Executive | Pricing Power | 130408 | Presentatie | Onno Oldeman

Achieving Pricing Power
Flevum

Onno Oldeman, Partner
Amsterdam, 8 April 2013

Amsterdam Office
Barbara Strozzilaan 380
1083 HN Amsterdam, The Netherlands
Tel: +31 (0)20 753 1253, Fax: +31 (0)20 753 1277
e-mail: onno.oldeman@simon-kucher.com
Internet: www.simon-kucher.com

Agenda

1. About Simon-Kucher & Partners
2. Top of Mind 2013
3. Achieving Pricing Power

Flevum_Achieving Pricing Power

-1-

Simon-Kucher & Partners

Global strategy consultants

Focus on marketing, pricing, sales

Track record of > 25 years on Smart Profit GrowthTM

Source: Simon-Kucher

-2-

Simon-Kucher growth
# Employees from 1985 to 2012
650
585
500
436 446
354
283
248

2012

2011

2010

2009

2008

2007

2006

2005

2004

187

2003

165

2002

147

2001

130

2000

112

1999

90

1998

71

1997

1996

1995

1994

1988

1993

1987

1992

1986

1991

5

1990

4

1989

3

56
35 46
22 27
7 13 18 19

1985

220


-3-

Global presence with 25 offices

São Paulo
Santiago de Chile
Americas

Europe/Middle East

USA, Boston
USA, Miami
USA, New York
USA, San Francisco
Brazil, São Paulo
Chile, Santiago de Chile

Austria, Vienna
Belgium, Brussels
Denmark, Copenhagen
France, Paris
Germany, Bonn
Germany, Cologne
Germany, Frankfurt
Germany, Munich

New offices in 2013

Asia/South Pacific
Italy, Milan
Luxembourg, Luxembourg
Poland, Warsaw
Spain, Madrid
Switzerland, Zurich
The Netherlands, Amsterdam
Turkey, Istanbul
United Kingdom, London
UAE, Dubai

Australia, Sydney
China, Beijing
Japan, Tokyo
Singapore, Singapore


-4-

Leading the pack in marketing & sales

Best Consultancies in "Marketing & Sales"
Rank

Consultancy

1

Boston Consulting Group

3

McKinsey & Company

4

Bain & Company

5

Roland Berger

401

Simon-Kucher & Partners

2

Score*

370
346
344
338

* Maximum 500; Source: manager-magazin August 2007/IMB & 2011 (Institute for Management & Consulting); Survey of 264 Top Managers

-5-

Clear focus: Smart Profit Growth
Commercial strategy

Marketing

Market strategy

Brand portfolio management

Brand and assortment strategy

Assortment optimization

Channel strategy

Innovation management

Pricing strategy

Segmentation

Marketing

Competitive strategy
Strategy

Smart
Profit
Growth

Pricing

Marketing efficiency
Sales
& CRM

Sales & CRM
Pricing

Value-based pricing

Key account management

Pricing process and organization

Sales force effectiveness

Innovative pricing models

Management of distributors

Price architecture and trade terms

Promotion management

Price communication

KPI’s & incentive systems

Price increase programs

Negotiation training


-6-

How others describe Simon-Kucher

"…world leader in giving advice to
companies on how to sell their
products…"

"…the world's leading
pricing consultancy…"

"Simon-Kucher is the world’s
leading pricing consulting firm."

"…world market leader
on pricing…"


-7-

Simon-Kucher thought leadership
Books (selection)

Articles (selection)

USA

Brazil

France

USA

Spain

UK

USA

NL

Hungary

Japan

Korea

Germany

China

NL

Germany


-8-

Simon-Kucher works side by side with industry leaders

Automotive

Retail/CG

Financial
Services

Life Sciences

Industrial
Goods

Software /
Technology

Logistics /
Travel

Media

Source: Selection of Simon-Kucher references

-9-

Industry specific pricing challenges we encounter (1/3)

Wholesale / Retail:
How to influence, measure and capture
the value per product category?

