the journal of professional pricing - shopify€¦ · the journal of . professional pricing. 10....

The Journal ofProfessional Pricing

VOLUME 25 l NUMBER 3 l Th i rd Q uar te r 2016

The Wor ld ’s Lead ing Assoc ia t ion Ded ica ted to Pr ic ing Management

A Profess iona l Pr ic ing Soc ie t y Pub l ica t ion

Capturing the Value of MedTech Ingenuity: The Case for Pricing Innovation by Julie Meehan, Marc Abels, Omer Saka and Anard Sairam

Who is in Charge of Customer Value in your Organization? The Emerging Role of Chief Value Officer

by Stephan M. Liozu, Ph.D. and Ron J. Baker

Making Salespeople Champions of Price Strategy by Reed K. Holden, PhD

The Delayed Revolution by Hermann Simon

Pricing is widely known to have significant profit improvement potential. Yet

most B2B companies still rely too heavily on guesswork to make sustainable

improvements. Companies that have harnessed the full power of pricing use

price optimization software because it is the only approach able to address

the massive complexity inherent in transactional pricing.

MarginMax™ is the only true mathematical price optimization application for

B2B markets. It leverages patented data science to produce pricing guidance

that helps decision makers get the right answer every time. MarginMax can

optimize all price modes from spot quotes to agreements to price lists,

producing guidance that makes sense and makes money. It runs on our

highly configurable, SaaS Optimization Platform which enables customers to

put prices in-market in a matter of weeks, and is able to scale to serve both

mid-size businesses and large global enterprises. MarginMax customers

realize the full potential of their pricing strategies, achieving sustainable profit

improvements of 5 to 15 percent or more.

STOP BY OUR BOOTH FOR A DEMO AND LEARN HOW YOU CAN ACHIEVE SUSTAINABLE MARGIN IMPROVEMENT.

ZILLIANT GIVES THEBEST ANSWERS TO EVERYDAY SALES DECISIONS

Grow Smarter with Zilliant. Learn more at www.zilliant.com/marginmax

YOUR BEST DEALPrice with more precision.

Understand your mix, and make it actionable.Deliver insights more effectively.

thekinigroup.com

Powerful pricing analytics built for the Fortune 500 at a price for mid-market businesses.

Stack the deck with your data

Th e Wor ld ’s O n ly Assoc ia t ion D ed ic a ted to Pr ic ing M anag e m ent

VO LUM E 25 l NUM BER 3 l Th i rd Q uar t e r 2016

The Journal of Professional Pricing

ADVISORY BOARDMR. ERIC MITCHELLFounder & Chairman of the BoardThe Professional Pricing SocietyMR. XAN CHAMBERLAINGlobal Pricing Manager, Hitachi Data SystemsMR. MARTIN COALSONPresident, ShipCarsNow, A Union Pacific CompanyMS. LYDIA DILIELLOFounder & PrincipalCapital Pricing Consultants LLCMS. KELLIE ECKER, CPP President, Ecker InvestmentsMR. DOUG FUEHNEVice President of Customer Value, PROSMR. JIM GEISMAN, CPPPresident, Software Pricing Partners, Inc.DR. SCOT HORNICKExecutive Vice President Revenue Management, The Hertz CorporationDR. RICHARD LANCIONI, CPPProfessor of Marketing Temple University, Fox School of BusinessDR. STEPHAN LIOZU, CPPFounder, Value Innoruption AdvisorsMS. LAURA PRESLANGeneral Manager, Dynamics Program Office, Microsoft CorporationMR. CHRIS PROVINESCEO, Healthcare Value Institute and Value Vantage Partners; Adjunct Professor, Rutgers University Graduate School of BusinessMS. STACEY SCHAEFFERDirector, Price and Offering ManagementSAS Institute, Inc.MR. MICHAEL SIMONETTOPrincipal, Pricing & Profitability Management, Deloitte Consulting LLP

PUBLISHER & PRESIDENTKEVIN MITCHELLPROFESSIONAL PRICING SOCIETYMARIETTA, GA

PROFESSIONAL PRICING SOCIETY3535 ROSWELL RD., SUITE 59MARIETTA, GA 30062PHONE: 770.509.9933, FAX: 770.509.1963E-MAIL: [email protected]: pricingsociety.com

ADMINISTRATIVE STAFFCHRIS BUCKINGHAM, Vice President of Sponsor

RelationsHELEN CAUTHEN MITCHELL, CMP, Meeting DirectorPHYLICIA FAIR, M.ED, Membership & Conference

CoordinatorLISA M. FISHER, Sr. Director Marketing,

Communications & Key AccountsMEAGAN FORD, Social Media StrategistSTEPHANIE HUDSON, Meeting PlannerWYNETTA JONES, Executive AdministratorDARNELL SHEPHERD, Project CoordinatorCHERICA SPANN, Membership/Conference ManagerMICHAEL TATONETTI, Director of Education &

CertificationREBEKAH WORTMAN, Marketing Publications Editor

The Journal of Professional PricingTM is published quarterly by Professional Pricing Society; Publisher Kevin Mitchell. All Rights Reserved © 2016, Professional Pricing Society accepts no responsibility in connection with any liability that might develop as a result of material published; opinions expressed are those of the authors and do not necessarily represent the publisher. No part of this publication may be reproduced in any form by microfilm, xerography, or otherwise, or incorporated into any information retrieval system, with-out the written permission of the copyright owner.

mailto:info%40pricingsociety.com?subject=

http://www.pricingsociety.com

PLAY SEVERAL MOVES AHEAD OF THE COMPETITIONTransform Pricing into a Strategic Advantage

Visit us at pros.com/checkmate to learn how you can transform pricing into a strategic advantage.

+ 1-855-846-0641

“Price optimization can be one of the

most powerful tools a firm has to increase

margins and grow revenue”

Aberdeen Group

With PROS pricing solutions, formulate winning pricing strategies that checkmate the competition and realize your company’s revenue growth and profit potential.

Deliver an incremental 100–300 basis points

of margin.

Prevent over discounting and set a winning price

for every deal.

Create pricing strategies from a single source

of pricing truth.

Do you have your pricing ducks in a row, but find sales people are losing ground at the

negotiation table?

Transform sales with how to use value messagesand price negotiating skills to counter toughprocurement tactics and realize the right price.

Announcing the 2nd Edition of the best sellingNegotiating with Backbone: 8 Strategies toDefend Your Price and Value, by Reed Holden,available through Amazon and other retailers.

Contact: Carolyn Holden 978.405.0021 [email protected]

Third Quarter 2016 The Journal of Professional Pricing7

CONTENTSTHE JOURNAL OF

PROFESSIONAL PRICING

10 Capturing the Value of MedTech Ingenuity: The Case for Pricing Innovation by Julie Meehan, Marc Abels, Omer Saka and Anard Sairam To thrive, even survive, MedTech companies should expand their innovation ambit to include pricing innovation. Because the challenge may seem daunting and risky, this article details pricing strategies that blend established techniques with new approaches. The blend helps MedTech companies change at a pace they can manage while bolstering their ability to compete, as the authors explain. This industry specific examination provides insights and strategies that can be leveraged by pricers in multiple industries.

