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Defining the customer experience to inform value based pricing

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Blue Canyon Partners Principal Axel Leichum on September 18 presented to MAPI's Division and Marketing Councils on how the customer experience can inform value-based pricing. The topic was one of the questions asked during the MAPI-Blue Canyon webinar on strategic pricing (Pricing Trends and Tools: How Companies Set Prices to Optimize Business Outcomes).

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Defining the customer experience to inform value based pricing

  1. 1. © 2014 Blue Canyon Partners, Inc. All rights reserved. September 2014 Defining the Customer Experience to Inform Value- Based Pricing
  2. 2. © 2014 Blue Canyon Partners, Inc. All rights reserved.  What is the customer experience?  How defining the customer experience informs value-based pricing  A framework for using customer experience to drive pricing decisions  The framework in action: 2 case studies Agenda 2
  3. 3. © 2014 Blue Canyon Partners, Inc. All rights reserved. What is the Customer Experience? 3 Effect Experience Product Experience Supplier Experience Three dimensions that define the total customer experience
  4. 4. © 2014 Blue Canyon Partners, Inc. All rights reserved. The Supplier Experience 4 Effect Experience Product Experience Supplier Experience Customer’s experience interacting with the supplier  Marketing/Sales Campaigns  Sales Calls  Solution Design & Engineering  Quote/Order Process  Inventory Management  Customer Support  Advisory Services
  5. 5. © 2014 Blue Canyon Partners, Inc. All rights reserved. The Product Experience 5 Effect Experience Product Experience Supplier Experience Customer’s experience interacting with the product  Installation  Set Up/Configuration  Customization/Modification  Use  Maintenance  Updating/Upgrading  Removal/Decommissioning
  6. 6. © 2014 Blue Canyon Partners, Inc. All rights reserved. The Effect Experience 6 Effect Experience Product Experience Supplier Experience Customer’s experience of the effect the offering has on their business  Process  Inputs  Outputs  Resources  Decision Making  Differentiation
  7. 7. © 2014 Blue Canyon Partners, Inc. All rights reserved. How Defining the Customer Experience Informs Value-Based Pricing 7 Defining the customer experience and understanding how the offering impacts the customer experience informs…  The value you are delivering to the customer  The customer’s willingness to pay  The price you can charge Effect Experience Product Experience Supplier Experience
  8. 8. © 2014 Blue Canyon Partners, Inc. All rights reserved. Effect Experience Product Experience Supplier Experience How Defining the Customer Experience Informs Value-Based Pricing 8 But there is a piece missing… $ $ $ $ $ $ You must not only define the customer experience but also the economics of the customer experience to successfully value and price the offering
  9. 9. © 2014 Blue Canyon Partners, Inc. All rights reserved. A Framework for Using Customer Experience to Drive Value-Based Pricing 9 Our Current Offering Economic Impact/ Value Delivered Value Captured (Price) Our Future Offering Competitor Offering Our Offering “Existing” Customer Experience “New” Customer Experience Change or difference in…  Supplier Experience  Product Experience  Effect Experience As determined by… Costs reduced Productivity improved Time saved  Risk avoided Revenue generated Share gained Driven by… Supplier vs. customer power Supplier vs. customer contribution Strength of proof Competitive dynamics Our Standard Offering Our Premium Offering
  10. 10. © 2014 Blue Canyon Partners, Inc. All rights reserved. The Framework in Practice: Case Study #1 10 Case Study #1: Product Experience Company: Manufacturer of Appliances Challenge: Develop and price new solution to penetrate retrofit market
  11. 11. © 2014 Blue Canyon Partners, Inc. All rights reserved. Case Study #1: Product Experience 11 Current Offering Existing Retrofit Customer Product Experience – Installation Future Offering Appliance Installation Work Plumbing Work Electrical Work Customer Time Coordination/Complexity Cost Uncertainty Increase Appliance Installation Work Reduce Plumbing Work Eliminate Electrical Work Reduce Customer Time Reduce Coordination/Complexity Eliminate Cost Uncertainty Define the customer experience for the current and future offering New Retrofit Customer Product Experience – Installation
  12. 12. © 2014 Blue Canyon Partners, Inc. All rights reserved. Case Study #1: Product Experience 12 Define the economics of the customer experience for the current and future offering to determine the value-based price premium Price Premium @ Different Value Capture Ratios Supplier/Customer 60/40: +$234 50/50: +$195 40/60: +$156 Base Retrofit Customer Product Experience – Installation (Most Difficult) New Retrofit Customer Product Experience – Installation (Most Difficult) Current Offering Future Offering Note: Not actual figures, data has been altered for confidentiality purposes Total: $840 Total: $840 Current Product Price: $500 Future Product Price: $695
  13. 13. © 2014 Blue Canyon Partners, Inc. All rights reserved. Case Study #1: Product Experience - Takeaways 13  Impact on Pricing Decisions and Overall Strategy ▫ Pricing Decisions • Recognized new solution should be sold at a premium, not at discount as originally assumed • Established price premium for new solution, above what initially thought appropriate ▫ Overall Strategy • Defined solution requirements to drive increased adoption in retrofit market • Determined target cost to drive R&D decisions • Identified potential need for new channel/business model  Key Learnings ▫ There isn’t just one customer experience – understand what experience you are targeting and price accordingly ▫ Need to understand tradeoffs in value-based pricing – what extra effort/costs are you imposing on the customer as well?