Consumer Goods:
How to optimize pricing & trade terms across
customers, channels and countries?


- 10 -


Industrial Goods:
How to optimize list prices and discounts for
>100,000 products and >3,000 customers?

Ingredients:
How to structure product management and key
account management?


- 11 -


Media:
How to counter the discounting magnet
in cross-media advertising?

Financial services:
How to structure and monetize your products and
services?


- 12 -

Agenda

2. Top of Mind 2013


- 13 -

Achieving profitable growth: Top of Mind 2013

Pricing power

Dedicated pricing function

C-level involvement


- 14 -

The dilemma

Profit

=

Price

Volume

Not yet
optimized

Limited
possibilities

-

Cost
Largely
exhausted

Source: Global Pricing Survey 2012

- 15 -

What is the most effective profit lever?

Case example

Price

€100

Variable unit costs

€60

Sales volume

1m

Fixed costs

€30 m


- 16 -

Price as the most effective profit lever

A 5% improvement of …
Profit driver

... leads to a profit increase of …

Profit

Old

New

New

Price

€100

€105

€15 m

Variable
unit cost

€60

€57

€13 m

Sales
volume

1m

1.05 m

€12 m

€30 m

€28.5 m

€11.5 m

Fixed
costs

+50%
+30%
+20%
+15%

* Assuming ceteris paribus; Source: Simon-Kucher

- 17 -

Obtaining pricing power

Pricing power is the ability
of a company to get the
price it deserves for the
value it delivers.


- 18 -

Pricing power
Credit Suisse: Pricing Power Ranking

Warren Buffet

"The single most important
decision in evaluating a
business is pricing power."
Source: Simon-Kucher research

- 19 -

Pricing power: Strong impact on profits

Average profit margin of last three years (index)

Companies with
high pricing power

All others

75

100

Low pricing power
reduces profits by

25%


- 20 -

(Reported) reasons for low pricing power

1. "We are a commodity"
2. "We are a distress –
purchase / low
involvement product"
3. "Our competitors are
stupid"


- 21 -

"We are a commodity"… so?

₤0.01/litre

₤0.50/litre

₤1.55/litre

₤4.52/litre


- 22 -

"We are a low involvement product"… so?

Sensor Excel
"1G"

Sensor 3
"2G"

2

Electric

–

–

–

Trimmer

–

–

–

3

€7.99

€9.99

€9.99

€14.99

Fusion
"5G"
4

Fusion Power
"6G"

–

at
launch

3

M3 Power
"4G"

Blades

Price

3

Mach 3
"3G"

4
–

€15.99

€19.99


- 23 -

"Our competitors are stupid"… really?
Is your company currently
engaged in a price war?

Who started the price war?

No
- there is a price
war, but
we are not
affected

19%

22%

Yes
58%

88%

No
- there is
no price war

7%
5%

We did – intentionally
We did – unintentionally

Source: Simon-Kucher & Partners Global Pricing Study 2012

- 24 -

Real reasons for lack of pricing power

1. No systematic pricing approach
2. Strategy and leadership deficits
3. Insufficient pricing know-how
(methods, people, "real" value
pricing)


- 25 -


Pricing power


C-level involvement


- 26 -

No clear pricing ownership = chaos
Sales

Finance

"I know what our
competitors charge"

"I know what our
costs are"

Low
prices

Target
margins

Pricing complexity is a fact of
life, because it almost always
involves:
… too many people
… too many opinions
… too many interactions

Marketing

Product

"I know what our
customers say"

"I know how great
our product really is"

Value
pricing

Brand
premium

… too much data
… too little time


- 27 -

Dedicated pricing function improves price performance
Companies with dedicated
pricing function are/have…
Pricing
power

Others

100

With pricing
function
Price
increases

Others

127
100

With pricing
function
Price implementation

Others

115
100

With pricing
function
Profitable growth
expectations
(increase)

Others
With pricing
function

111
100
114

…27% more often
"high pricing power"

