andrew bailey - wbs entrepreneurship mentoring programme - final workshop
DESCRIPTION
Pricing strategies: Are youpricing yourself into or out of the market?Andrew Bailey, Director, Negotiating MentorTRANSCRIPT
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
Pricing Strategies
Andrew Bailey
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
“Price is an extremely effective profit driver. Price can generate huge profits or destroy margins”. (Simon Kucher & Partners 2009)
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
Agenda
Why you should take Pricing seriously
Some insights and myths
Developing your Pricing approachProcessDefine your PricingPricing methodsPractical steps you can takeCase studies
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
Agenda
Why you should take Pricing seriously
Some insights and myths
Developing your Pricing approachProcessDefine your PricingPricing methodsPractical steps you can takeCase studies
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
–THE most powerful Profit lever
–Perception and influence
–Communication
–The impact of Pricing decisions IS huge
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
ProfitDriver
Increase in performance
Profit
(£M)
Current measure
of profit driver
Newmeasure
New
Price £100 10% £110 £20m
Sales Volume
1m 10% 1.1m £16m
Fixed costs
£50m 10% £45m £15m
Variable unit costs
£40m 10% £36m £14m
Achieving a 10% improvement, delivers an increase in profits of ….
Variable costs
Fixed costs
Volume
Price
40%
100%
60%50%
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
ProfitDriver
Increase in performance
Profit
(£M)
Current measure
of profit driver
Newmeasure
New
Price £100 -5% £95 £5m
Sales Volume
1m -5% 0.95m £7m
Fixed costs
£50m £50m
Variable unit costs
£40m £40M
Pricing is the most DANGEROUS profit destroyer
-30% -50%
PriceSales
A 5% deterioration in Pricing or Sales reduces profit by ….
With a 10% price decrease, to achieve a 50% gross margin, sales volume would have to increase by 25%
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
Perception & influence
Perception
Power
Value
Control
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
Communication
Expectation
Signals to the market
Product and service management
Competitive intelligence
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
AgendaWhy you should take Pricing seriously
Some insights and myths
Developing your Pricing approachProcessDefine your PricingPricing methodsPractical steps you can takeCase studies
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
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
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
– 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.
Issues companies have with Pricing ….
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
Customers
Product/Brands/Service
People
Revenue
The benefits of a structured, disciplined pricing strategy
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
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
The benefits of a structured and well disciplined pricing strategy
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
AgendaWhy you should take Pricing seriously
Some insights and myths
Developing your Pricing approachProcessDefine your PricingPricing methodsPractical steps you can takeCase studies
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
Pricing Strategy Development
Price Enablers – Organisational
Capability
Price Implementation
(execution)
Pricing Strategy & Execution Process
PriceDecision•Architecture•Price Levels•Negotiation
Organisationand People•People•Culture•Structure
PricePerformanceMeasurement
(enforcement)
Controlling•Trends •Performance indicators•Time series analysis•Profit performance•Elasticity
Infrastructure•IT•Processes•Systems•Tools•Framework
Execution•Discounts•Incentives•Deals•Negotiation•Roles•Accountability
Copyright Commercial Strategy and Business Support Ltd 2012
Price Strategy
Strategy•Objectives• Approach•Competition• Value• Structure• Optimisat
ion• Segment
ation• Differenti
ation
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
Strategic Issues
Volume GrowthLow High
ProfitabilityGrowth
Low
High
?
