Andrew Bailey - WBS Entrepreneurship Mentoring Programme - Final Workshop

commercial strategy 4 ®
strategy pricing negotiating

Pricing Strategies

Andrew Bailey

copyright Commercial Strategy and Business Support Ltd 2012


“Price is an extremely effective profit driver. Price
can generate huge profits or destroy margins”.
(Simon Kucher & Partners 2009)



Agenda

Why you should take Pricing seriously

Some insights and myths

Developing your Pricing approach
 Process
 Define your Pricing
 Pricing methods
 Practical steps you can take
 Case studies


– THE most powerful Profit lever

– Perception and influence

– Communication

– The impact of Pricing decisions IS huge


Profit Increase in Profit
Driver performance (£M) Achieving a 10%
improvement,
Current of profit New New
measure driver delivers an increase
measure
in profits of ….
Price £100 10% £110 £20m
100%
Price

Sales 1m 10% 1.1m £16m
60%
Volume 50%
40% Volume

Fixed costs
Fixed £50m 10% £45m £15m Variable
costs

costs
Variable £40m 10% £36m £14m
unit
costs



Pricing is the most DANGEROUS profit destroyer

Profit Increase in Profit A 5% deterioration in
Driver performance (£M) Pricing or Sales reduces
profit by ….
Current of profit New New
measure driver measure
-30% -50%
Price £100 -5% £95 £5m
Sales Price

Sales 1m -5% 0.95m £7m
Volume

Fixed £50m £50m
costs
Variable £40m £40M
unit
costs

With a 10% price decrease, to achieve a 50% gross
margin, sales volume would have to increase by 25%


Perception & influence
Perception

Power

Value

Control



Communication
Expectation

Signals to the market

Product and service management

Competitive intelligence



Agenda
Why you should take Pricing seriously

Some insights and myths

Developing your Pricing approach
 Process
 Define your Pricing
 Pricing methods
 Practical steps you can take
 Case studies


Pricing Myths
•Raising prices loses customers
•Customers are only interested in price
•Price elasticity is necessary for price optimisation
•Pricing is a big event to set and manage
•This customer is different
•Discounts are bad
•There exists an optimal price number
•Better to be safe than sorry
•You need complex systems/lots of data to manage pricing
•Marketing set prices, sales execute them, finance control them
•Once you set the price, job done



Issues companies have with Pricing ….
– 65% of companies are not able to charge the prices they deserve.
• Low pricing cuts profit by 25%.

– 46% of companies think they are in a price war.
• 83% blame competitors for starting it.

– Companies only get 50% of what they expect when they raise prices.
• 30% achieve 75% of a planned increase.

– Better the pricing „know how‟, higher the pricing power and the higher the
profits.
• Focus ion profit not market share.
• Invest in expertise.
• Improve execution.

Source: Simon Kucher & Partners study published in the Professional Pricing Society Journal Jan 2012.



The benefits of a structured, disciplined pricing strategy

Customers 
Product/Brands/Service

People

Revenue 


The benefits of a structured and well disciplined pricing strategy

Customers


•More motivational for customers to access greater value through transparent
structure
•Promotes collaboration and information sharing
•Rewards growth activity


Product/Brands/Service
•Ensures Investment is aligned to Brand Strategy/objectives and to execution
•Improves trade spend efficiency

People


•Provides clarity, consistency, focus & guidance in a complex area
•Enables building capability
•Confidence & structure to negotiations
•Commercial skills

Revenue
•Optimal Pricing across the market place and channels
•Aligned and consistent promotional pricing


•Increase in promotional sales through better execution
•More efficient conditional discounts
•More efficient and effective Trade Funds management
•More efficient supply chain
•Reduced invoice queries
•Improved operational cash flow through reduced overdue debt


Pricing Strategy Development

Pricing Strategy & Execution Process

Price Price Enablers – Price Price
Strategy Organisational Implementation Performance
Capability (execution) Measurement
(enforcement)

Strategy Controlling
•Objectives Infrastructure Execution •Trends
•Approach Organisation •IT Price •Discounts •Performance
•Competition and People •Processes Decision •Incentives indicators
•Value •People •Systems •Architecture •Deals •Time series
•Structure •Culture •Tools •Price Levels •Negotiation analysis
•Optimisation •Structure •Framework •Negotiation •Roles •Profit
•Segmentation •Accountability performance
•Differentiation •Elasticity

Copyright Commercial Strategy and Business Support Ltd 2012


Strategic Issues
Strategy & Goals are crucial inputs to developing Pricing Strategy

