How to take a scientific approach to pricing in business-to-business markets

1. Taking the Art Out of Pricing in
Business-to-Business Markets

2. The Age of the Pricing Professional
• Pricing is now viewed as a strategic priority
• Core concepts of good pricing practices are
converging
• This is a good thing!
• Means that pricing can be:
– More widely understood across functions
– Based on consistent, repeatable processes
– That are more likely to be accepted
• Pricing is now more science than art!
© 2006 Holden Advisors Corp., Concord, MA 2

3. Moving From Art to Science
• B2C pricers have some great tools
– Conjoint analysis
– Price optimization software
• Unfortunately these are of limited use in B2B
– Complex buying centers
– Smaller segments
– Driven more by financial value than attitudes/perceptions
• The focus for B2B pricers – consistent:
– Definitions
– Criteria for what is/isn’t effective
– Processes
© 2006 Holden Advisors Corp., Concord, MA 3

4. What Every Pricing Program Must Have
Pricing
Defined Strategy Polices &
Pricing
Controls
Approach
List List
Net Prices
Prices Prices
Pricing
Model
Measurable
Results
Price Offering Price
Metrics Matrix Levels
© 2006 Holden Advisors Corp., Concord, MA 4

5. Choosing a Pricing Approach
The Expert believes that there is only one answer.
The Master knows there are many answers.
• “Value-based” pricing is the long-run objective
– Often difficult to start here
• Requires cross-organizational buy-in
– And capabilities development
• Need to consider other options
– Better cost-plus pricing
– Better market-based pricing
– Pricing to value
• Better to plan for evolution - not revolution
© 2006 Holden Advisors Corp., Concord, MA 5

6. Pricing Strategy
Making the Best Choice
Three Choices
1. Skim 2. Penetration 3. Neutral
Principal Drivers Influencers
• Product Lifecycle • Market Economics
• Value position relative to • Competition
• Cost position
competitors
• Response profile and history
• Differentiated
• Parity
• Disadvantaged • Objectives for
product/service line
© 2006 Holden Advisors Corp., Concord, MA 6

7. Elements of a Price Model
Good Price Metrics
• Relate to customer’s
– Profit model
– Ability to pay
– Willingness to pay
• Can be easily audited
• Limit gaming by sales and clients
• Examples:
– Power by the hour
– Assets under management
© 2006 Holden Advisors Corp., Concord, MA 7

8. Elements of a Price Model
The Matrix
• The specific offering elements and bundles that
have prices attached to them
• Objective is to enable segmented pricing
• Think in terms of platforms
– Silver - for price buyers
– Gold - for the majority of customers
– Platinum - for relationship buyers
• Add in a la carte elements to move between
– Provides means to trade price and value
© 2006 Holden Advisors Corp., Concord, MA 8

9. Price Levels
Align process with approach
Better Better
Pricing
Cost-Plus Market-Driven
to Value
Pricing Pricing
• Adjust cost multipliers • Base prices on: • Must understand
based on perceived offering cost and
• Qualitative indicators
value revenue impacts for the
of value customer
• Low for low value or
• Competitor price
undifferentiated • And differentiation
levels
offerings relative to the
competition
• Use costs as
• Higher for differentiated
benchmark for low end
offerings • Take a “fair” share
of possible price range
• Reasonable to target
10% - 40%
© 2006 Holden Advisors Corp., Concord, MA 9

10. Tying It All Together
Pricing Model Architecture Example
- Region
Deal
- Competition
Guidance
- Strategic Importance
+%
- Project Risk
Price Levers Price Levers
Initial Fixed-Price Level
Base Gold
+%
-% Package Package
Set by:
Type of Application
Size
Complexity
-% +%
SLA’s SLA’s
Criticality
Deal
Guidance
-%
© 2006 Holden Advisors Corp., Concord, MA 10

11. Process and Task Level Criteria
Criteria for effective pricing processes
System Level Definition
Repeatable Same input = same output
Visible Communicated and well understood across entire organization
Scalable Supports growth and staff transitions
Trackable Data generated at key points in process and is easily accessible
Standardization XX% of pricing covered in standard process, YY% exceptions
Point to key information and process needs
Relative
Model & Transaction
Value Competitive Comm- Process
Customer
Drivers Scanning unications Measures
Policies Price Mgmt.
Value
© 2006 Holden Advisors Corp., Concord, MA 11

12. Final Thoughts
• There is a science to pricing
• Emphasize standards, processes, and
definitions
• Facilitates understanding of the pricer’s role
• Predictability and visibility build
– Trust
– Confidence
– Buy-in
© 2006 Holden Advisors Corp., Concord, MA 12

13. Thank You!
Mark Burton
Vice President, Holden Advisors
mburton@holdenadvisors.com