2. Pricing Principles
Pricing should be based on the value to the customer, not the cost to you
Prices should be tangible, so your customers can see what they get for what they pay
Prices should be comparable – on terms that you control
IF you want to change your prices, you must reframe the service or product
Price differentiation is the key enabler of profit
Pricing communication shapes the client’s perception of value
You must be prepared to lose some sales in order to increase profits
2
4. Reading the customer’s mind
Working of what customer wants is sometimes easier – Value Modelling
Share to potential customers
ONCE A PRICE PRECEDENT IS SET, IT IS HARD TO INCREASE
Reframe your prices with promotions then raise
Introduce new product variations
Bundling
Free offers
Upselling
Psychology of giving – emotional value
4
5. How many pricing models are there?
Flat or Fixed product price
Bespoke quotes for each customer
Monthly memberships or subscriptions
Percentage of value generated
All inclusive pricing
Cost plus % mark up
Hourly rates
Auctions
Industry standard
Annual contract
Demand based (dynamic pricing
5
Advanced commitment discounts
Free to one group supported by other
(Advertising)
Freemium
Interest charges
Penalty Fees
Income based charges
Marginal cost pricing
Discounting for market share
Decline price as adoption grows
Random fluctuations in price
Temporary promotions
6. Pricing Strategies
Fixed Price Services – Typically for services where the details (scope and standard) and quantum (volume/frequency) of
the requirement is known or predictable
Variable Service – Usually used in conjunction with Fixed Price Services, for services where either the details (scope and
standard) of the requirement are unknown (e.g. project work) or details are known but the frequency of the requirement
is unknown or unpredictable, or at the client’s discretion (e.g. turn around cleans to student bedrooms).
Cost Plus – This pricing strategy allows for the supplier to recover all actual costs incurred for the management and
delivery of the services including overhead costs with an additional agreed profit margin applied.
Target Price – This is used where a target price for the services is agreed, which is then reconciled against the actual
costs and an agreed mechanism to adjust the price (up or down) with a degree of cost sharing between the client and the
supplier on a ‘gain/pain’ basis.
6
7. Pricing Strategy Factors
Form of contract used
Number of services in scope
Complexity of requirements
Client objectives in relation to pricing (e.g. price certainty, value for money, flexibility etc.)
Capacity of client team to manage some pricing strategies (administrative burden)
The quantity and quality of pricing data available
7
8. Pricing
8
Time and Materials
Fixed or Firm
Volume based
Guaranteed Maximum
Price with Target Cost
(GMPTC)
9. Pricing to Win (P2W)
Price-to-Win is a process where you analyse and evaluate your company’s competitors and their data to predict how
they will bid
You will use this predicted bid and information about the customer’s budget to make a bid of your own.
Your bid is a dynamic trade-off which takes both the customer’s and competitors into consideration.
In terms of Price-to-Win strategies, this statement must generally be true:
Customer’s Perceived Value ≥ Customer’s Budget ≥ Your Price ≥ Your Cost
9
10. Cost Model – Model Inputs
MACRO ECONOMIC ASSUMPTIONS
Inflation, Commodity Prices, Interest rates, Exchange rates, Economic Growth
PROJECTS COSTS AND FUNDING
Development Costs, Development Fees, Project Company Costs, Contract Price, Construction phase
insurance, Start up costs, Stock, Working Capital, Taxes, Financing Costs, Contingency
OPERATIONAL REVENUES AND COSTS
Operating revenues from sales of products, Cost of fuel or raw materials, Personnel, Office, Vehicle,
Insurance etc
TAXATION AND ACCOUNTING
Capitalisation, Amortisation and Depreciation of Project Costs
Corporation Tax and VAT
Investment and ROI calculations
10
11. Cost Model – Model Outputs
CONSTRUCTION PHASE COSTS
DRAWDOWN OF EQUITY/DEBT
INTEREST CALCULATIONS
OPERATING REVENUE AND COSTS
TAX
PROFIT AND LOSS ACCOUNT
BALANCE SHEET
CASH FLOW (SOURCE AND USE OF FUNDS)
SUMMARY SHEET OF PROJECTS COSTS AND FUNDING
CASHFLOW SUMMARY
INVESTOR RETURNS
11
12. Project Risks
Macro economic risks (financial risks) – external economic effects
Commercial risks (project risks) – inherent to the project
Political risks (country risks) – effects of government actions
12
13. Analysis of Commercial Risks
Commercial viability
Completion risks
Environment risks
Operating risks
Revenue risks
Input supply risks
Force Majeure
Contract mismatch
Sponsor/Funding Support
13
What the risk is?
Whether it is covered in the project
contracts?
What other mitigation there is for risks
not covered contractually (guarantees or
insurance)
What impact the risk that then remains
would have on the project company
Risk evaluation and allocation
Due Diligence
Monte Carlo Simulations
14. Model Review – Example
14
Cost book
Cost assumptions
Cost refresh
Model build and expertise
THERE IS NO RULE IN PRICING!