Key steps for more effective pricing of services

1. Winning Services Strategies:
How to Avoid the Commodity Trap

2. Agenda
Current challenges for services firms
Foundations for services success
Breaking out of the commodity trap
© 2005 Holden Advisors Corp., Concord, MA 2

3. The Current Service Environment
For service outsourcing companies
Financial performance is inconsistent
Customers are very aggressive negotiators
Third-party companies manage and negotiate the
deal
For traditional product-driven firms
Service-product solutions seen as the future
Can t get arms around complexity
For both
Costing systems are inadequate
© 2005 Holden Advisors Corp., Concord, MA 3

4. The Current Service Environment:
Some Root Causes
Cost-focused value propositions
Drives high-value solutions to commodity status
Future train wreck in on-demand solutions
Complexity of solutions overwhelm the sellers
Lose focus on important customer value drivers
Poor targeting of the right opportunities
Undermines pricing power
© 2005 Holden Advisors Corp., Concord, MA 4

5. The Service Profitability Trap
Increased
Price
Erosion
Services
Competitive
Added to
Intensity
Stem
Increases Unprofitable Erosion
Service
Programs
Customer
Costs
Expectations
Increase
Increase
© 2005 Holden Advisors Corp., Concord, MA 5

6. Creating a Winning Services Program
By connecting to sources of customer value
Compelling value propositions
Define
Activities in terms that are meaningful to customers
Activities
Cost Constrained resources that drive opportunity costs
Differentiated / undifferentiated
Categorize Expected / unique
Bundle to create unique value for specific segments
A la carte for commonly consumed services
Package
Fence to capture differences in value
Based on value not cost-plus
Price Manage customer behavior and purchasing patterns
© 2005 Holden Advisors Corp., Concord, MA 6

7. Need to Connect with Customer Value
If senior leaders in a firm, can t agree on the value proposition ,
It is a big problem.
Rick Kash, The New law of Demand and Supply
Full Suite of
Applications Less down time
Lower training costs
Customer
Excellent
Profits
Integration
Faster product roll-outs
Customer cross-selling
Usability
© 2005 Holden Advisors Corp., Concord, MA 7

8. Costing
Key elements
Specific activities and resources
Identifies top candidates for process variation reduction
Facilitates analysis of service deployment at the
segment and customer level
Watch out for
Averages
Bottlenecks
Transfer pricing policies
© 2005 Holden Advisors Corp., Concord, MA 8

9. Categorization
Drivers are costs, customer value, competitive
offerings
Key questions
High incremental or opportunity costs associated
with delivery?
Is / is not required for an entire segment every time?
Do some customers get more value than others?
Do key competitors offer the service?
Does competition charge for it? How?
Is our performance differentiated from the
competition?
© 2005 Holden Advisors Corp., Concord, MA 9

10. Packaging
Driven by hierarchy
Core
Segment-specific base offerings
High-value bundles and a la carte services
Use bundling to capture difference in value between
segments or customers
High-value bundles
Low-value bundles with restrictions to limit broad
appeal
© 2005 Holden Advisors Corp., Concord, MA 10

11. Pricing
Capture value
Change customer behavior to reduce delivery costs
Improves quality of delivery
Improves management of constrained resources
Must be driven to a menu
With specific service level agreements
Challenge is keeping it simple
Pricing model may drive service definition
© 2005 Holden Advisors Corp., Concord, MA 11

12. Customer Negotiations
Playing Better Poker
Customers are terrific poker players
Know how to get high value for low price
Unless we provide salespeople with the tools
and training, will always lose the pot (profits)
Needs to be supported by systems and
analysis
And by senior managers
© 2005 Holden Advisors Corp., Concord, MA 12

13. Final Thoughts
The Service Value Cycle
Focus on
Differentiated
Services
Increase Rationalize
Value Unvalued
Delivered Services
Profitable
Service
Programs
Improve
Reduce
Service
Costs
Quality
© 2005 Holden Advisors Corp., Concord, MA 13

14. Thank You!
Mark Burton
Vice President
Holden Advisors
978-405-0022
mburton@holdenadvisors.com
www.holdenadvisors.com