20 Who is in Charge of Customer Value in your Organization? The Emerging Role of Chief Value Officerby Stephan M. Liozu, Ph.D. and Ron J. Baker This article explores the need for the creation of a Chief Value Officer role for both service and manu-facturing firms.

28 Making Salespeople Champions of Price Strategy by Reed K. Holden, Ph.D.How do we support our salespeople, through compensation plans, tools, and messaging, to become the champions of the organization’s pricing strategy? How do we get their buy-in to do so? These are the crucial questions that every company must address, as the author explains.

34 The Delayed Revolution by Hermann Simon In this article, the author examines the delayed revolution of the adoption of internet alternatives to tra-ditional experiences – such as shopping and consuming traditional media and newspapers. The author posits that only five or ten percent of the internet’s potential has been tapped so far and predicts future trends of how increased adoption of internet offerings will affect several industries in the coming years.

For change agents seeking profit nirvana, please note: effective pricing is your most powerful lever to getto the top! At Pricing Solutions, we have helped many companies in many industries take theexhilarating ride to the top; to take price increases, reduce needless discounting and grow theirbusinesses. If you agree that every penny counts and you want to drive pricing improvement, give usa call or visit our web site.

OUR

APPROACH

TO PRICING

ACCELERATES

YOUR CLIMB

UP THIS

SIDE AND

AVOIDS

THIS

SIDE

P E O P L E & O RG A N I Z AT I O N – P RO C E S S & C H A N G E M A NAG E M E N T – R E S E A RC H & A NA LYT I C S – TO O L S & S Y S T E M S

w w w. p r i c i n g s o lu t i o n s . c o m

Pricing Solutions Ad 10 6/8/10 12:31 PM Page 1


To thrive, even survive, MedTech companies should expand their innovation ambit to include pricing innovation. Because the challenge may seem daunting and risky, this article details pricing strategies that blend established techniques with new approaches. The blend helps MedTech companies change at a pace they can manage while bolstering their ability to compete, as the authors explain. This industry specific examination provides insights and strategies that can be leveraged by pricers in multiple industries. Julie Meehan is Principal ([email protected]), Marc Abels is Partner ([email protected]), Omer Saka is Part-ner ([email protected]) and Anard Sairam is Senior Manager ([email protected]) at Deloitte Consulting LLP.

Capturing the Value of MedTech Ingenuity: The Case for Pricing Innovation

CONTINUED ON NEXT PAGE �

The pressure to create more innovative pricing strategies stems from the industry’s shift from a market share to a profit margin focus. As MedTech companies continue to seg-ment and rationalize their portfolios, new product bundles and pricing options can add new complexity. Nonetheless, tailoring offerings based on customer insights can create more value in the end.

— Glenn Snyder, principal and U.S. MedTech Practice leader, Deloitte US

For some time, product innovation has been a ticket to achieving results for Medical Technology (MedTech) companies. Building better mouse traps was the order of the day and MedTech companies could confidently

capture the value of their innovations with basic pricing strate-gies such as cost-plus or benchmarking against competitors. But these days are coming to an end. If MedTech companies don’t adapt to the dramatic market changes beginning to sweep across the industry globally, they will likely further diminish the ability to capture the value of their offerings.

Significant market changes are underway and can only intensify with time. Healthcare providers are under significant pressure to justify the clinical and economic value of their spending. At the same time, non-traditional players are bursting onto the scene

with innovative products fortified by new business models. M&A activity in the sector is accelerating, creating the need to wring value from large product portfolios and justify high valuations

to investors. Patients act like con-sumers, often avoiding products and services whose value is unclear or perceived as too costly.

In addition, most MedTech compa-nies still see health economics—the integration of clinical and economic rationale—as a very technical pur-suit and, as a result, don’t use it as a source of effective pricing strategies. The shortfall comes at the same time that the industry is shifting its focus from market share to profit margins—a challenge that can be addressed by innovation in pricing.

Despite these changes and chal-lenges, a recent Deloitte sur-vey found that only 8 percent of MedTech pricing executives plan to move beyond traditional pricing

Capturing the Value of MedTech IngenuityThe Case for Pricing Innovation

Capturing the Value of Medtech Ingenuity: The Case for Pricing Innovation 54

In addition, low-cost competitors with comparable technology and lower labor cost threatenmargins in certain commoditized product categories.

FDA Product Clearance1

# of

Dev

ices

from

em

ergi

ng m

arke

ts

% o

f Dev

ices

from

em

ergi

ng m

arke

ts

China India Other Emerging Markets % of total devices

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

250

200

150

100

50

0

7%

6%

5%

4%

3%

2%

1%

0%

Source: FDA 510K Clearance, fda.gov, March, 2015

Figure 1: Medical devices from emerging markets cleared by the FDA

A Vastly Different Business Climate The race for market share during the last decade is increasingly becoming a race to protect net revenue and margin. When product innovation was the primary driver of success, MedTech companies could increase market share without experiencing downward price pressure.

However, four significant global macro trends in healthcare are putting pressure on prices that can increasingly erode net profit and margins if MedTech companies aren’t prepared. The following four megatrends will likely continue unabated into the foreseeable future.

A Relentless Drive to Contain Costs Worldwide, governments, payers, and providers and even patients are upping demands that MedTech products deliver demonstrable value and are priced accordingly. In the US, the Obama administration is requiring that, by 2018, 50 percent of Medicare payments must be based on the value that the product or treatment delivers. In France, MedTech companies with annual revenues in excess of €20 million must provide health authorities with a medico-economic evaluation of products to justify reimbursement.

In Asia, Chinese authorities are trying to reduce costs by pushing top hospitals to purchase domestically produced MedTech devices.4 Japanese healthcare officials are revising reimbursement rates every two years to tame the country’s escalating healthcare expenses.5

Centralized purchasing, which has been common in the US for many years and is expanding across Europe, is also adding to downward pricing pressure. In Germany, more than 60 percent of hospital demand comes from group purchasing organizations.6 In France, 60 percent of medical products are purchased by state-run hospitals.7

New Players are Changing the Competitive Landscape The MedTech industry’s solid growth is attracting major investments from non-traditional players and spurring low-cost competitors to expand globally. Increased competition will create ever-increasing downward pressure on prices.

Google, for example, has established a research lab, Google X, devoted to innovative products such as an armband that will detect cancer. It has also partnered with Johnson & Johnson to develop surgical robotics. Low-cost producers from China and India are making inroads into global markets (figure 1).8 More than half of 2013 revenue of China’s Mindray, for instance, came from outside of China.9

M&A is Accelerating MedTech M&A activity in 2015 has maintained momentum and is increasing as companies seek to fortify their margins with broader portfolios, greater scale and favorable tax jurisdictions. Because of the high valuations of many of the mergers over the past few years, the new entities will likely have to capture the full value of combined portfolios, including the latent value of products whose full value hadn’t been captured prior to the merger.

