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Case Study: Optimizing Pricing Strategy for a Product Portfolio

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Case Study: Optimizing Pricing Strategy for a Product Portfolio

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About Us:

With offices in North America and Europe, The MarkeTech Group provides a unique combination of extensive marketing research methodology expertise, deep medical technology domain knowledge and value-added strategic marketing consulting to medical technology companies who seek high quality marketing research studies and professional marketing strategy consulting.

The MarkeTech Group's team of marketing research and strategy experts take pride in integrating their leading voice of customer (VOC) research expertise and strategic consulting into their clients' marketing and R&D departments to help successfully launch and maintain profitable products in healthcare.

The MarkeTech Group, LLC
502 Mace Blvd, Suite 15
Davis, CA 95618
Tele: (+1) 530-792-8400
Fax: (+1) 530-792-8447

The MarkeTech Group, SARL
3, Rue Emile Péhant
44 000 Nantes
Tele: +33 (0)2 72 01 00 80
Fax: +33 (0)2 40 48 29 40

Contact Us: http://www.themarketechgroup.com/index.php?page=Contact_TMTG&utm_source=SlideShare&utm_medium=Social+Media&utm_campaign=Optimizing+Pricing+Strategy+for+a+Product+Portfolio

Visit Us on the Web: http://www.themarketechgroup.com/?utm_source=SlideShare&utm_medium=Social+Media&utm_campaign=Optimizing+Pricing+Strategy+for+a+Product+Portfolio

About Us:

With offices in North America and Europe, The MarkeTech Group provides a unique combination of extensive marketing research methodology expertise, deep medical technology domain knowledge and value-added strategic marketing consulting to medical technology companies who seek high quality marketing research studies and professional marketing strategy consulting.

The MarkeTech Group's team of marketing research and strategy experts take pride in integrating their leading voice of customer (VOC) research expertise and strategic consulting into their clients' marketing and R&D departments to help successfully launch and maintain profitable products in healthcare.

The MarkeTech Group, LLC
502 Mace Blvd, Suite 15
Davis, CA 95618
Tele: (+1) 530-792-8400
Fax: (+1) 530-792-8447

The MarkeTech Group, SARL
3, Rue Emile Péhant
44 000 Nantes
Tele: +33 (0)2 72 01 00 80
Fax: +33 (0)2 40 48 29 40

Contact Us: http://www.themarketechgroup.com/index.php?page=Contact_TMTG&utm_source=SlideShare&utm_medium=Social+Media&utm_campaign=Optimizing+Pricing+Strategy+for+a+Product+Portfolio

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Case Study: Optimizing Pricing Strategy for a Product Portfolio