High Use Business Goals as input to
the process
Trade off – ‘Dream Position’
Which customers Depending on Goals there are
different Pricing strategies to
prepared not to do
adopt
business with
Recognised a Trade-off between
Profitability Profit and Volume
Growth
Dream Position can be achieved,
Trade off – however not by Pricing alone
? Volume growth at
the expense of Pricing has to be part of the
Profit overall Business strategy and
integral and aligned to it

Low
Low Volume Growth High


Strategic Issues
Depending on your position in the market you will have a different set of
products/service goals and therefore Pricing Strategies

Decrease

Price Attack
Follower/
Invader Introductory Pricing

Pricing Differentiation
Price
Differentiation Value Pricing

Market Market Position
Leader/
Competing Strategies
Defender
Increase
Increase Price/Value strength Decrease


What do we mean by Price?

 Pricing & Investment covers
all these areas and should be
considered holistically.

 The pocket price waterfall
shows the true profitability of
customers

 Individually, each item in the
pocket price waterfall may be
small, but together they have a
significant impact on
profitability

List Invoice Pocket
price/ price price
Gross
Price


What do we mean by Price?

 Basic price attracts
customers

 Customers can choose what
they want to pay

Business strategy based on
overall revenue generation

Basic Pocket
price price



Cost Based Pricing
– Pricing relates to the internal costs of the business
– It is easy to do, assuming you know the true costs
of doing business
– Is better for businesses that deal with large
volumes, lower margins or operate in markets
dominated by price
– Does not take account of what the customer
actually values in the product or service
– Can be less competitive if your costs are not
competitive



Cost Plus Pricing
Dependent on accuracy of cost
measurement

Improvements in cost are passed
through to the customers

Competitor improvement in costs
Std Profit margin impacts your competitive position
Variable costs
Cost + price may be lower than
R&D, Fixed costs Value delivered to customers and
willingness to pay



Market/Competition Driven Pricing
Definition:
Competition Driven Pricing is where Pricing decisions are
influenced primarily by observed or anticipated actions of actual or
potentials competitors

Motivated by:
A fear of being unable to sell if prices are not aligned with
competitor price levels
Objective of maintaining/increasing market share or sales



Market/Competition Driven Pricing

 Taking competitor Pricing as the
Standard.

 Product could be perceived as
being expensive against the
competition.

You need to know about the
competition and the value you
Price Comp A Comp B Comp C Comp D create compared to them.



Competition Driven Pricing

Assumptions (wrong)

Products are difficult to differentiate
High volume = High Mkt Share = High Profits
Price is THE most important purchase criteria

Risk

Price wars, undifferentiated products
Customer needs neglected
Reactive approach
Chasing unprofitable volume


Value Based Pricing
– Based on the price that customers are willing to pay and the
benefits the business and product offers them

– Therefore you need to know
– Benefits
– Value
– Buying decisions

– You need to consider
– The strength of the benefits
– Competitive products, price, offering, points of difference
– Customer perception


Value Based Pricing Customer value is the price of the best
alternative (reference value) +/- the value of
whatever differentiates the offering from the
alternative (differentiation value)

The Higher the
VALUE the
greater the
Willingness to
Pay
Differentiation
Value
Reference Total Customer
Value Value


Insight
• No relationship between Production Costs and Willingness to Pay.
• Cost Based Pricing can leave value on the table.
• Competition/Market Based Pricing is based on assumptions and can
be considered high risk.
• Product Value allows Pricing to be higher (than the competition) and
still gain high sales and market share.
• Customers regard Product Attributes and Product Service as more
important than Price.



Value
Based

Market
Based

Cost
Plus



Structuring your Pricing
Bundled pricing
• Getting value from customers for products they have a lower willingness to pay for by
bundling them with other product you know a customer wants e.g. McDonalds

Reward customer behaviour
• Behaviour that adds value to your business
• Only pay for the behaviours that matter e.g. Consumer Goods

Menu Pricing
• Give customers options e.g. Cars, Insurance, subscriptions

Discounting
• Incentivise customers to drive the business in the way that you want them to e.g. sales
volumes

Rebates
• To reward loyalty or to encourage longevity

Portfolio
• Offering a range of products at different value and price levels.
• Packages can be created that ensure overall deal value.



Value Mapping – Price & Value
The Value Equivalence
Lose Market Share
as Customers
Line illustrates where
receive < Value for customers get exactly what
the Price they pay
they ay for.