  14. 14. © 2014 Blue Canyon Partners, Inc. All rights reserved. The Framework in Practice: Case Study #2 14 Case Study #2: Effect Experience Company: Supplier of Solutions for the Refrigerated Container Market Challenge: Determine price and available market for next generation container monitoring technology
  15. 15. © 2014 Blue Canyon Partners, Inc. All rights reserved. 15 Understanding the Effect Experience required detailing the customer’s overall operational experience with refrigerated containers – activities, economic factors, and players/roles Ownership In Operation Example of Economics Details •Energy •Maint & Repair •Monitoring •Acquisition •Storage & Prep •Inland Transport •Loading/Unloading •Handling at Terminal •Vessel Transport Case Study #2: Effect Experience Capital Cost Operating Cost Claims Cost Handling Cost Economics Vessel & Overhead Cost Example of Activities Details •Monitor •Maint & Repair •Claims Admin •Claims Payout Activities Shipping Line Terminal Shipper/Receiver 3rd Party Trans Reefer Depot Leasing Firm Players/Roles
  16. 16. © 2014 Blue Canyon Partners, Inc. All rights reserved. Case Study #2: Effect Experience 16 See Decide Act Who • Shipping line – Reefer Operations • Shipping line – Reefer Operations • If container in depot: Depot Tech • If container in terminal: Terminal Tech • If container on vessel: Ship Tech What • Request for data log/temperature history • Container number • Location of container • Who to contact to download data log data • Locate container • Wait (if container is inland or at customer) • Lift/move containers to access and power (if necessary) • Download data log information • Send data to Reefer Operations Where • Shipping line offices • Shipping line offices • Dependent on container location When • Claim filed • Customer request • Internal operations request • When request for temperature history received • When request to retrieve data log is received How • Shipping line system • Manual request • Shipping line system • Experience • Shipping line guidelines • Manual locating • Manual download at container • Upload to shipping line systems or email Develop a set of use cases for the next generation monitoring technology and document how the solution would effect the customer’s operations
  17. 17. © 2014 Blue Canyon Partners, Inc. All rights reserved. Case Study #2: Effect Experience 17 Who • Shipping Line – Reefer Operations • Shipping line – Reefer Operations • Shipping line – Reefer Operations What • Request for data log/temperature history • Container number • Login to monitoring system • Select container • Download temperature history Where • Shipping line offices • Shipping line offices • Shipping line offices When • Claim filed • Customer request • Internal operations request • When request for temperature history received • When request for temperature history received How • Shipping line system • Manual request • Shipping line system • Download temperature history from monitoring system database through web-based interface RED=Change in Process The new customer experience using the next generation monitoring technology changed who, what, where, when, and how the temperature history is accessed See Decide Act
  18. 18. © 2014 Blue Canyon Partners, Inc. All rights reserved. Reefer Trips - $XX,000 Dry Backhaul Trips - $X00 Revenue Costs Annual Revenue/Cost Per Refrigerated Container Capital Cost $X,445 Operating Cost $X,520 Claims Cost $X85 Handling Cost $X,645 Case Study #2: Effect Experience 18 Detail operating economics to determine economic impact and value delivered by the next generation monitoring technology use cases Note: Figures disguised for confidentiality purposes
  19. 19. © 2014 Blue Canyon Partners, Inc. All rights reserved. Case Study #2: Effect Experience 19 Use Case Description Market Interest Viability Value Potential (Benefit Per Container Per Year) 1 On-Demand Temperature History End-to-end temperature record stored in the global monitoring system and available via on-demand remote download •Reduce claim admin costs by 50% = $XX •Reduce claims paid by 25% = $X4 •Total value potential = $X9 2 Use Case 2 Description 2 • Reduce claims rate (% of trips with claim) by 5% = $X • Total value potential = $X 3 Use Case 3 Description 3 • Eliminate monitoring costs of $X0/day while in terminal = $X00 • Total value potential = $X00 4 Use Case 4 Description 4 • Reduce maintenance labor costs by 10%: = $X6 • Reduce claims rate (% of trips with claim) by 5% = $X • Total value potential = $X5 5 Use Case 5 Description 5 • Reduce energy costs by 5% = $X3 • Reduce maintenance labor costs by $X0 = $X0 • Total value potential = $X03 6 Use Case 6 Description 6 • Increase annual trips per container by 5% = $X33 • Total value potential = $X33 Total Total Value Potential = $X42 Aggregating the economic impact and value delivered by each use case defines the total potential value of the next generation monitoring technology Note: Figures disguised for confidentiality purposes Lower Higher
