Customer value pricing is about improving the customer experience with pricing and ensuring that the supplier better understands their customer's value creation process. A visual design thinking approach is used to help understand the customer and estimate their "willingness to pay".

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Value based pricing in the capital equipment aftermarket

  1. 1. Value based pricing in the capital equipment aftermarket 10th Copperberg aftermarket conference, Wiesbaden 20 October 2016 Dr Shaun West
  2. 2. Copperberg Aftermarket Europe 2016| October 2016 |Shaun West Introduction Value based pricing means understanding both the calculation and the customer emotions A practical model to help you build up value-based pricing for the aftermarket is developed and presented Why is pricing important? Customer value creation and its impact on pricing The pros and cons of different pricing strategies An example of value based pricing
  3. 3. Copperberg Aftermarket Europe 2016| October 2016 |Shaun West History Pricing and value are not new problems!
  4. 4. Copperberg Aftermarket Europe 2016| October 2016 |Shaun West Today How much for a glass of water? What would you pay? The situation has a major impact on price
  5. 5. Copperberg Aftermarket Europe 2016| October 2016 |Shaun West Background Why is pricing important? What is important when pricing services? - Offering higher value added products and services - Offering services and solutions - Rethinking pricing strategies - Setting the right price - Capturing customer value Pricing is a key part of the business model and impacts many different areas “…manufacturers should price their most advanced service offerings according to value-, rather than to cost- or competition based strategies” (Rapaccini 2015)
  6. 6. Copperberg Aftermarket Europe 2016| October 2016 |Shaun West Background Value as a fundamental of service pricing What does the literature tell us? - That buyer’s choice is dependent on price is an oversimplification of the problem - Pricing has an impact on customer satisfaction - Pricing for services is dependent on situations - Pricing must reflect functional and emotional aspects - Pricing and service scopes are related The use of value must be a central aspect in the pricing objectives “..what is the difference in worth of the two offerings to my firm, and how does it compare to the difference in their prices?” (Anderson et al, 2009)
  7. 7. Copperberg Aftermarket Europe 2016| October 2016 |Shaun West Background Pricing is the most powerful tool in the marketing toolbox What does the literature tell us? - Pricing has a huge impact on the financial results - Pricing is a multi-department activity - Services are often given away free - Services firms need to adjust their revenue models - Manufacturers find it hard to change pricing models It is importing to develop pricing objectives, strategies and tools to help support new pricing models
  8. 8. Copperberg Aftermarket Europe 2016| October 2016 |Shaun West Background Pricing in firms must work on three different levels Alignment is needed at each level Pricing objectives must align with the strategy of the firm The tools that help create the ’price’ that is given to the customer Different strategies can be applied to achieve the pricing objectives Objectives Strategies Tools and methods
  9. 9. Copperberg Aftermarket Europe 2016| October 2016 |Shaun West Background Pricing objectives are the basis for profitable decisions What does the literature tell us? - Pricing objectives are quantitative and qualitative - Sales, profits, market share… - Relationships, competitors… - The objectives must be understood within the firm The objectives of pricing lead to different operational pricing strategies within the organization ”…objectives of pricing are to determine which pricing strategy will be the basis for profitable decisions as a result of company’s overall strategy” (Hinterhuber, 2003)
  10. 10. Copperberg Aftermarket Europe 2016| October 2016 |Shaun West Background What are service firms doing today Findings confirmed that pricing of services is complex: - Different pricing models help with margin optimization - It was hard to move away from a cost-plus model - Firms had a desire to move to value-based pricing but were unsure of the implications - The buyer might be more advanced in pricing model innovation than the seller - Pricing also provides a focus on measuring customer value Within a firm there should be an alignment between the pricing objectives, pricing strategies and tools. “Such tools are needed to create a value based pricing model.” Anderson et al. (2009). Firms are not using information that could help them to identify the customer value
  11. 11. Copperberg Aftermarket Europe 2016| October 2016 |Shaun West Background Firms need to be able to understand customer value to get to the price What does the literature tell us? - Three categories for service pricing methods: cost based, competition based, and demand based - Pricing methods: negotiated pricing, pure bundling, trade discounts, efficiency pricing, cash discounts, and bundling - Different pricing tools required to support the pricing methods Correct pricing levels help firms to boost there sales and margins ”…empirical research on pricing methods is extremely limited” (Avlonitis and Indounas 2005)
  12. 12. Copperberg Aftermarket Europe 2016| October 2016 |Shaun West Pricing strategies Cost plus pricing does not always provide value to the customer Pricing process Cost plus - Easy to use - Supplier does not understand customer value - Can provide the customer with poor value - Can lead to ’over-scoping’ of services - Pricing is only a calculation Pricing process begins with costs not customer value - that’s why it is easy Scope Cost Margin Price Value
  13. 13. Copperberg Aftermarket Europe 2016| October 2016 |Shaun West Pricing strategies Cost plus pricing does not always provide value to the customer Pricing process Cost plus - Easy to use - Supplier does not understand customer value - Can provide the customer with poor value - Can lead to ’over-scoping’ of services - Pricing is only a calculation The value is judged by the customer, price by the supplier Scope Cost Margin Price Value Customer Customer Price paid Value received Supplier Cost build- up Margin Scope