…15% more often successful
price increases

…11% higher price
implementation success

…14% more often optimistic
EBITDA expectations


- 28 -

Pricing organization: Where should it sit?
Signaling

Distance to customer

Decision competence

Long decision flow

High hierarchy level
Bundling of pricing
concepts
Focus on total
company goals
Distance to
customer
Missing flexibility

D
e
c
e
n
t
r
a
l

C
e
n
t
r
a
l

Customer
proximity
Flexibility

Missing
co-ordination
Inconsistencies

Low hierarchy level
Customer proximity
Flexibility

Missing decision
competence


- 29 -

What is the right type of pricing organization? It depends
Central pricing

Hybrid

Divisional/regional pricing

Central price control
important for brand
image
Brand assures same
quality everywhere
Easy for consumers to
buy products elsewhere

High standardization
degree of pricing
processes to ensure
consistency
Local inputs to
differentiate local
willingness to pay

Heterogeneous business
units (e.g., healthcare vs.
office)
Low level of
standardization possible

High international
transparency of prices

Central pricing
competence center within
marketing
Regional pricing units in
contact with national
sales

Pharmaceutical
wholesaler
Different health systems
by country, high need for
local differentiation

Need for standardization of processes to increase pricing
quality

Market differences/regulations
between decentralized units
too different for standardized
pricing

High arbitrage risk

Strong, global brands,
transparent prices
High risk of arbitrage

Local inputs to capture different
local willingness to pay

- 30 -


Pricing power


C-level involvement


- 31 -

C-level involvement drives pricing performance
Companies with increased
C-level involvement in pricing
are/have…
Pricing
power

Others

100

C-level
Price
increases

Others

135
100

C-level
Price implementation

Others

Profitable growth
expectations
(increase)

Others
C-level

…18% more often successful
price increases

118
100

C-level

…35% more often
"high pricing power"

…7% higher implementation
success

107
100
130

…30% more often optimistic
EBITDA expectations


- 32 -

Porsche & General Motors: different leaders, different strategies
"We have a policy of keeping
prices stable to protect our
brand. When demand goes down
we reduce production but don’t
lower our prices."
Wendelin Wiedeking, CEO Porsche
1992-2009

Operating margin %*
20%
15%
10%
5%

Year

0%

"Fixed costs are extremely high
in our industry. We realized that
in
a
crisis
we
are better off with lowering
prices than reducing volume."

'00

'01

'02

'03

'04

'05

'06

'07

'08

-5%
-10%
-15%

Richard Wagoner, CEO GM
2000-2009

* for Porsche partly estimated

- 33 -

Clear direction from top management

"In terms of size and market share we
are where we want to be.
Therefore our strategy changes:
From 'growing faster than the market'
to 'grow in line with the market'.
We hope that our competitors are also
satisfied with their position. If that is
not the case, we will defend our
position with all means."
FTD, March 2012
Søren Skou,
CEO Maersk Line

- 34 -

Maersk: Turn around after change of top management
HARPEX (charter rates)
1000
900

Entire board
of Maersk
exchanged

800
700

"Back to black" program:
Stop market share
growth goal

600

Capacity reduction

500

Systematic price
increases

400
300

Clear communication of
new strategy

200
100
0
16-8-2010

16-2-2011

16-8-2011

16-2-2012

Source: Bloomberg April 25, 2012

- 35 -

Leaders' task: Sales can't always be "nice"
How should your customer react ...
... when he sees
your service offer?

... when he sees
your price?

You have to get what you deserve!


- 36 -

Summary

Obtaining pricing power brings you higher
profits. Look for the real reasons of missing
pricing power and develop the solutions.
A dedicated pricing function significantly
improves price performance. Setting the right
pricing organization depends on your ambitions,
culture and strategy (e.g. on hierarchy and
customer proximity).
C-level involvement severely increases the
ability to successfully implement pricing
improvements. C-level should provide direction
and set the example (e.g. Porsche, Maersk).