Trade off – Which customers prepared not to do business with
‘Dream Position’
Use Business Goals as input to the process
Depending on Goals there are different Pricing strategies to adopt
Recognised a Trade-off between Profit and Volume
Dream Position can be achieved, however not by Pricing alone
Pricing has to be part of the overall Business strategy and integral and aligned to it
Trade off – Volume growth at the expense of Profit
Strategy & Goals are crucial inputs to developing Pricing Strategy
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
Strategic Issues
Price/Value strengthIncrease Decrease
PriceDifferentiation
Price Attack
Introductory Pricing
Pricing Differentiation
Value Pricing
Market Position
Competing Strategies
Depending on your position in the market you will have a different set of products/service goals and therefore Pricing Strategies
Market Leader/
Defender
Decrease
Increase
Follower/Invader
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
Agenda
Why you should take Pricing seriously
Some insights and myths
Developing your Pricing approachProcessDefine your PricingPricing methodsPractical steps you can takeCase studies
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
•In
voice
d
disco
unt
List price/ Gross Price
Invoice price
Pocket price
•Tu
rnov
er re
bate
•Pro
mot
iona
l
Suppo
rt•
Mar
ketin
g Sup
port
•Hos
pitali
ty/G
ift
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
What do we mean by Price?
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
•Res
erve
d se
ating
Basic price
Pocket price
•Che
cked
bag
gage
•Adm
in fe
e
Basic price attracts customers
Customers can choose what they want to pay
Business strategy based on overall revenue generation
What do we mean by Price?
•Prio
rity b
oard
ing fe
e
•Spo
rts e
quip
men
t
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
Agenda
Why you should take Pricing seriously
Some insights and myths
Developing your Pricing approachProcessDefine your PricingPricing methodsPractical steps you can takeCase studies
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
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
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
Cost Plus Pricing
Dependent on accuracy of cost measurement
Improvements in cost are passed through to the customers
Competitor improvement in costs impacts your competitive position
Cost + price may be lower than Value delivered to customers and willingness to pay
Std Profit margin
Variable costs
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
Market/Competition Driven PricingDefinition:
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
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
Price Comp A Comp B Comp C Comp D
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 create compared to them.
Market/Competition Driven Pricing
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
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
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
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
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
Value Based Pricing
Reference Value
Differentiation Value
Total Customer Value
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
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
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.
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
Value Based
Market Based
Cost Plus
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
Agenda
Why you should take Pricing seriously
Some insights and myths
Developing your Pricing approachProcessDefine your PricingPricing methodsPractical steps you can takeCase studies
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
Structuring your PricingBundled 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.
copyright Commercial Strategy and Business Support Ltd 2010
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
Value Mapping – Price & Value
Perceived Value
Pri
ce
Gain Market Share as Cus-tomers receive > Vlaue for the Price they pay
Lose Market Share as Cus-tomers receive < Value for the Price they pay
The Value Equivalence Line illustrates where customers get exactly what they ay for.
On this line the perceived benefits match the price they pay for them
Simon Kucher & Partners 2009
Value Equivalence Line
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
Product and Price Differentiation
Price
Sa
les
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.
Price
Sa
les
Profit Profit
Stimulate greater usage
Skim value
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
Agenda
Why you should take Pricing seriously
Some insights and myths
Developing your Pricing approachProcessDefine your PricingPricing methodsPractical steps you can takeCase studies
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
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.
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
Position vs. CompetitionWeaker Stronger
RelativeImportance to the customer
Low
High
Over Performing?
Competitive Disadvantage
Competitive Advantage
Superior performance in the most important factors
Acceptance of inferior performance in less important factors
Internal and external view of the market
Markets where Price is less important are good places to be
Tracking visibility
Access to multiple
sites
Tracker design/usab
ility
Pricing
Alarm functions
Reports
Mapping to site (scale)
Reliability
Data history
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
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.
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
Value Creation
Before Where do they have
problems How can we fill these gaps Do existing activates add
sufficient value
Before
During
After
After How is the customer
rewarded for using our product
What value do we create to ensure repeat purchases
During Do our products help our
customers solve their problems What further activities can we
provide to add value Can we make our Customer
value more thingscopyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
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.
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
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.
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
0 20,000 40,000 60,000 80,000 100,000 120,000 140,00021.00
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Product sector
Volume
Net
Pri
ce i
n £
/t
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
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.
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
Questions?
copyright Commercial Strategy and Business Support Ltd 2012
commercial strategy
4 ®strategy ▪ pricing ▪ negotiating
Closing remarks
copyright Commercial Strategy and Business Support Ltd 2012