Baxter’s acquisition of Gambro in 2012, for example, has created a global powerhouse of renal products. The 2015 Biomet-Zimmer merger gave the two companies significant scale in the orthopedics market. The merger of Medtronic and Covidien this year is expected to cut annual expenses by $850 million.10 The 2015 acquisition of Johnson & Johnson’s Dublin-based Cordis by Cardinal Health is further evidence of companies creating greater focus on specific therapeutic areas.

The Chinese government has given local companies the directive to expand globally and become multinational companies. Companies such as Mindray are entering the premium segment of the Chinese, US and EU markets and are becoming formidable competitors offering affordable products with competitive quality.

Sheryl Jacobson, principal and Life Science Health Care Practice leader, Deloitte China

Figure 1: Medical devices from emerging markets cleared by the FDA

mailto:jmeehan%40deloitte.com?subject=

mailto:maabels%40deloitte.com?subject=

mailto:rsaka%40deloitte.com?subject=

mailto:asairam%40deloitte.com?subject=



approaches. Only 23 percent intend to make the case for the economic value of their company’s products.

To thrive, even survive, MedTech companies should expand their innovation ambit to include pricing innovation. Because the challenge may seem daunting and risky, this article details pricing strategies that blend established techniques with new approaches. The blend helps MedTech companies change at a pace they can manage while bolstering their ability to compete.

A Vastly Different Business Climate

The race for market share during the last decade is increas-ingly becoming a race to protect net revenue and margin. When product innovation was the primary driver of success, MedTech companies could increase market share without experiencing downward price pressure.

However, four significant global macro trends in healthcare are putting pressure on prices that can increasingly erode net profit and margins if MedTech companies aren’t prepared. The fol-lowing four megatrends will likely continue unabated into the foreseeable future.

A Relentless Drive to Contain CostsWorldwide, governments, payers, and providers and even patients are upping demands that MedTech products deliver demonstrable value and are priced accordingly. In the US, the Obama adminis-tration is requiring that, by 2018, 50 percent of Medicare payments

must be based on the value that the product or treatment delivers. In France, MedTech companies with annual revenues in excess of €20 million must provide health authorities with a medico-economic evaluation of products to justify reimbursement.

In Asia, Chinese authorities are trying to reduce costs by push-ing top hospitals to purchase domestically produced MedTech devices.4 Japanese healthcare officials are revising reimburse-ment rates every two years to tame the country’s escalating healthcare expenses.5

Centralized purchasing, which has been common in the US for many years and is expanding across Europe, is also adding to downward pricing pressure. In Germany, more than 60 percent

The Chinese government has given local companies the directive to expand globally and become multinational companies. Companies such as Mindray are entering the premium segment of the Chinese, US and EU markets and are becoming formidable competitors offering affordable products with competitive quality.

— Sheryl Jacobson, principal and Life Science Health Care Practice leader, Deloitte China


To bolster the competitive success of their products, MedTech companies need to create innovative pricing strategies that beat competitors by demonstrating the product’s unique value and providing incentives for customers to continue buying. In our experience, businesses have three levers they can pull to create powerful pricing strategies. As figure 2 shows, these strategies don’t require wholesale change in each of the three levers. Although pricing strategies can be complicated, they don’t have to be. Instead, companies can blend innovative techniques with traditional approaches:

• Pricing structure; How to set the price. These techniques can range from benchmarking against competitors to basing prices on the clinical outcomes that the product offers.

• Payment model; How to charge customers. Options span from line item and bulk pricing to risk sharing arrangements based on results.

• Incentives; How to spur growth. These techniques include discounts based on volume, and incentives to purchase across multiple product lines.

For example, a MedTech company could offer a new product that can reduce hospital readmission rates for a certain condition. The price can be based on what competitors charge and the company can use traditional line-item pricing for the payment model. The pricing innovation could take the form of rebates offered if the product doesn’t achieve the promised outcome of reducing hospital readmissions. Similarly, an effective pricing strategy for a portfolio of products could use existing list prices and offer bulk pricing on sets of products. The innovation could come into play with incentives to increase sales. For example, the company could offer discounts when customers reach certain spending levels.

The ability to pull different levers of a pricing strategy offers several innovative options. Three particularly powerful strategies that MedTech companies could consider are: outcomes-based pricing, portfolio pricing and solutions pricing.

Figure 2: Strategies and tactics for MedTech pricing innovation

1

PricingStructuresHow do you

establish the price?

PaymentModels

How do you realizethe price?

Pricing Strategy Framework

Low Complexity, Low Value Capture

Line Item Pricing$ / item

High Complexity, High Value Capture

Traditional Innovative

1. May have Government Price Reporting implications in US2. Contract is carefully constructed to avoid legal / compliance issues New options that Med Tech companies can evaluate

2

3

Bulk Pricing$ / set of items

IncentiveStructures

(Rebates or Discounts)How do you

incentivize growththrough rebatesand discounts?(Share, Spend

or Volume)

List-minus PricingPricing is established basedon the published list price

Volume-basedVolume-based incentives

Capitation$ / PMPM

Outcomes /Risk-based

$ / successful outcome

Pay-per-therapy$ / day of therapy

Subscription Fee$ / month

Pay-per-use$ / episode

Cost-plus PricingAdd margin to costs

to set price

Market-based PricingPrices established based on

competitor benchmarks

Outcomes / Risk-based PricingPrices set based on the value provided by the product

(e.g., clinical outcome or economic value)

Indication-based PricingA different price for a differentindication for the same device

Solutions Pricing1 Prices are established for entire therapy including products and service

Price Predictability “Certainty” around how much and how often device prices will increase during a given time period

Portfolio-based Pricing1 Prices are developed and optimized for the entire portfolio

Payment Terms-basedPrompt pay incentives

Supply-chain /Delivery-based

Order-based incentives

Share of Wallet-basedIncentives based on % spend

Sole SourceSole source discounts

Portfolio-basedCross-portfolio incentives

Outcomes / Risk-basedRebate given if outcome

is not achieved

Alliance-based2

Incentives from gross sales

Market Share-basedIncentives based on share

Up SellIncentives to upgrade

Competitive Change Out2

Incentives to increase spend

Growth-basedBaseline growth

incentives

Patients as Value-Conscious Consumers Patients are taking charge of their healthcare and increasingly aware of the costs and value of treatment options. In the US, patients are investigating prices and skipping treatments and preventative care tests when their insurance plans have high deductibles.11

On the other hand, consumers are willing to pay out of pocket when the treatment justifies the expense. For example, many active Baby Boomer cataract surgery patients are paying for premium intraocular lenses (an additional $1,000 per eye) to achieve spectacle independence (post-surgery in case of astigmatism) and maintain a healthy lifestyle.12 Pregnant woman often pay $200 out of their own pockets for 3-D and 4-D ultrasound tests.13

The MedTech industry’s traditional pricing approaches will provide little or no defense against these megatrends. Industry players need to adopt more innovative pricing strategies to protect net revenue and margins and outmaneuver their competitors.