  1. 1. CASE STUDY OPTIMIZING PRICING STRATEGY for a PRODUCT PORTFOLIO METHODOLOGIES USED: 1. Qualitative Interviews 2. Adaptive Conjoint Analysis (ACBC) o simPRO™ Preference Simulator o Reactor™ Market Modeling & Forecasting
  2. 2. The following case study and data is from an actual CLIENT project, however the data has been de-identified to avoid sharing any sensitive client or confidential information and is intended for general information only.
  3. 3. First….let’s meet the CLIENT
  4. 4. LOOKING TO LAUNCH A NEW PRODUCT TO REPLACE AN EXISTING PRODUCT Dominant market leader in….. 1 2 LOOKING TO MAXIMIZE PROFITS FOR ITS PRODUCT PORTFOLIO 3 SEEKING TO AVOID CANNIBALIZING EXISTING PRODUCT SALES NETWORKED HOSPITAL EQUIPMENT
  5. 5. The CLIENT wanted to know…..
  6. 6. Research Objectives CENTRAL RESEARCH QUESTION: What impact will different pricing models and timing of our product launch have on our revenues and profits?
  7. 7. Research Objectives CENTRAL RESEARCH QUESTION: What impact will different pricing models and timing of our product launch have on our revenues and profits? 1.What is the purchasing process and who are the key decision makers and influencers?
  8. 8. Research Objectives CENTRAL RESEARCH QUESTION: What impact will different pricing models and timing of our product launch have on our revenues and profits? 2. 1.What is the purchasing process and who are the key decision makers and influencers? What is the preference for different product and non-product features and pricing models?
  9. 9. Research Objectives CENTRAL RESEARCH QUESTION: What impact will different pricing models and timing of our product launch have on our revenues and profits? 2. 1.What is the purchasing process and who are the key decision makers and influencers? 3.How do we maximize our 5 year profits? What is the preference for different product and non-product features and pricing models?
  10. 10. Phases
  11. 11. 23 IN-DEPTH INTERVIEWS Hospital C-Level Executives Hospital Managers and Directors GOALS Identify key decision makers Understand the decision-making process PHASE Qualitative Analysis 1 2
  12. 12. We IDENTIFIED DOPs and CFOs as the DECISION MAKERS that should be the key TARGETS for sales and marketing. In-Depth Interviews Key Findings 1 Identify key decision makers GOALS 1  Risk Managers are not the decision makers  CNOs and CIOs are potential influencers
  13. 13. In-Depth Interviews Key Findings 2 Understand the decision- making process GOALS 2 Incremental changes or expansions to these networked hospital equipment typically fall under the operational & financial authority of DOPs…
  14. 14. In-Depth Interviews Key Findings 2 Understand the decision- making process GOALS 2 …while larger additions or entire system upgrades require C-level approval. Incremental changes or expansions to these networked hospital equipment typically fall under the operational & financial authority of DOPs…
  15. 15. In-Depth Interviews Key Findings 2 Understand the decision- making process GOALS 2 Decision-making is based on: …while larger additions or entire system upgrades require C-level approval. Incremental changes or expansions to these networked hospital equipment typically fall under the operational & financial authority of DOPs… → Overall Cost of Ownership → Brand → System IT Architecture → Product Usability Features → Time to Market
  16. 16. 442 WEB-BASED SURVEYS DOP, CFO, CEO, CIO, COO, CNO, IT Director, VP Nursing Determine intention of upgrading or replacing existing product Statistically validate preference for different pricing models 1 2 GOALS PHASE Quantitative Analysis
  17. 17. Key Findings 1 Half of customers plan to upgrade within 2 years... PLAN TO UPGRADE/REPLACE WITHIN 2 YEARS 53% PLAN A REPLACEMENT 28% Surveys Determine intention of upgrading or replacing existing product GOALS 1
  18. 18. Key Findings 1Surveys …because of the following 5 reasons: Product Lease Expires60%... Significant New Product Benefits Offered61%... Current Products No Longer Supported46%... Equipment No Longer Functions Properly & Too Costly To Maintain 46%... The Price Declines16%...
