pps spring 2007
DESCRIPTION
Professional Pricing Society presentation on working within your organization\'s constraints to evolve your pricing capabilitiesTRANSCRIPT
Pricing in a Constrained WorldSeparating Rhetoric from Reality
Professional Pricing Society Spring Conference
April 20, 2007
2© 2007 Holden Advisors Corp., Concord, MA
The Current State of Pricing
• Agreement on “best pricing” practices• Great results by improving price realization• The profession is focused on where we can
make a difference but…• We are losing focus on the strategic
foundations of pricing• That is where the biggest opportunities lie
Many organizations see short-term gains but there is still more money to be made - much more
3© 2007 Holden Advisors Corp., Concord, MA
On the Path to Pricing Nirvana…Watch Out for Death Valley
Long-Term Goals• Deliver superior
value• Price to value• Hold the line during
negotiations• Manage our
competitors• Get sales involved• Educate the
organization
Short-Term Priorities• Make the quarter• Grow market share• Hit margin numbers• Negotiate with
major accounts• Quickly get
answers out to the field
• Price new products• Improve price
realization
Pricing teams often get stuck on the “short-term” side of the canyon – trapped by perceived constraints
4© 2007 Holden Advisors Corp., Concord, MA
The Importance of Price
• Good: 1% improvement in price=11% improvement in net profit– But it focuses on “average” results– Often leads to an imbalance in prices
• Better: Eliminating unnecessary discounting can improve margins by over 20%
• Best: Better list prices, less discounting, and tiered offerings significantly increase both profits and revenue
5© 2007 Holden Advisors Corp., Concord, MA
The Realities of a Value-Based ApproachDon’t Move Too Fast!
• If we push too quickly towards the long-term view…• Customers won’t know what hit them
– Negotiate harder– Defect to the competition
• Competitors over-react– Act opportunistically– Start a price war
• Sales teams often unprepared– Managers too!
Failure to anticipate and manage these forces can cause pricing initiatives to backfire
© 2004Dynamic Value Advisors CorpConcord MA 6 6
6© 2007 Holden Advisors Corp., Concord, MA
What Keeps Us From Bridging the Gap?
Perceptions
CapabilitiesData
7© 2007 Holden Advisors Corp., Concord, MA
Breaking Free of Perceived Constraints
Conventional Thinking• “You can go for increased revenues or increased
margins but not both”– Leads to “pendulum” pricing and commoditization– Destroys pricing power
• Most organizations struggle with making price changes• Customers know your position will change
Unconventional Wisdom• Innovate for growth - price for profits• Adopt a “high-low” product and pricing strategy• Take your time – exert patient pressure
8© 2007 Holden Advisors Corp., Concord, MA
Taking It One Step at a TimeBetter Data Improves Results
Level I
Able to de-average by product or service line
Basic knowledge – “Off the web
site”
Superficial, Anecdotal
Level II
Able to incorporate
cost-to-serve data
Understand offerings and general price
ranges
Based on perceptual
research and sales input
Level III
Able to incorporate opportunity
cost data
Understand value of
competitor offerings
Can connect offerings to $$ for customers
Costs
Competitor Offerings and
Prices
CustomerValue
9© 2007 Holden Advisors Corp., Concord, MA
Building the Skills of the TeamTime to Be Honest With Yourself
Level I
Maintain price lists and policies
Identify most relevant
competitors and offerings
Position benefits of the offering
Level II
Discern true trends versus
outliers
Analyze customer
perceptions & work w/sales
Analyze and sell against
customer pain points
Level III
Establish price levels that
capture a fair share of value
Analyze value to the customer &
define key differences
Present quantifiable
value propositions
Pricing:Able to…
Marketing:Able to…
Sales:Able to…
10© 2007 Holden Advisors Corp., Concord, MA
Use Knowledge of ConstraintsTo Develop a Structured Change Plan
IdentifyCritical
Changes
Define end state, gaps, and vision
Assess Readiness
Assess conditions for change
Develop Change
Plan
Develop transformation
plan
SensitizeThe
Organization
Consensus on detailed
changes
Transform The
Organization
Pilot and roll out changes
Constraints Define Universe of Options at Each Stage
11© 2007 Holden Advisors Corp., Concord, MA
PricingChangeAgenda
Making the Change Agenda Work Understand Constraints to Define Options
Customers
Competitors
External
Regulatory
Economic Environment
CapabilitiesStrategy
Objectives
BusinessPerformance
CostStructure
Data & Infrastructure
Motivation & Incentives
Internal
12© 2007 Holden Advisors Corp., Concord, MA
Pricing Options Grow Over TimeServices Industry Example
Fixed Fee Pricing
Pricing to Value
Better FTE-Based
Pricing
Better Cost-Plus
Pricing
Objectives – Years 1 - 2 Objectives - Years 3 - 4
Pricing capabilities increasing over time with:
• Improvements in service definition and standardization
• Improvements in analysis of costs and risks
• Pursuit teams’ ability to define, sell, and measure value
In FY 2006, the value of signed contracts increased 32% and earnings tripled
13© 2007 Holden Advisors Corp., Concord, MA
Advice From the FieldIterate – Don’t Conquer
“It’s all about determining the roadmap and associated steps for getting from current state (of disaster) to the optimal future end state (of utopia)…I think it boils down to driving a series of ongoing small successes that help build upon each other to accomplish the end goal.”
- Former consultant and current Pricing Director
“I expect that it will take 4 to 6 years to bring about the changes that I think we need to make.”
- Former consultant and current Vice President, Operations
“Sometimes you have to take a ‘bad’ deal or two. Get over it and stay focused on the big picture.”
- Former product manager and current consultant
14© 2007 Holden Advisors Corp., Concord, MA
Concluding ThoughtsTime to Get Others Involved
• Adopt a long term, holistic, and strategic vision• Be realistic about what can be done – and how long it
will take• Compromise when
– It improves business results– Brings a key constituency along
• Stand firm when– Short-term results are affected– You can go for the knock-out
• Be someone that others can work with• Sell the heck out of the results
Thank You!
Mark BurtonVice PresidentHolden Advisors978-405-0022