1. AFC Pricing Workshop Basics of pricing put into practice 24 November 2010 Check our website: http://www.thehouseofmarketing.be Follow us on Twitter. LinkedIn or Facebook

2. 2 Agenda 18h00-18h15 Intro 18h15-19h15 Basics of pricing 19h15-20h00Continental Courier Case

3. AFC and The House of Marketing: a win-win partnership 3 Marketing expertise and support to AFC customer projects Workshops to AFC members

5. Privately owned, Belgium based company

6. 50+ marketing consultants / experts

8. Team of consultants with different nationalities and cultural backgrounds enabling us to easily integrate the local culture while managing the multicultural differencesGeography & Nationality 4

9. Located in Mechelen 5

11. Segmentation

12. Branding & Positioning

13. Business & Marketing Planning

14. Innovation

16. Product/ Brand/ Category/Services Management

17. Communication

18. Online marketing

19. Sales & Channel Management

20. Customer Relationship Management

22. Organizational design & Change Management

23. Marketing Audit

24. Marketing Coaching & Training

26. Marketing Dashboards & KPI’s

27. Customer Lifetime Value & Return on Marketing Investments (ROMI)6

28. Clients across many different sectors ICT & Media Utilities & Resources Financial & Other Services Consumer Goods & Retail Healthcare & Public Sector Transport & Logistics 7

29. 8 Agenda 18h00-18h15 Intro 18h15-19h15 Basics of pricing 19h15-20h00Continental Courier Case

31. Assisted Electrabel with their websites, pricing & channels

32. Analyzed and installed new pricing levels @ The House of Marketing

33. Designed and integrated new websites for Zoo Antwerp

34. Launched new product for NetlogPersonal information: Live in Ghent, play soccer competitively, cannot choose between snowboarding and skiing, love electro and house festivals & parties, South-America is my favorite holiday destination.… 9

35. 10 Pricing in The News Increasing price InBev & AlkenMaes increase beer prices* 23/08/2010, De Tijd NMBS increases tariffs* 16/08/2010, deredactie.be $ Lowering price or price image Delhaize decreased prices of 1000 products 01/04/2010, De Tijd Danone launches discount range of yoghurt 12/09/2008, Le Figaro $ Cutting Costs Solvay keeps on cutting costs in 2010 18/02/2010, De Standaard VW stops its production for a week 23/02/2009, De Tijd * Note: Common reasons given are increased costs of raw materials and other resources., reduced sales and high inflation

36. Pricing is a huge lever to increase profit 11 Profit + 13% Improve Price by 5% Profit increase Profit + 50% Total Revenue = 100 Fixed Cost = 65 Profit = 10 Variable Cost = 25 Reduce Variable Costs by 5% Improved price realization of 5% generates 50% profit improvement* * Note: Assuming Average Fortune 500 Company

39. 32% said prices will definitely have to be lowered in coming year

40. Only 14% of respondents said would raise prices, and in 10% of the cases, would raise prices less than the increase in costs, putting additional strain on margin

41. And yet… 62% of respondents say their customers perceive their product as offering a unique solution and are willing to pay a premium for itSource: THOM Pricing Survey 2009 – preliminary results of 700 participants 12

42. 13 Organizational misalignment around pricing 1 Gaps in price execution and management (Unwarranted variance in field, reactive pricing...) 2 Offer not aligned to different value requirements of segments or desired customer behaviors 3 Failure to drive and sustain value differential 4 Not effectively communicating value to change customer’s perceptions 5 From our experience, companies face many barriers to achieving higher price realization Target price Price realized Value based pricing is about addressing these gaps to increase profitability

43. 1 Organizational misalignment around pricingDiffering, and at times conflicting goals, relating to pricing within same company can limit the effectiveness of pricing strategies “Get me both higher market share and profit . . . now” President Marketing Finance R&D Sales BU General Manager Operations “This is the best product with the best technology on the market. It should be worth millions” “This product took years to develop and our prices need to recapture this huge investment” “If we bundle in more services we can justify higher prices and drive market share” “Customers are saying our price is too high and competitors have and lowered price” “We are well behind this quarter. Let’s do what it takes to start driving volume now” “Special requests from customers are killing us. It’s driving our costs through the roof” Pricing should be addressed strategically after finding common grounds and approaches on pricing and value management 14

44. Outliers Acceptable line Outliers 2 Price execution gaps: Unwarranted variance across pricingSophisticated customers use your discounting policies to gain unwarranted discounts Results 50% 45% 40% 35% 30% Actual discount 25% 20% 15% 10% 5% €0 €100.000 €200.000 €300.000 €400.000 €500.000 €600.000 €700.000 €800.000 €1.000.000 €900.000 Sales revenues 15

47. Meeting competition16

49. Differences in value can be captured with product variations or serviceaugmentation that creates natural fences between segments 17 17

50. Example Carbon Black Producer 4 Failure to sustain and drive differential value Sustain differential advantage Drive differential advantage Traditional way Value-based way Less Freight €0.03 Product Product Less Defective €0.08 Cost Cost Positive differentiation Less WIP Scrap €0.07 Price Price Fewer Material Rejection €0.05 Value Value Customers Customers Reference Value € 0.85 / kg Next best competitive Alternative internal mixing costs Change approach for new product development to ensure delivered value e.g. IKEA Innovations sustain and expand differential value 18