- 37 -

Agenda

2. Top of Mind 2013


- 38 -

Where does it go wrong in daily practice?
"With our stupid
competitors attacking
us, we end up in a
price war"

"We don’t really know
what premium we
deserve"

"Our prices are costplus and mainly
historically grown"

"Do we charge for
everything we
deliver?"

"We communicate
and sell too much on
price, instead of on
value"


- 39 -

Building Pricing Power calls for action on three core disciplines

Typical deficiencies and leakages
What the
customer is
willing-to-pay…
… and what we
actually get

Portfolio &
pricing strategy
Value based
pricing
Value
selling

Product offerings that
do not fit the
market requirements

Prices which are
either too high or
too low

Value not defended,
discounts based on
gut-feel and ‘fear’


- 40 -

Pricing Power Framework

Simon-Kucher & Partner’s Pricing Power framework

Pricing &
portfolio
strategy

Value based
pricing

1 Segment market and 4 Develop value based

customer base, clarify
price strategy
2 Determine value

drivers per segment
and willingness-to-pay

pricing approach,
tools and rules
5 (Un)bundle portfolio

to maximize
willingness-to-pay

3 Differentiate offering, 6 Reinvent your price

pricing & sales
approach

model and metric

Value
selling
7 Optimize value selling

competence, from gut-feel
to structured decisions
8 Optimize value

communication, set anchor
prices
9 Improve pricing control,

setup KPIs and monitoring
framework

Value pricing awareness and capability development

- 41 -

Know the value: Understand your premium and brand strength
Project example

New filter innovation
Structured value-driver analysis
Price increase in prices in 3 steps
by 36%
Marginal loss of market share


- 42 -

Identify the key value drivers and evaluate performance
Project example

Identify value drivers

Rank on importance

Quality of content

4,2

Search engine usability

4,1

Archive function

Assess performance

4,1

Content depth

3,7

Author reputation

3,5

Price level

3,1

Flexibility of offering

2,6

After sales process

1,6

…

1,6

…

1,6

…

1,1
Customer X

Competition


- 43 -

Use customer insights to challenge internal beliefs
Project example

Strategic
Disadvantages

Customer perspective
High

High

Internal perspective
Strategic
Advantages
10
4
12

1
8

14

10

4

8

Importance

Importance

11

2

11
3

5

1

13

Low

6

Relative Performance

5
7

7

Consistency

Low

Low

Consistency

14

6

3

OverPerforming

Strategic
Advantages
2

9

9
6

Strategic
Disadvantages

High

Low

OverPerforming

Relative Performance

High

Price


- 44 -

Assess premium and brand strength per segment
Project example

Relative importance of value driver

Size of customer segment

40%
Want price only

23%

30%
Want no risk

9%

Want it now

39%

Want the best

29%

20%

10%

% of sales
0%
On-press
End-use
Service
performance performance programs

Technical
support

Speed of
delivery

On-time
delivery

Price


- 45 -

Develop a differentiated proposition for each client segment
‘One-size-fits-all’price
One-size fits all Price

Differentiated Prices
Differentiated price
Volume

Volume

Customers not
reached yet!

Super Eco
Eco
Willingness-topay not
exploited!

Differentiation
= from rectangle to
triangle

Standard
Premium
Super Premium

Price

Price
- 46 -

Differentiation works!

www.klm.de:
€492 per seat

DUS 

BAR

Private
tariffs

www.klm.nl:
€284 per seat

SIM-only 50:
€2.95/month
+ 6 ct/min. (incl. 50 min.)
SIM-only 500:
€17.95/month
+ 4 ct/min. (incl. 500 min.)