  19. 19. To DETERMINE the most important PURCHASING DRIVERS, respondents were asked to select their most preferred product configuration in a conjoint exercise. Key Findings 2Conjoint Analysis Statistically validate preference for different pricing models GOALS 2 Brand Brand A Brand B Brand C Upgrade Guarantee Plan S/W only Not Included S/W & H/W Time to Commercial Availability 6 months 6 months Available Now Service Levels Service Only Service with Parts None Product Feature #1 Fast Slow Fastest Product Feature #2 High Low Low IT Architecture Hardware Hardware Web-based Payment Model Purchase Lease Lease Total Networked Equipment Price $160K for all units ($40K per unit) $2.3K per month ($30K per unit purchase price equivalent for 5 years of operation at 6% discount rate) $3.9K per month ($50K per unit purchase price equivalent for 5 years of operation at 6% discount rate) Total Price of Service Plan $6K for all units ($1K per unit) $4K per month ($900 per unit) $5K per month ($1.2K per unit) ⃝ ⃝ ⃝ Please select the product that you most prefer. Assume everything about the 3 products is identical EXCEPT for those differences presented in each scenario. Choose the product you most prefer by clicking on of the buttons below. By forcing respondents to make various trade-offs between features and price, it becomes possible to measure which product features are more likely to drive product selection.
  20. 20. Key Findings 2 0% 5% 10% 15% 20% 25% 30% Total Monthly Service Plan Price Brand Service Levels Upgrade Guarantee Payment Plans Price per Unit IT Architecture Product Feature #1 Time to Market Product Feature #2 Importance 27% MONTHLY SERVICE PLAN PRICE is validated to be the MOST IMPORTANT purchase decision driver.12% 13% 13% 12% 9% 6% 5% 4% 3% Conjoint Analysis
  21. 21. Next, we used our proprietary market forecasting simulator, ™, to assess how the Client could maximize profits based on the survey and market data. Revenue Market Share Profitability Conjoint Analysis Historical Market Data INPUT FORECAST FOR:
  22. 22. Combine survey findings with historical market data to model various strategic options Determine impact of product and non-product features on:  Revenue  Market Share  Profitability Assess likelihood of adoption of the new product 1 GOAL PHASE Market Forecasting 2
  23. 23. Using Reactor™ Market Model, we TESTED alternative business decisions… Market Model Scenario Modeling CLIENT PROJECT System Price Monthly Lease* Service Price Months to Launch Unit cost System Unit Cost Service Long-Run Annual Units Long-Run Unit Share Long-Run Brand Unit Sales Long-Run Brand Unit Share Year 1 Revenue** Year 2 Revenue** Year 3 Revenue** Year 1 Profit** Year 2 Profit** Year 3 Profit** Discounted 3-Year Profit Discounted 5-Year Profit New Red Lease $55,000 $700 $300 0 $12,000 $50 1,914 10.46% New Blue Purchase $55,000 $300 0 $12,000 $50 302 1.65% New Red Purchase $55,000 $300 0 $12,000 $50 344 1.88% New White Purchase $55,000 $300 0 $12,000 $50 158 0.86% 2,718 14.85% $116,240,492 $185,984,786 $185,984,786 $92,196,643 $147,514,629 $147,514,629 $348,420,503 $579,322,702 Legacy Red Lease $45,000 $677 $275 $10,400 $50 6,809 37.20% Legacy Blue Purchase $45,000 $275 $10,400 $50 886 4.84% Legacy Red Purchase $45,000 $275 $10,400 $250 1,161 6.34% Legacy White Purchase $45,000 $275 $10,400 $250 585 3.20% 9,440 51.58% $530,815,537 $530,815,537 $530,815,537 $382,195,592 $382,195,592 $382,195,592 $1,042,200,103 $1,640,444,516 Client Total 12,158 66.43% $647,056,029 $716,800,324 $716,800,324 $474,392,235 $529,710,221 $529,710,221 $1,390,620,605 $2,219,767,218 Comp#1 Legacy Lease $35,000 $677 $200 1,332 7.27% Comp#1 Legacy Purchase $35,000 $200 1,515 8.28% 2,847 15.55% Comp#1 New Lease $40,000 $773 $200 0 444 2.43% Comp#1 New Purchase $40,000 $200 0 569 3.11% 1,013 5.53% Comp#1 Total 3,859 21.08% Comp#2 Legacy Lease $55,000 $850 $250 354 1.94% Comp#2 Legacy Purchase $55,000 $250 1,258 6.87% 1,612 8.81% Comp#2 New Lease $55,000 $850 $250 0 183 1.00% Comp#2 New Purchase $55,000 $250 0 491 2.68% 674 3.68% *Assumes 5 Year lease with a 6% annual discount rate compounded monthly Comp#2 Total 18,304 2,286 12.49% **Undiscounted 14.9% 51.6% 15.6% 5.5% 8.8% 3.7% Long Run Unit Share New Legacy Comp#1 Legacy Comp#1 New Comp#2 Legacy Comp#2 New