51. Example Carbon black particles Better product dispersability creates more complete mixing that... Our cleaner product creates output reliability which... … allows you to target supply – sensitive segments. generating improved revenue of … reduces total raw materials used. decreasing input cost by € 0.06 / kg € 0.10 / kg Example Carbon Black Producer 5 Not effectively communicating value to change customer’s perceptions Concept Product Focus “What do we offer?” Features Features Application Focus “Why should the customer care?” Benefits Benefits Revenue Drivers Cost Drivers Customer Focus “What is that worth?” € Value Better articulating value helps to change price perceptions and justifying price points 19

52. A classic example of value selling… 5

53. Three elements need to be considered to pricing 21 Determine value needs, perceptions and price sensitivities of customers or segment Understand cost to serve and how these change over time Costs Customers Competition Identify how your offer compares to competition and develop competitive scenarios

54. Determine contribution margin 1 Identify incremental costs 2 3 Identify volume/price trade-offs Evaluate the market context to understand profit implications 4 Cost Cust Costing: deciding on the most profitable activities Comp 22

55. Contribution margin: variable & fixed costs 1 Cost Cust Comp Company XYZ: Price Ex. € 10 Total Contribution =3.000 (Per Unit = € 3) ....................................... Unit variable cost Ex. € 7 Fixed Costs Ex. 1.500 Contribution Margin = 3.000/10.000 = 30% Profits = 1.500 Unit Sales Ex. 1.000 Total Contribution = Sales revenue – Total Variable Cost Contribution Margin (%) = Total Contribution / Sales Revenue 23

56. Cost Cust 2 Identifying The Incremental Costs Comp Incremental costs: Cost of production for one additional unit Variable cost: Cost of last produced unit NOTaverage variable cost Fixed costs: Most seen as incrementalBUT be careful of step changes… Opportunity costs: The contribution foregone when an asset is used for one purpose instead of another 24

58. Identify volume/price trade-offs: Breakeven analysis - (-10) %BE = (30+(-10)) = 50% -Δ Price %BE = (CM +Δ Price) Cost Cust 3 Comp Unit Breakeven Sales % Breakeven sales change Price Ex. 10 Total Contribution Per Unit = 3 ......................... Example Current price: € 10 Variable cost/unit: € 7 Current Weekly Sales: 1.000 Units How much would sales have to increase to make a 10% price reduction profitable? Unit variable cost Ex. 7 Fixed Costs Ex. 1.500 Break-Even Unit Sales = 1000 Break-Even Sales = Fixed Costs / Total Contribution per unit 26

59. 4 Cost Cust Strategic guidelines when facing different cost types Comp Cost Type Cost Type Strategic Objective High Variable costs High Fixed Costs Opportunity Costs Drive Price Drive Volume Capacity Optimization Low Contribution Margin High Contribution Margin Contribution Margin foregone Example: Wholesale distribution Office supplies, Technology distribution Example Chemical plant, Pulp and paper. …

61. The more intense, the worse

62. Play as hard as you can

63. Weigh the cost of each confrontation

64. Goal is to win, regardless of the cost

67. Differences in value can be captured with product variations or serviceaugmentation that creates natural fences between segments 30 30

68. Cost Cust Tiered offerings are creating fencesdemonstrating value and increasing profits Comp Dell – Consumer Choices Duracell Marriott – Consumer choices BMW - series

69. Cost Cust Reinforce & communicate the value you provide in the market Comp Goal: Frame the reference

71. Play as hard as you can

73. Weigh the cost of each confrontation

75. Create offering aligned with segment needs

76. Improve perception through communication and marketing actionslow low medium high Value Received

77. 34 Agenda 18h00-18h15 Intro 18h15-19h15 Basics of pricing 19h15-20h00Continental Courier Case

78. Common opportunity areas we see that can result in enhanced price realization Price Opportunity # 1: COLLECT MORE ON ALL OFFERINGS BY REDUCING PRICING VARIABILITY Price Opportunity # 2: MAKE MORE MONEY ON DIFFERENTIATED SERVICES Price Opportunity # 3: IMPROVE BUSINESS MIX TO IMPROVE PROFITS 35

80. Estimated marketing budget for 2010: $1.5 million

81. Goals for 2011: increase sales by 20% and increase margins realizedQuestions Are there types of customers which are more/less profitable than others? Are there account managers with lower or higher margins? What does price band analysis tell us?

82. Solutions case Some customer types seem to be more profitable than others. All account managers set on average higher prices than expected (negative avg discount) Are there types of customers which are more/less profitable than others? 2. Are there account managers with lower or higher margins?

84. Click: insert – scatter plot

86. Are there a lot of outliers or is everything scattered across a single band?

87. Outliers mean that policies are not always adhered to. Every outlier would need to be checked and evaluated individually.Analyzing found results Price banding can help identify customers with a too high or too low discount

90. Missed Profit Opportunity Accounts: 299= A Customer Account 40

92. The actual revenues realizedPrice (Euros) 41

94. Customers

95. …

96. Order size discount?

97. Competitive discount?

98. Payment term bonuses

99. Yearly bonuses

100. Promo’s

101. …Check correlation discount - country Identify possible leakages Correlation discount - salesperson Interviews for yearly rebates. promo’s. payment term discounts. etc. Data analysis Difference between list price and pocket price can sometimes even be so big that costs are no longer covered

103. Understand which sales drive incremental capacity costs and which do not. enabling company to price to profitably recover capacity cost from the former. while pricing to drive incremental contribution from the latter

105. Target customers (or jobs) that most value capabilities for profitable growth and focus your resource investments of service to those segments

106. Anticipate and plan for changes in competitor and customer behavior that could threaten your competitive position in your target segments

107. Collect and communicate competitive information to minimize the impact of negative-sum competitive confrontations

109. Sell “value delivered”. not features. and grow markets by educating more customers on the value that your company can deliver