  20. 20. © 2014 Blue Canyon Partners, Inc. All rights reserved. Price Per Container % of Annual Value Delivered Captured 20% 30% 40% $X44 $X66 $X88 Case Study #2: Effect Experience 20 Create scenarios with various value capture and market penetration assumptions to establish price per container and estimate annual available market Annual Available Market $ Millions % of Annual Value Delivered Captured Market Penetration (% of Reefer Population) 20% 30% 40% 20% $X8 $X3 $X7 30% $X3 $X09 $X46 40% $X7 $X46 $X95 Note: Figures disguised for confidentiality purposes
  21. 21. © 2014 Blue Canyon Partners, Inc. All rights reserved. Case Study #2: Effect Experience - Takeaways 21  Impact on Pricing Decisions and Overall Strategy ▫ Pricing Decisions • Detailed economic impact and value delivered of monitoring technology, well beyond what initially thought • Established well supported price per container, to confidently price to customers ▫ Overall Strategy • Identified higher economic impact use cases for prioritizing development and marketing focus • Defined annual market opportunity to determine investment levels • Identified barriers to address for successful adoption  Key Learnings ▫ The most obvious benefits of a solution do not always deliver the most value – detailing the economic impact is critical ▫ The value delivered can differ significantly by customer – pricing should differ accordingly as well
  22. 22. © 2014 Blue Canyon Partners, Inc. All rights reserved.  Define the customer experience to determine if value-based pricing is appropriate ▫ Do you have an offering that provides a unique or different customer experience? ▫ Examine supplier, product, and effect experience  Map out the “existing” and “new” customer experience ▫ Define your base – current offering, competitor’s offering, etc. ▫ Focus on the key aspects of the experience, don’t get lost in the details  Define the economics and your offering’s impact ▫ Remember to consider tradeoffs, rarely is there a “free lunch”  Be realistic in deciding how much of the value you can capture to set price ▫ Consider customer’s power and contribution, strength of proof, and competitive dynamics  Defining the customer experience provides value beyond pricing ▫ Informs multiple elements of strategy How You Can Use Customer Experience to Inform Value-Based Pricing 22
  23. 23. © 2014 Blue Canyon Partners, Inc. All rights reserved. Axel J. Leichum, Principal Axel J. Leichum Current Responsibilities Axel Leichum leads numerous business-to-business focused strategy projects that help Blue Canyon’s clients improve their understanding of customer needs, identify and prioritize growth opportunities, effectively segment and target markets, and enhance their major customer relationships. PRINCIPAL T (847) 967-0253 E ajl@bluecanyonpartners.com Experience With more than 12 years as a management consultant, Axel brings extensive experience in conducting primary and secondary research and performing economic analysis, combined with the ability to translate information into insight and actionable strategies for clients. Axel’s client engagements have spanned a wide variety of industries and geographies. His work includes:  Developing a pricing strategy for a global supplier of healthcare equipment  Defining a go-to-market strategy for an IT infrastructure management software and hardware provider  Developing a global growth strategy for a supplier of equipment to the telecommunications industry  Defining the market opportunity for a new technology to be introduced into the utility industry Prior to joining Blue Canyon, Axel served as a consultant with Booz  Allen & Hamilton’s management consulting practice (now known as Strategy&) working primarily with clients in the financial services and consumer products industries. Education and Affiliations Axel has a Bachelor of Arts in Economics from Northwestern University with departmental honors. Thought Leadership Axel has written and contributed to a number of articles and white papers on topics such as adjacencies and pricing strategies. His two white papers on adjacencies --Discovering Your Next Growth Opportunity: Adjacent Markets and Adjacent Markets: Choose Your Battles Wisely--explore how to identify and prioritize adjacent market opportunities. 23

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