From Setting Price to Creating Pricing Strategies For years, product and customer profitability have not been a major concern for many MedTech companies. In times of prosperity, customers were king and products and services were often offered below the total cost of bringing them to market. However, as profit margins become the focus, getting pricing basics right should be the first priority of MedTech companies.

When businesses in this sector put a price on a new product, they often look at competitor prices and set theirs at a reasonable point above them. They may also examine their own costs to assure that prices provide acceptable margins. But competition is mounting and buyers are becoming more aggressive in their propositions, by, for example, issuing RFPs more frequently and reducing the effective timeframe for prices established in the process. As competition heats up, setting prices against those of competitors can easily knock the company and its products out of the running.

Figure 2: Strategies and tactics for MedTech pricing innovation



of hospital demand comes from group purchasing organizations.6 In France, 60 percent of medical products are purchased by state-run hospitals.7

New Players are Changing the Competitive LandscapeThe MedTech industry’s solid growth is attracting major invest-ments from non-traditional players and spurring low-cost com-petitors to expand globally. Increased competition will create ever-increasing downward pressure on prices. Google, for example, has established a research lab, Google X, devoted to innovative products such as an armband that will detect cancer. It has also partnered with Johnson & Johnson to develop surgical robotics.

Low-cost producers from China and India are making inroads into global markets (figure 1).8 More than half of 2013 revenue of China’s Mindray, for instance, came from outside of China.9

M&A is AcceleratingMedTech M&A activity in 2015 maintained momentum and is in-creasing as companies seek to fortify their margins with broader portfolios, greater scale and favorable tax jurisdictions. Because of the high valuations of many of the mergers over the past few years, the new entities will likely have to capture the full value of combined portfolios, including the latent value of products whose full value hadn’t been captured prior to the merger.


Portfolio-Based Pricing MedTech companies often have one or two product categories that outperform others. The challenge for these companies, then, is to bring up the tail (i.e., products that have a low revenue or margin contribution). The issue is particularly acute in mergers and acquisitions where valuations are often high and companies have to sell a large portfolio of products to justify the valuations to investors.

Portfolio-based pricing increases sales by offering incentives to customers when they reach different levels of cross-portfolio spend during a specific time period. As is the case with outcomes-based pricing, a successful portfolio strategy can combine new with traditional techniques.

Consider a MedTech company that offers catheters and balloons. Using traditional pricing approaches, the company would market each separately. Using a portfolio-based pricing structure, however, the company could charge less for the catheters than they currently do and use that strategy to increase sales of balloons to customers who buy the products together. Under this scenario, the company captures more revenue and profit from balloons even though it is garnering less from catheters. Lowering the price of catheters also reduces customer acquisition costs. The company can then leverage any traditional form of incentives, such as volume discounts, that would spur sales (figure 4).

Figure 4: Example of portfolio-based pricing

1

PricingStructures

PaymentModels


Low Complexity, Low Value Capture High Complexity, High Value Capture


2

3

IncentiveStructures

Sample Strategies:

Traditionalist

Portfolio Planner

Cost-plus PricingAdd margin to coststo set price

Portfolio-based PricingPrices developed and optimizedfor the entire portfolio





Source: Deloitte analysis

Figure 3: Example of outcomes-based pricing

1

PricingStructures

PaymentModels




2

3

IncentiveStructures

Sample Strategies:

Traditionalist

Outcomes Optimizer


Outcomes / Risk-based PricingPrices set based on the value provided by the product(e.g., clinical outcome or economic value)



Growth-basedBaseline growthincentives


Outcomes-Based Pricing In response to soaring healthcare costs, payers are making bold moves—changing the basis of reimbursements from product and service volume to the outcomes that products deliver. MedTech companies should match the bold moves by mastering outcomes-based pricing.

Outcomes-based pricing links a product’s price to its ability to achieve specific outcomes such as reduced hospital readmissions, shorter hospital stays, improved surgical results, and/or increased safety. Although a complex endeavor, an effective foray into outcomes-based pricing can be achieved with a blend of innovative and traditional pricing techniques (figure 3). To illustrate, imagine a MedTech company that has developed a new scanning

device that can replace manual inspections in hospital wards over time. The cost to manufacture the device is $2,000.

Using traditional cost-plus pricing, the company might add 50 percent to its costs and set the price at $3,000. But what if the organization looked at the impact of its product on a hospital’s costs? For example, the device can reduce length of stay while improving the quality of treatment. Let’s assume that the device saves a hospital $20,000 annually. Using an outcomes-based pricing structure, the company could set a contracted price of $22,000. It could then support that price with traditional line item pricing and incentives including rewards for prompt payment.

Case from the Field Consider St. Jude Medical. The company produces a cardiac rhythm management device that has four leads instead of three. The use of four leads minimizes the chances that a lead will become dislodged once the device is implanted in the patient. Reduced risk of dislodged leads improves outcomes of quadripolar CRT in chronic and acute cases of heart failure.

The company combined an innovative use of rebates as an incentive with traditional market-based pricing for the device and line-item pricing for the payment model. In a program it calls, “Do More. Re-Do Less.” the company will credit 45 percent of the net price if lead revision is required within one year.14

Needed Capabilities To support outcomes-based pricing, organizations will need advanced analytics capabilities to measure outcomes and adjust for non-controllable factors. Companies will have to develop good relationships with customers in order to agree on how to adjust for non-controllable factors. Businesses must also have the data and tools at the ready to assess outcomes and track customer payments and rebates. In addition, organizations may have to boost administrative support, accept longer sales processes, and modify sales force incentives to encourage outcomes-based selling and mitigate downsides for the salesforce. Companies must also be able to monitor product selection and assure maximum profits.

Case from the Field A niche MedTech company based in the US had nearly 20 product categories. A disproportionate amount of revenue came from a few of the products and the company wanted to gain deeper penetration with its customers across its entire product portfolio.

The MedTech company turned to portfolio-based pricing. It was able to use traditional market-based prices with line-item pricing. As an innovative incentive, the company offered steadily larger discounts as customers increased overall purchases and bought from larger number of product categories.

Needed Capabilities Portfolio-based pricing requires advanced analytics to track customer performance and support sales forecasting processes to account for non-controllable factors. Businesses may need new tools that track customer purchase commitments, rebates and provide data for compliance reporting. Government Price Reporting (GPR) is also a key consideration in structuring portfolio-based structures in the US. MedTech companies may also have to revamp sales compensation plans to encourage cross-selling and eliminate internal organizational barriers.