On this line the perceived
Price

benefits match the price they
pay for them

Gain Market Share
as Customers
receive > Vlaue for
the Price they pay

Perceived Value
Simon Kucher & Partners 2009



Product and Price Differentiation
Products/services can be differentiated to appeal to different customer segments.
Consider how segments differ in what drives value and what drives cost to serve.
Create a Price structure that charges more when a sale creates more value for the
buyer or higher cost to the seller.

Stimulate greater
usage
Sales

Sales

Profit Profit Skim value

Price Price


Case Study 1 Established business – new product
Objective Introduce product with superior performance and features and drive
higher and ongoing revenue than competition.
Issue Tracking technology product being introduced to established market.
Solution Identify competitor products.
Map where the product out performs current products.
Understand customer „willingness to pay‟.
Create strong Value Proposition.
Results Three variants of the product;
•Basic – comparable to most competitors.
•Medium – enhanced functionality, higher pricing.
•Full – complete functionality, higher spec. than all rivals.

Equipment was the same for all variants.
Basic/Medium included options to upgrade functionality.
All variants included;
•One off payment.
•Ongoing revenue driver.
•Subscription options for added value services.


High Competitive Alarm Reliability Competitive Superior performance in
Disadvantage functions Advantage the most important factors
Reports
Mapping to Pricing
site (scale)
Tracking
visibility
Acceptance of inferior
Tracker
design/usab performance in less
ility important factors
Data history
Relative
Importance to Access to
the customer multiple Internal and external view
sites
of the market

? Over Performing Markets where Price is
Low
less important are good
Weaker Position vs. Competition Stronger places to be



Case Study 2 Start up technology business
Objective Bring new product to market that delivers significant margin in the
future and creates equity value.
Issue Innovative technology in new area, some competition but unproven.
Solution Develop pricing approach focused on the value the product brings to
end users and hardware suppliers.
Structured model that enables;
•Initial cost recovery through one-off charge.
•Ongoing revenue through yearly licence fee.
•Per user charge on monthly basis.
•Per application charge on monthly basis.
•Additional revenue opportunities through support packages.
Results Flexible pricing approach that allows revenue to be generated through
a number of sources.
Model can grow/contract with the user enabling them to manage
costs.
Contract basis allows business to project forward revenues.



Value Creation
After Before
 How is the customer  Where do they have problems
rewarded for using our  How can we fill these gaps
product  Do existing activates add
 What value do we create to sufficient value
ensure repeat purchases
After Before

During
 Do our products help our During
customers solve their problems
 What further activities can we
provide to add value
 Can we make our Customer value
more things


Case Study 3 Service business – new product
Objective Introduce new product to the public sector consulting market based
on high value proposition.
Issue Developing product offering and pricing approach that enables the
companies to engage with the public sector to access services at an
acceptable level, while at the same time generating revenue for the
business.
Solution Product offering with a range of attributes and price points.
Service accessed virtually to enable high value – low cost –
affordable pricing.
Customers/Clients can move up/down product offerings depending
on requirements and context.
Results Price introduced successfully.
Flexibility to evolve the service offering to cater for the requirements
of public sector.



Case Study 4 Business to Business
Objective To grow pricing and margins in line with financial requirements and
brand positioning.
Issue Continual pressure on pricing from customers/competitors.
Low profitability from some customers.
Lack of control over pricing.
Risks of industry consolidation.
Solution Identify and understand pricing architecture.
Introduce pricing structure to link volume to price.
Change customer pricing according to architecture.
Implement sales processes and systems to ensure compliance.
Improve sales skills and awareness of pricing issues.
Results Improved overall margins delivered over period.
Adverse customer reaction avoided through phased approach.
Sales buy in achieved through re-aligned incentives.



Product sector

26.00

25.50

25.00
Net Price in £/t

24.50

24.00

23.50

23.00

22.50
0 20,000 40,000 60,000 80,000 100,000 120,000 140,000
Volume



Case Study 5 Consumer Goods
Objective Grow pricing and margins and resist customer and competitor
pressure.
Issue Sales teams inability to withstand demands from customers to reduce
prices and reacting weakly to competitor actions in the market.
Solution Increase (recruit and train) capability in pricing knowledge and
expertise.
Identify the key issues for sales people.
Improve value selling skills.
Develop negotiating capability.
Results Improved margin retention.
Greater confidence in dealing with customers.
Signals to competitors resulting in reduced levels of price competition.



Questions?



Closing remarks


Andrew Bailey - WBS Entrepreneurship Mentoring Programme - Final Workshop

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