  24. 24. Market Model Scenario Modeling CLIENT PROJECT …an iterative process…
  25. 25. … to QUANTIFY the SALES effects of alternative business decisions: Market Model Key Findings: Sales Team Guidance  A moderate software upgrade plan with specific features & limited hardware upgrade guarantees is most highly valued option… and leads to increased share, revenue, and profits  The different needs of buying & leasing customers was identified… o …and those leasers that are potential brand switchers can be captured (or retained) with a specific combination of service and pricing plans  Switching costs are worth a 5% price premium for an incumbent product
  26. 26. Market Model Key Findings: Product Portfolio Opportunity If the existing product is taken off the market the new product can achieve 68.0% 14.4% 5.6% 9.6% 2.5% Long Run Unit Share – NEW PRODUCT ONLY New Client Product Competitor #1 Legacy Product Competitor #1 New Product Competitor #2 Legacy Product Competitor #2 New Product 68% market share.
  27. 27. Market Model Because many customers preferred the legacy product, and really wanted an improved service plan, rather than an improved product… However, we IDENTIFIED that the Client’s upgraded PRODUCT plan was NOT the OPTIMAL product strategy. Key Findings: Product Portfolio Opportunity
  28. 28. …by leaving its existing product on the market the Client can achieve 32.8% 41.1% 10.4% 4.0% 9.3% 2.4% Long Run Unit Share - OPTIMIZED PRODUCT PORTFOLIO Client New Product Client Legacy Product Competitor #1 Legacy Product Competitor #1 New Product Competitor #2 Legacy Product Competitor #2 New Product Market Model Key Findings: Product Portfolio Opportunity Therefore we RECOMMENDED the Client introduce the new product at a premium price and retain the existing product as a value product. (instead of 68%) market share... …and an overall increase in profitability 74% 74%
  29. 29. $- $100 $200 $300 $400 $500 $600 $700 Y1 Profit Y2 Profit Y3 Profit Scheduled Launch 12-mo Pre-Announce Market Model Long-Run Brand Unit Sales Long-Run Brand Unit Share Year 1 Revenue** Year 2 Revenue** Year 3 Revenue** Year 1 Profit** Year 2 Profit** Year 3 Profit** Discounted 3-Year Profit Discounted 5-Year Profit 6K 33% $228M $364M $364M $174M $278M $278M $658M $1.1B 7.5K 41% $394M $394M $394M $275M $275M $275M $750M $1.2B 13.5K 74% $623M $758M $758M $449M $553M $553M $1.4B $2.3B We DISCOVERED that the Client could see a 36% drop in PROFIT because of delayed purchases if a new product is pre-announced. Key Findings: Pre-Announcement 64% SAMPLE OUTPUT Without the pre-announcement, customers will continue to purchase the current product, especially if they can also purchase a S/W upgrade plan.
  30. 30. FINDINGS and RECOMMENDATIONS
  31. 31. We provided guidance on product roll-out management, pricing strategies, product line management, including: FINAL RECOMMENDATIONS 1 2 3 Schedule new product announcements very close to actual launch dates Minimizes short-term revenue reductions and optimizes financial returns. Target DOPs and CFOs DOPs and CFOs are the primary decision-makers and should be the primary target for sales and marketing strategy. Create a two-tiered product portfolio by keeping existing (legacy) product Profits are maximized when both the legacy and new products are available on the market. Price the new product at a premium Customers who value the new product’s features are willing to pay a higher price. Price-sensitive customers will have a satisfactory value- priced alternative in the client’s portfolio. 4
  32. 32. USA 502 Mace Blvd, Suite 15 Davis, CA 95618 PH: + 1 530-792-8400 FX: + 1 530-792-8447 http://www.themarketechgroup.com/ Europe / France 3 rue Emile Péhant 44000 Nantes PH: +33 (0)2 72 01 00 80 FX: +33 (0)2 40 48 29 40

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