B2B:
€4.10 / consignment
< 10kg,
Germany

C2X:
€8.90 / consignment

Airport:
€3.45 per liter
Bottle of
water

Supermarket:
€0.50 per liter


- 47 -

Combine three pricing methods
Cost-plus

Competition-oriented

€ 160

% mark up

Competitor
product A

Value-based

Volume

Our product
€ 100

Costs

Competitor
product B

High elasticity
Low elasticity

Competitor
product C
€ 40

Challenge: just costs are high or
low, the perceived value is not

Challenge: determine your main
competitor and benchmark

Price level

Challenge: understand willingnessto-pay and price elasticity


- 48 -

Pitfall of cost-plus pricing, potential of value pricing

Power/Value Pricing
Willingness
to pay
Non-metallic
paint

770 €

Profit
potential

Cost-Plus
Metallic
paint

Cost
20 €

If the automotive industry sets prices according to the cost-plus approach,
metallic paint would cost €30 – but the automotive industry does not!

- 49 -

Issue with competitive pricing: price wars
Culture of market share

"We have to defend
our volumes at all
costs."

"They are
aggressive and
want to steal
market share!"

Vicious cycle of price decreases
Crisis leads
demand to drop

Fear of market
leader to loose
volume

Company

Company

A

B


Aggressive
price behavior
of market
leader

Vicious
cycle

Followers feel
threatened

Price reactions by
followers to
defend market
share

- 50 -

Price the value: Do real value pricing
Project example

911

€83,000

Success factors:
"Don't follow the crowd!"
Know and quantify the
value drivers!
- Design

€60,300
Cayman S
Boxster S

€54,700

- More power (15hp)
- Handling


- 51 -

Measure willingness-to-pay, use multiple sources and methods

Data analysis
Benchmarks:
SKP project
experience

Gabor Granger/
Neuropricing

PriceStrat/
ComStrat

Expert
knowledge
(PriceStrat)

Methods
Merchant
questionnaires

Sources

van Westendorp
Available
competitor
information

Indirect
Conjoint
analysis
Historical
transaction data


- 52 -

Re-invent your price model

Change of price model: from price per
tire to price per km
Customer perspective: costs are
aligned with revenue basis (per km)
Customer gets stable price per km


- 53 -

Value-based price metric: Enercon charges for the yield

Founded in 1984; Revenue: $ 4 billion;
42% of patents world wide in this field.
Enercon partner concept: Price of service contract depends on
yield of wind park;
86% of customers sign 12-year service contract.
Price for wind tower depends on wind situation in specific region.


- 54 -

Use pricing to differentiate or to redefine revenue models
Pay per use

Buckets
p

p

Bucket +
PPU

Min

Min
p

Pure flat
fee

Min
Progressive /
declining
PPU
PPU with
max.
charge

Min
Examples simple PPU:
Price per min. / MB
Examples innovative PPU:
Price per session
Price per workplace

Influencing factors

p

PPU w/ or
w/o MRC

p

Flat fees

Min
Bucket +
PPU w/
max
charge

p

p
Fair-use
flat fee

Min

Min

Competitive intensity
Product comparability
Price structure
differentiation

p

p
Incremental
buckets

Adaptive
flat fee
Periods

Min
Examples:
Minute buckets
GB buckets
Increment buckets

Customer's (wrong)
estimation of usage
Product life cycle stage

Examples:
Full flat
Adaptive flat
Company flat

P = total price; Min = minutes; PPU = pay per use; MRC = monthly recurring cost
Source: Simon-Kucher project experience and analysis

- 55 -

And create clever bundles to boost earnings per customers
120 €

50 €

Dinner

Hotel room

150 €

Room & dinner

Win-Win situation
Customer has a price
advantage of nearly 12%
Budget 150 €
€

Hotel’s profit
increases by 25%

Bundle

€

€

WtP
WtP

WtP*

Profit

Profit
VC

Profit
VC**

VC

Quantity

Quantity

Quantity

* WtP: Willingness-to-pay, ** VC: Variable cost

- 56 -

Use multiple bundles to address differences in customer needs
Project example

Recommended
Basic

Standard

Premium

Bug fixing
Correction of typographical errors
Helpdesk (response time)

2 days

12 hours

2 hours

Upgrades

bi-annually

quarterly

as released

Updates

bi-annually

quarterly

as released

Additional service fees/hour

€ 35

€ 30

€ 25

Remote technical support (localization)

100 hours

250 hours

500 hours

Remote technical support (exploitation)

100 hours

250 hours

Maintenance services

bi-annually

quarterly

Monitoring systems logs
Project Management of content activities
Software training
Software consultation
Annual SLA payment

€ 50,000

€ 70,000

€ 90,000


- 57 -

Sales reps will tell you: "Every deal tells its own story"
Selection of responses from sales reps.