1

PricingStructures

PaymentModels




2

3

IncentiveStructures

Sample Strategies:

Traditionalist

Portfolio Planner









1

PricingStructures

PaymentModels




2

3

IncentiveStructures

Sample Strategies:

Traditionalist

Outcomes Optimizer



















Baxter’s acquisition of Gambro in 2012, for example, has cre-ated a global powerhouse of renal products. The 2015 Biomet-Zimmer merger gave the two companies significant scale in the orthopedics market. The merger of Medtronic and Covidien this year is expected to cut annual expenses by $850 million.10 The 2015 acquisition of Johnson & Johnson’s Dublin-based Cordis by Cardinal Health is further evidence of companies creating greater focus on specific therapeutic areas.

Patients as Value-Conscious ConsumersPatients are taking charge of their healthcare and increasingly aware of the costs and value of treatment options. In the US, patients are investigating prices and skipping treatments and preventative care tests when their insurance plans have high deductibles.11

On the other hand, consumers are willing to pay out of pocket when the treatment justifies the expense. For example, many ac-tive Baby Boomer cataract surgery patients are paying for pre-mium intraocular lenses (an additional $1,000 per eye) to achieve spectacle independence (post-surgery in case of astigmatism) and maintain a healthy lifestyle.12 Pregnant woman often pay $200 out of their own pockets for 3-D and 4-D ultrasound tests.13

The MedTech industry’s traditional pricing approaches will pro-vide little or no defense against these megatrends. Industry play-ers need to adopt more innovative pricing strategies to protect net revenue and margins and outmaneuver their competitors.






1

PricingStructures

PaymentModels




2

3

IncentiveStructures

Sample Strategies:

Traditionalist

Portfolio Planner









1

PricingStructures

PaymentModels




2

3

IncentiveStructures

Sample Strategies:

Traditionalist

Outcomes Optimizer


















8 Capturing the Value of Medtech Ingenuity: The Case for Pricing Innovation 9

Figure 3: Example of outcomes-based pricing Figure 4: Example of portfolio-based pricing


1 Cost-plus Pricing


1 Cost-plus Pricing

Pricing

Structures

2 Payment

Models

3

Incentive Structures

Add margin to costs to set price

Line Item Pricing $ / item

Payment Terms-based Prompt pay incentives

Growth-based Baseline growth incentives

Sample Strategies: Traditionalist Outcomes Optimizer

Outcomes / Risk-based Pricing Prices set based on the value provided by the product (e.g., clinical outcome or economic value)

Pricing

Structures

2

Payment Models

3

Incentive Structures

Add margin to costs to set price

Line Item Pricing $ / item

Bulk Pricing $ / set of items

Volume-based Volume-based incentives

Portfolio-based Pricing Prices developed and optimized for the entire portfolio

Sample Strategies:

Traditionalist Portfolio Planner

Portfolio-based Cross-portfolio incentives










Portfolio-based pricing increases sales by offering incentives to customers when they reach different levels of cross- portfolio spend during a specific time period. As is the case with outcomes-based pricing, a successful portfolio strategy can combine new with traditional techniques.

Consider a MedTech company that offers catheters and balloons. Using traditional pricing approaches, the company would market each separately. Using a portfolio- based pricing structure, however, the company could charge less for the catheters than they currently do and use that strategy to increase sales of balloons to customers who buy the products together. Under this scenario, the company captures more revenue and profit from balloons even though it is garnering less from catheters. Lowering the price of catheters also reduces customer acquisition costs. The company can then leverage any traditional form of incentives, such as volume discounts, that would spur sales (figure 4).

Case from the Field Needed Capabilities Consider St. Jude Medical. The company produces a To support outcomes-based pricing, organizations will cardiac rhythm management device that has four leads need advanced analytics capabilities to measure outcomes instead of three. The use of four leads minimizes the and adjust for non-controllable factors. Companies will chances that a lead will become dislodged once the device have to develop good relationships with customers in order is implanted in the patient. Reduced risk of dislodged leads to agree on how to adjust for non-controllable factors. improves outcomes of quadripolar CRT in chronic and Businesses must also have the data and tools at the ready acute cases of heart failure. to assess outcomes and track customer payments and

rebates. In addition, organizations may have to boost The company combined an innovative use of rebates as administrative support, accept longer sales processes, and an incentive with traditional market-based pricing for the modify sales force incentives to encourage outcomes- device and line-item pricing for the payment model. In a based selling and mitigate downsides for the salesforce. program it calls, “Do More. Re-Do Less.” the company will Companies must also be able to monitor product selection credit 45 percent of the net price if lead revision is required and assure maximum profits. within one year.14

Case from the Field Needed Capabilities A niche MedTech company based in the US had nearly 20 Portfolio-based pricing requires advanced analytics to product categories. A disproportionate amount of revenue track customer performance and support sales forecasting came from a few of the products and the company wanted processes to account for non-controllable factors. to gain deeper penetration with its customers across its Businesses may need new tools that track customer entire product portfolio. purchase commitments, rebates and provide data for

compliance reporting. Government Price Reporting (GPR) The MedTech company turned to portfolio-based pricing. is also a key consideration in structuring portfolio-based It was able to use traditional market-based prices with structures in the US. MedTech companies may also have line-item pricing. As an innovative incentive, the company to revamp sales compensation plans to encourage cross- offered steadily larger discounts as customers increased selling and eliminate internal organizational barriers. overall purchases and bought from a larger number of product categories.


From Setting Price to Creating Pricing Strategies

For years, product and customer profitability have not been a ma-jor concern for many MedTech companies. In times of prosperity, customers were king and products and services were often of-fered below the total cost of bringing them to market. However, as profit margins become the focus, getting pricing basics right should be the first priority of MedTech companies.

When businesses in this sector put a price on a new product, they often look at competitor prices and set theirs at a reason-able point above them. They may also examine their own costs to assure that prices provide acceptable margins. But competition is mounting and buyers are becoming more aggressive in their

propositions, by, for example, issuing RFPs more frequently and reducing the effective timeframe for prices established in the process. As competition heats up, setting prices against those of competitors can easily knock the company and its products out of the running. To bolster the competitive success of their products, MedTech companies need to create innovative pricing strategies that beat competitors by demonstrating the product’s unique value and providing incentives for customers to continue buying. In our experience, businesses have three levers they can pull to create powerful pricing strategies. As figure 2 shows, these strategies don’t require wholesale change in each of the three levers. Although pricing strategies can be complicated, they don’t have to be. Instead, companies can blend innovative techniques with traditional approaches:

Figure 5: Example of solutions pricing


Advancing Through Measured Steps Each of the pricing strategies we have discussed is a complex endeavor with its own pros and cons. Outcomes-based pricing, for example, provides competitive advantage by differentiating products based on the results they deliver. However, outcomes can be difficult to quantify in certain medical conditions and businesses will have to control for factors such as surgeon skill and patient co-morbidities.