  14. 14. Copperberg Aftermarket Europe 2016| October 2016 |Shaun West Pricing strategies Competition/market based pricing does not always provide value to the customer Pricing process Competition/market base - Pricing is controlled by the market - Market benchmarks must be understood - Supplier does not understand customer value - Value capture can be low Price is set by the market - that’s why it is easy Scope Cost Market Price Value
  15. 15. Copperberg Aftermarket Europe 2016| October 2016 |Shaun West Pricing strategies Competition/market based pricing does not always provide value to the customer Pricing process Competition/market base - Pricing is controlled by the market - Market benchmarks must be understood - Supplier does not understand customer value - Value capture can be low The value is judged by the customer, price set by the market Scope Cost Market Price Value Customer Customer Price paid Value received Supplier Cost build- up Margin Market Market benchmarkScope
  16. 16. Copperberg Aftermarket Europe 2016| October 2016 |Shaun West Pricing strategies Value based pricing is based on the customer’s value creation process Pricing process Value based - Customer value is the driver for the price - Price supports scope definition - Supplier understand customer value creation - Supplier measures margin at the end of the provide - Can leave customers feeling they are overpaying Pricing process begins with customer value - that’s why it is hard Value Price Scope Cost Margin
  17. 17. Copperberg Aftermarket Europe 2016| October 2016 |Shaun West Pricing strategies Value based pricing is based on the customer’s value creation process Pricing process Value based - Customer value is the driver for the price - Price supports scope definition - Value based pricing must be included risk pricing - Supplier understand customer value creation - Supplier measures margin at the end of the provide - Can leave customers feeling they are overpaying Value is determined by ’value in use’ but risks ignoring intangible issues Value Price Scope Cost Margin Customer Supplier Cost build- up Margin Price paid Value in use Scope
  18. 18. Copperberg Aftermarket Europe 2016| October 2016 |Shaun West Pricing tools and methods for value based pricing Value-based pricing to identify the ’willingness to pay’ and the ’fair-price’ Triangulation of value-base pricing based on the data and analysis: market, internal and customer Customer Supplier Products and services Gain makers Value in use Willingness to pay region Market Market benchmark Gains ⬆ Pains ⬇ Total value delivered Customer Pain relievers Margin ’Fair’ price Scope
  19. 19. Copperberg Aftermarket Europe 2016| October 2016 |Shaun West Scope Customer Supplier Products and services Gain makers Value in use Willingness to pay region Market Market benchmark Gains ⬆ Pains ⬇ Total value delivered Customer Pain relievers Margin ’Fair’ price Pricing tools and methods for value based pricing Building a pricing model based on customer value needs you to think like the customer Think and feed? Say and do? Hear? See Pains Gains Empathy mapping Gains ⬆ Pains ⬇ Customer value proposition Customer jobs Gains Pains Gains creators Pains relievers Products and services Customer value creation Value in use Jobs to be done Strategic aims and inputs Pricing is not a one-time event and has to be viwed from many different angles Benchmarking Market data, win/loss analysis, CRM….
  20. 20. Copperberg Aftermarket Europe 2016| October 2016 |Shaun West Pricing tools and methods for value based pricing Bundling and unbundling to capture value and improve customer experience Outcome value pricing - Payment per unit produced - Risk share based on 3(-5) performance indicators O&G contracts with interest in oil - Benchmark: cost per barrel should be in a similar ball pack as the same services from the price list There are always more ways to build a value based price Equipment-based value pricing - Monthly fees: fixed costs, obsolescence/upgrades - Fee per use (typically per hour) - Risk share based on 3(-5) performance indicators Gas turbines service contracts in power generation - Benchmark: monthly fees plus basic fees should be in a similar ball pack as the same services from the price list
  21. 21. Copperberg Aftermarket Europe 2016| October 2016 |Shaun West Pricing tools and methods for value based pricing When to use value based pricing and when not to from experience Cost plus or market based - For consumable parts with standard delivery - For logistics - For travel and living costs If you don’t add value why should you take more margin? Value based - Where the customer gains revenue per unit cost - Where the customer saves costs per unit production - Where risk exchange take place If you add value you should take more margin. How one screw can change customer relationship
  22. 22. Copperberg Aftermarket Europe 2016| October 2016 |Shaun West Value-based pricing work does work! Value not cost in O&G can help to drive the cost out Background - Customer revenue is based on per barrel of oil - Facility had a ’cost’ mentality - The availability and HSE were poor Customer value - Customer value is derived from oil sold - Outsource to competent party - Alignment of goals Supplier value - Income based on per barrel - Removes procurement distractions - Alignment of goals Moving from cost plus to a tariff-like agreement can provide opportunities to cut per barrel costs goo.gl/Ab3ZEH
  23. 23. Copperberg Aftermarket Europe 2016| October 2016 |Shaun West Closing Summary Pricing needs to be tailored to individual customers and how you add value to their business while being sensitive to the market norms Pricing can make or break a relationship with a customer Pricing should be in line with customer value creation The best pricing strategies put the customer in the centre An example of value based pricing has been presented
  24. 24. Copperberg Aftermarket Europe 2016| October 2016 |Shaun West http://www.advancedservicesgroup.co.uk/ssc2017
  25. 25. Copperberg Aftermarket Europe 2016| October 2016 |Shaun West Thanks for your time! Questions over coffee… Slides posted on SlideShare.com

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