Slides from the Copperberg Manufacturing Pricing Excellence conference in Amsterdam (May 2017). The mode provides a simple approach to value based pricing. http://www.pricingeurope.com

1. Pricing models
Copperberg Pricing Excellence, Amsterdam
30 May 2017
Dr Shaun West
Copperberg Aftermarket Europe 2016| October 2016 |Shaun West
Willingness
to pay
region
Scope
Customer Supplier
Products
and
services
Gain
makers
Value in
use
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 viewed from many different angles
Benchmarking
Market data, win/loss analysis, CRM….

2. Copperberg Pricing Workshop | May 2017 |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
Discussion on pricing

3. Copperberg Pricing Workshop | May 2017 |Shaun West
History
Pricing and value are not new problems!

4. Copperberg Pricing Workshop | May 2017 |Shaun West
Today
How much for a glass of water?
What would you pay? The situation has a major impact on price

5. Copperberg Pricing Workshop | May 2017 |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. Copperberg Pricing Workshop | May 2017 |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. Copperberg Pricing Workshop | May 2017 |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. Copperberg Pricing Workshop | May 2017 |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. Copperberg Pricing Workshop | May 2017 |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. Copperberg Pricing Workshop | May 2017 |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. Copperberg Pricing Workshop | May 2017 |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. Copperberg Pricing Workshop | May 2017 |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. Copperberg Pricing Workshop | May 2017 |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. Copperberg Pricing Workshop | May 2017 |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. Copperberg Pricing Workshop | May 2017 |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. Copperberg Pricing Workshop | May 2017 |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. Copperberg Pricing Workshop | May 2017 |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. Copperberg Pricing Workshop | May 2017 |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
Scope
Margin
’Fair’ price

19. Copperberg Pricing Workshop | May 2017 |Shaun West
Willingness
to pay
region
Scope
Customer Supplier
Products
and
services
Gain
makers
Value in
use
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 viewed from many different angles
Benchmarking
Market data, win/loss analysis, CRM….

20. Copperberg Pricing Workshop | May 2017 |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. Copperberg Pricing Workshop | May 2017 |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. Copperberg Pricing Workshop | May 2017 |Shaun West
Open discussion
When to use value based pricing and when not to from experience
What pricing models do you use today?
- Cost plus / mark-up
- Market based / benchmark
- …
Pricing pressure in today’s market
- What pressures do you face
- Where does it come from?
- …
How one screw can change customer relationship
Who sets the pricing policy
- F&C, production
- Sales
- …
What could you do to improve pricing?
- Increase price, lower price, structure of price
- Pay per use, risk share, discounts…
- …

23. Copperberg Pricing Workshop | May 2017 |Shaun West
Further reading
This is an excellent book on pricing…

24. Copperberg Pricing Workshop | May 2017 |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
Discussion on pricing

25. Copperberg Pricing Workshop | May 2017 |Shaun West
Thanks for your time!
Questions over coffee… Slides posted on SlideShare.com