Portfolio pricing offers the potent advantage of increasing profits with existing customers without discounting highly profitable products. It can also promote cross-selling and unlock latent value in combined portfolios created through an M&A. Nonetheless, GPR in the US will require additional resources to meet compliance requirements. In addition, bulk pricing may not be an incentive for smaller customers who won’t reach purchasing thresholds.

Solution pricing is also subject to GPR reporting in the US and can also have a major impact on go-to-market efforts. For example, the effectiveness of the strategy rests on the ability of the sales force to forge close relationships with customers. As a result, sales models may have to change from selling products to managing accounts and partnerships.

Although the challenges are complex, MedTech companies can follow a straightforward, step-by-step process to determine the best pricing strategies for their products (figure 6). The effort culminates in a pilot to test assumptions, tradeoffs, and build organizational knowledge.

Step 1—Collaborate with Customers: Pricing strategies shouldn’t be developed in conference rooms alone. Customers must be part of the process of creating a joint vision of how to share value.

Step 2—Evaluate Product Portfolio: Businesses should examine the products and customer needs to develop hypotheses about the best place to start.

Step 3—Assess Market and Competitor Dynamics: Assumptions about the best places to start should be weighed against what competitors are likely doing or will do.

Step 4—Develop Product Specific Pricing Strategies: Having zeroed in on the best places to start and understanding competitor moves, MedTech companies can begin applying specific pricing strategies to their products as a pilot.

Step 5—Know Your Capabilities: Once the strategies are crafted, the business needs to assess what new capabilities it must develop.

Step 6—Design and Launch a Pilot: Finally, organizations should create a playbook for the pilot including team structure and governance. The company can then launch the pilot and document lessons learned.

Steps for Implementing Innovative Pricing Strategies

Step 1Start by

collaborating withyour customers

Step 2Evaluate product

portfolio

Step 3Assess market

and competitordynamics

Step 4Develop productspecific pricing

strategy

Step 5Assess

execution andcapability

considerations

Step 6Design and

launch a testpilot


Figure 6: Steps for implementing innovative pricing strategies

Solutions Pricing MedTech companies increasingly see the value of shifting from selling products and absorbing service as a cost to offering solutions for both products and services that the customer values together. MedTech businesses are following two paths to create value through solutions:

• Boosting disease area footprints: For example, MedTech companies can offer procedure packs or move from diagnosis and treatment to supporting chronic conditions such as diabetes and heart disease. Prices are set at the level of disease area and encompass the entire package of products and services.

• Offering non-clinical services: For example, MedTech organizations can provide hospital management and operational support and/or financial services. Pricing is based on the value to the customer.

To illustrate, imagine a MedTech company that markets both consumables and more high-end products such as stents and active devices. The company is facing a decreasing share of wallet and to boost its revenue, it decides to help its hospital customers to reduce costs by offering integrated solution kits. Through market research, the MedTech company found that potential hospital customers valued time gain, inclusive maintenance services and faster patient turnarounds as the solution’s main benefits. Moreover, Voice of the Customer research indicated that hospitals are willing to pay a higher price for the kit than the individual component parts. A traditional company would opt for cost-plus pricing in combination with bulk pricing and a share-of-wallet based incentive structure. By opting for integrated solutions, however, the company can combine the innovation of solution-based pricing structures with pay-per-therapy payment model, whilst applying a share-of-wallet based incentive structure.

Case from the Field Consider the medical device company Medtronic. With its strong footprint in cardio and endovascular procedures and subsequent insights into the operations of a hospital’s catheterization laboratory (cath lab), the company observed many hospitals facing issues to contain costs. To counter this issue, the company recently launched Hospital Solutions, a new business focused on providing services directly related to hospital operational efficiency, to manage and modernize cath labs. By doing so, the company was able to monetize its cath lab knowledge into new revenue streams whilst providing integrated solutions to answer customer needs.15

Needed Capabilities To make solution selling a success, MedTech companies need to have these capabilities in place:

• Analytics capabilities to understand customer behavior including clinical and economic data

• Technology capabilities to monitor price and bundle and unbundle solution components according to customer needs

• Ability to closely monitor how well the solution is performing and managing the impact of regulatory requirements such as GPR, FDA and CE (European Conformity) approvals


1

PricingStructures

PaymentModels




2

3

IncentiveStructures

Sample Strategies:

Traditionalist

Solutions Seeker

Volume-basedVolume-based

incentives


Solutions PricingPrices are established for entiretherapy including products and service


















Step 1Start by



portfolio

Step 3Assess market



strategy

Step 5Assess


considerations

Step 6Design and

launch a testpilot













1

PricingStructures

PaymentModels




2

3

IncentiveStructures

Sample Strategies:

Traditionalist

Solutions Seeker


incentives









• Pricing structure; How to set the price. These techniques can range from benchmarking against competitors to bas-ing prices on the clinical outcomes that the product offers.

• Payment model; How to charge customers. Options span from line item and bulk pricing to risk sharing arrangements based on results.

• Incentives; How to spur growth. These techniques include discounts based on volume, and incentives to purchase across multiple product lines.

For example, a MedTech company could offer a new product that can reduce hospital readmission rates for a certain condition. The price can be based on what competitors charge and the com-pany can use traditional line-item pricing for the payment model.

The pricing innovation could take the form of rebates offered if the product doesn’t achieve the promised outcome of reducing hospital readmissions. Similarly, an effective pricing strategy for a portfolio of products could use existing list prices and offer bulk pricing on sets of products. The innovation could come into play with incentives to increase sales. For example, the company could offer discounts when customers reach certain spending levels.

The ability to pull different levers of a pricing strategy offers sev-eral innovative options. Three particularly powerful strategies that MedTech companies could consider are: outcomes-based pricing, portfolio pricing and solutions pricing.

Outcomes-Based PricingIn response to soaring healthcare costs, payers are making bold moves—changing the basis of reimbursements from product and service volume to the outcomes that products deliver. MedTech companies should match the bold moves by mastering outcomes-based pricing.

Outcomes-based pricing links a product’s price to its ability to achieve specific outcomes such as reduced hospital readmis-sions, shorter hospital stays, improved surgical results, and/or increased safety. Although a complex endeavor, an effective foray into outcomes-based pricing can be achieved with a blend of innovative and traditional pricing techniques (figure 3). To illus-trate, imagine a MedTech company that has developed a new

In Japan, reimbursement for major devices has dropped by approximately 25 percent in the last decade, according to Japan’s Medical Device Institute. Medical materials have been the first line of attack for healthcare providers seek-ing to save money, and many are increasing their purchas-ing power through joint procurement efforts and increasing visibility into pricing data.

— Jun Matsuo, partner and Life Science sector leader, Deloitte Japan Tetsuyuki Tatsuoka,

senior manager, Deloitte Japan

Each of the pricing strategies we have discussed is a com-plex endeavor with its own pros and cons. Outcomes-based pricing, for example, provides competitive advantage by dif-ferentiating products based on the results they deliver. How-ever, outcomes can be difficult to quantify in certain medical conditions and businesses will have to control for factors such as surgeon skill and patient co-morbidities.