… their purchaser was
really tough. We had to
give in a little…

"Which factor had the
biggest influence in
determining the deal's
final price?"

… we had to lower the
price because of
increased competition…

… it's a very small
customer and from the
pharmaceuticals
industry where you can
always get a little
extra…


- 58 -

Peer Pricing: Definition of price drivers as basis for a structured price logic
Target prices are calculated sequentially by applying mark-ups / discounts for defined price drivers.
A defined price corridor serves as a negotiation space for the sales reps.
Productspecific base
price

Project example
Product
1 specific

Customer
2 specific

Customer
size

Specialty

Customer
potential

…

Format

Thickness


Target
price

…
Achiever
price

Payment
terms

Product
price

Basis

Order
3 specific

Customer
price

Order
price

Order
volume

Industry

…

Small order
surcharge

Differentiation of prices
according to product,
customer and order
related factors

Target
price

Realized prices as
reference points for
future price setting

Min. price

Expert judgment as
reference for future
price setting

- 59 -

To boost win rates a systematic pricing & value selling process
is required
Project example

1

Product specific price

2

3

Client price

Order specific price

0

Base
price

Product
Value

List
price

e.g.
- Thicker beams
- Extra protection

List
price

Client
Discount

Net
Price

e.g.
- High volume client
- Good payment terms

Net
Price

Order
Surcharge

Final
Price

e.g.
- Small orders
- Specials requiring research

Source: SKP Project Database

- 60 -

Sell value: Anchor prices highly influence purchase decision
Base scenario (print implicit)

Alternative scenario (print explicit)

68%

16%

32%

0%

84%


- 61 -

Steer behavior through right value communication…
Project example

Price communication

Changes in sales volume

1 month

Before

3 months

6 months

29,95 €

59,85 €

95,85 €

Volume distribution (%)

Introduction of new
price communication

60%
50%
1 month

6 months

You save
33%

You save
47%

29,95 €
After

3 months

19,95 €

15,95 €

per month

per month

per month

3 months

40%
30%

1 month

20%
Select
1 month

Select
3 months

Select
6 months

10%

6 months
0%

Time


- 62 -

…and value selling

Project example

Before…
"If needed, could you
also deliver on short
notice the next day?"

…after

"No problem – this is
covered in all of our
service contracts."

"Of course, it will cost
€30 more for the added
planning work."

Customer

Cost mindset:

Value mindset:

"This doesn’t cost us more,
so the customer doesn’t
have to pay more!"

"Service is important to the
customer, so he should be
willing to pay extra for it."


- 63 -

Four steps to build Pricing Power

Simon-Kucher & Partner’s Pricing Power framework

Pricing &
portfolio
strategy

Value based
pricing

1 Segment market and 4 Develop value based

customer base, clarify
price strategy
2 Determine value

drivers per segment
and willingness-to-pay

pricing approach,
tools and rules
5 (Un)bundle portfolio

to maximize
willingness-to-pay

3 Differentiate offering, 6 Reinvent your price

pricing & sales
approach

model and metric

Value
selling
7 Optimize value selling

competence, from gut-feel
to structured decisions
8 Optimize value

communication, set anchor
prices
9 Improve pricing control,

setup KPIs and monitoring
framework

Value pricing awareness and capability development

- 64 -

Thank you!


- 65 -

Executive | Pricing Power | 130408 | Presentatie | Onno Oldeman

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