Portfolio pricing offers the potent advantage of increasing prof-its with existing customers without discounting highly profit-able products. It can also promote cross-selling and unlock latent value in combined portfolios created through an M&A. Nonetheless, GPR in the US will require additional resources to meet compliance requirements. In addition, bulk pricing may not be an incentive for smaller customers who won’t reach purchasing thresholds.

Solution pricing is also subject to GPR reporting in the US and can also have a major impact on go-to-market efforts. For example, the effectiveness of the strategy rests on the ability of the sales force to forge close relationships with custom-ers. As a result, sales models may have to change from selling products to managing accounts and partnerships.

Although the challenges are complex, MedTech companies can follow a straightforward, step-by-step process to deter-mine the best pricing strategies for their products (figure 6). The effort culminates in a pilot to test assumptions, tradeoffs,

and build organizational knowledge.

Step 1—Collaborate with Customers: Pricing strategies shouldn’t be developed in conference rooms alone. Custom-ers must be part of the process of creating a joint vision of how to share value.

Step 2—Evaluate Product Portfolio: Businesses should examine the products and customer needs to develop hypoth-eses about the best place to start.

Step 3—Assess Market and Competitor Dynamics: As-sumptions about the best places to start should be weighed against what competitors are likely doing or will do.

Step 4—Develop Product Specific Pricing Strategies: Having zeroed in on the best places to start and understand-ing competitor moves, MedTech companies can begin ap-plying specific pricing strategies to their products as a pilot.



Advancing Through Measured Steps


scanning device that can replace manual inspections in hospital wards over time. The cost to manufacture the device is $2,000.

Using traditional cost-plus pricing, the company might add 50 percent to its costs and set the price at $3,000. But what if the or-ganization looked at the impact of its product on hospital’s costs? For example, the device can reduce length of stay while improv-ing the quality of treatment. Let’s assume that the device saves a hospital $20,000 annually. Using an outcomes-based pricing structure, the company could set a contracted price of $22,000. It could then support that price with traditional line item pricing and incentives including rewards for prompt payment.

Portfolio-Based PricingMedTech companies often have one or two product categories that outperform others. The challenge for these companies, then, is to bring up the tail (i.e., products that have a low revenue or margin contribution). The issue is particularly acute in mergers and acquisitions where valuations are often high and companies have to sell a large portfolio of products to justify the valuations to investors. Portfolio-based pricing increases sales by offering incentives to customers when they reach different levels of cross-portfolio spend during a specific time period. As is the case with outcomes-based pricing, a successful portfolio strategy can combine new with traditional techniques.

Consider a MedTech company that offers catheters and balloons. Using traditional pricing approaches, the company would mar-ket each separately. Using a portfolio-based pricing structure, however, the company could charge less for the catheters than they currently do and use that strategy to increase sales of bal-loons to customers who buy the products together. Under this scenario, the company captures more revenue and profit from balloons even though it is garnering less from catheters. Lowering the price of catheters also reduces customer acquisition costs. The company can then leverage any traditional form of incen-tives, such as volume discounts, that would spur sales (figure 4).

Solutions PricingMedTech companies increasingly see the value of shifting from selling products and absorbing service as a cost to offering so-

lutions for both products and services that the customer values together. MedTech businesses are following two paths to create value through solutions:

• Boosting disease area footprints: For example, MedTech companies can offer procedure packs or move from diag-nosis and treatment to supporting chronic conditions such as diabetes and heart disease. Prices are set at the level of disease area and encompass the entire package of prod-ucts and services.

• Offering non-clinical services: For example, MedTech organizations can provide hospital management and opera-tional support and/or financial services. Pricing is based on the value to the customer.

To illustrate, imagine a MedTech company that markets both con-sumables and more high-end products such as stents and active devices. The company is facing a decreasing share of wallet and to boost its revenue, it decides to help its hospital customers to reduce costs by offering integrated solution kits.

Through market research, the MedTech company found that po-tential hospital customers valued time gain, inclusive maintenance services and faster patient turnarounds as the solution’s main benefits. Moreover, Voice of the Customer research indicated that hospitals are willing to pay a higher price for the kit than the individual component parts.

A traditional company would opt for cost-plus pricing in com-bination with bulk pricing and a share-of-wallet based incen-tive structure. By opting for integrated solutions, however, the company can combine the innovation of solution-based pricing structures with pay-per-therapy payment model, whilst applying a share-of-wallet based incentive structure.

Conclusion: Move Ahead of the Pack

The MedTech market is changing significantly, and those changes are underway now. Payers, providers and patients are increas-














Step 1Start by



portfolio

Step 3Assess market



strategy

Step 5Assess


considerations

Step 6Design and

launch a testpilot













1

PricingStructures

PaymentModels




2

3

IncentiveStructures

Sample Strategies:

Traditionalist

Solutions Seeker


incentives









Payers, providers and patients are in-creasingly demanding that the price of MedTech products have a direct relationship to the value that the prod-uct provides.

ingly demanding that the price of MedTech products have a direct relationship to the value that the product provides. Non-traditional players are making hefty investments and low-cost providers are rapidly expand-ing their global footprints—all of which will add more down-ward pressure to prices. M&A activity in the MedTech industry is on the rise and the new enti-ties will have to capture the full value of combined portfolios to justify the valuations to respec-tive investors.

These trends will likely con-tinue to put pressure on prices which can cut into the net profit and margins of MedTech com-panies that don’t pick up the mantel of pricing innovation. MedTech companies stand at a crossroads: They can wait and let the market define their fortunes, or they can take a leadership role by shaping the market and charting their own destinies.

References

1. 2014 Deloitte Survey of Pricing Executives at the Professional Pricing Society Conference Breakout Session (N=30).

2. “White House Plans to Shift Medicare Away from Fee-For-Service, 50% Of Pay-ments Tied to Quality by 2018” Forbes, January 26, 2015, http://www.forbes.com/sites/brucejapsen/2015/01/26/medicares-bolt-from-fee-for-service-means-50-per-cent-value-based-pay-by-2018/, accessed November 23, 2015.

3. Dennis, Alison, Lantrès, Olivier and Willhöft, Cord. “Full steam ahead on France MedTech and pharmaceutical regulatory reforms,” Mondaq, November 18, 2013, http://www.mondaq.com/x/275598/Healthcare/Full+Steam+Ahead+On+France+Medtech+And+Pharmaceutical+Regulatory+Reforms, accessed November 23, 2015.

4. Jourdan, Adam. “China calls for greater use of homegrown medical devices,” Reuters, August 18, 2014, http://www.reuters.com/article/2014/08/18/us-china-med-icaldevices-idUSKBN0GI0UU20140818, accessed November 23, 2015.

5. Evaluatepharma Japan Sales, Volume, Pricing 2015, Evaluatepharma, March 2015, http://www.evaluategroup.com/public/Reports/EvaluatePharma-Japan-Sales-Volume-Pricing-2015.aspx, accessed November 23, 2015.

6. The Medical Technology Industry in Germany, Germany Trad and Invest, 2014/2015, https://www.exportinitiative-gesundheitswirtschaft.de/EIG/Re-daktion/EN/Publikationen/the-medica-technology-industry-in-germany.pdf?

blob=publicationFile&v=6, accessed November 23, 2015.

7. Klein, Thomas. “Hospital Procure-ment: The Importance of “Buying French,” European Medical Device Technology, May 19, 2014, http://www.emdt.co.uk/daily-buzz/hospital-pur-chasing-importance-buying-french, ac-cessed November 23, 2015.

8. Moynihan, Tim. “Google Takes on the Challenge of Making Robot Surgery Safer,” Wired, March 30, 2015, http://www. wired.com/2015/03/google-robot-surgery/, accessed November 23, 2015.

9. Mindray Annual Report, 2013, Min-dray, 2013, http://media.corporate-ir.net/mediafiles/IROL/20/203167/2013_Mindray_Annual_Report.pdf, accessed November 23, 2015.

10. “Medtronic to Acquire Covidien for $42.9 billion in Cash and Stock,” Medtronic, June 15, 2014, ht tp://newsroom.medtronic.com/phoenix.zhtml?p=irol-newsArticle&c=251324&ID=1939883, accessed November 23, 2015.

11. Too High a Price: Out of Pocket Health Care Costs in the United States, Commonwealth Fund, November 2014, http://www.commonwealthfund.org/~/media/files/publications/issue-brief/2014/nov/1784_collins_too_high_a_price_out_of_ pocket_tb_v2.pdf, accessed November 23, 2015.

12. “Surgery Cost,” http://www.allaboutvision.com/visionsurgery/cost.htm, ac-cessed November 23, 2015.

13. Dean, Ruthie. “Expecting? How much does an ultrasound cost?” Bernard Health Blog, May 2, 2014, http://www.sjm.com/~/media/LandingPage/focus/HF_Prospec-tus_Brochure_06_FINAL_RGB_US-2001186BEN.ashx, accessed November 24, 2015.

14. Disease Management Prospectus: Chronic and Acute Decompensated Heart Failure, St. Jude Medical, 2014, https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwjeu9iT_6vJAhVGTCYKH ak6CcEQFggiMAA&url=http%3A%2F%2Fwww.sjm.com%2F~%2Fmedia%2FLandingPage%2Ffocus%2FHF_Prospectus_Brochure_06_FINAL_RGB_US-2001186BEN.ashx&usg=AFQjCNEsrTwwC5In2APwMGDh71GhqG5Spw&sig2=grmvonN2rn 1AHmDdRAw4cQ,%20accessed%20November%2023,%202015.

15. “Medtronic Announces Formation of Hospital Solutions Business Aimed at Driving Efficiencies and Cost Savings,” Medtronic, September 2, 2013, http://news-room.medtronic.com/phoenix.zhtml?c=251324&p=irol-newsArticle&id=1851106, accessed November 23, 2015.

Capturing the Value of MedTech IngenuityThe Case for Pricing Innovation

http://www.forbes.com/sites/brucejapsen/2015/01/26/medicares

http://www.forbes.com/sites/brucejapsen/2015/01/26/medicares

http://www.mondaq.com/x/275598/Healthcare/Full+Steam+Ahead+On+France+Medtech+And+Pharmaceutical+Regulatory+Reforms

http://www.mondaq.com/x/275598/Healthcare/Full+Steam+Ahead+On+France+Medtech+And+Pharmaceutical+Regulatory+Reforms

http://www.reuters.com/article/2014/08/18/us-china-medicaldevices-idUSKBN0GI0UU20140818

http://www.reuters.com/article/2014/08/18/us-china-medicaldevices-idUSKBN0GI0UU20140818

http://www.evaluategroup.com/public/Reports/EvaluatePharma-Japan-Sales-Volume-Pricing-2015.aspx

http://www.evaluategroup.com/public/Reports/EvaluatePharma-Japan-Sales-Volume-Pricing-2015.aspx

http://www.emdt.co.uk/daily-buzz/hospital-purchasing-importance-buying-french



http://newsroom.medtronic.com/phoenix.zhtml?p=irol-newsArticle&c=251324&ID=1939883




http://www.commonwealthfund.org/~/media/files/publications/issue-brief/2014/nov/1784_collins_too_high_a_price_out_of_ pocket_tb_v2.pdf



http://www.allaboutvision.com/visionsurgery/cost.htm

http://www.sjm.com/~/media/LandingPage/focus/HF_Prospectus_Brochure_06_FINAL_RGB_US-2001186BEN.ashx

http://www.sjm.com/~/media/LandingPage/focus/HF_Prospectus_Brochure_06_FINAL_RGB_US-2001186BEN.ashx

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwjeu9iT_6vJAhVGTCYKH ak6CcEQFggiMAA&url=http%3A%2F%2Fwww.sjm.com%2F~%2Fmedia%2FLandingPage%2Ffocus%2FHF_Prospectus_Brochure_06_FINAL_RGB_US-2001186BEN.ashx&usg=AFQjCNEsrTwwC5In2APwMGDh71GhqG5Spw&sig2=grmvonN2rn 1AHmDdRAw4cQ,%20accessed%20November%2023,%202015








Copyright © 2016, Oracle and/or its affiliates. All rights reserved. Oracle and Java are registered trademarks of Oracle and/or its affiliates.

Oracle CloudApplications

ERPFinancials Procurement Projects Supply Chain

HCMHuman CapitalRecruiting Talent

CRMSales Service Marketing

More Enterprise SaaS Applications Than Any Other Cloud Services Provider

Fonts: Univers LT Std. 75 Black, 65 Bold, 55 Roman, 45 Light, 67 Bold Condensed, 57 Condensed

PRODUCTION NOTES

Black KeylinePrints!

VENDOR NOTE: Please use center marks to align page.

Please examine these publication materials carefully. Any questions regarding the materials, please contact Darci Terlizzi (650) 506-9775

READER

01LASER% RELEASED

9/082016

Resize

8.5” x 11”Job #:Ref #:

Headline:Live:Trim:

Bleed:

216M_CLD00122_OCldApps_APP_8.5x11M_116M_CLD00053_OCldApps_APP_8x10.5Oracle Cloud Applications8” x 10.5”8.5” x 11”NA

www.simon-kucher.com

Simon-Kucher & Partners is a global consulting firm specializing in TopLine Power®, which encompasses strategy, marketing, pricing, and sales. Our practice is built on evidence-based, practical strategies for profit improvement via the top line. Simon-Kucher & Partners is regarded as the world‘s leading pricing advisor and thought leader.



This article explores the need for the creation of a Chief Value Officer role for both service and manufacturing firms. Stephan M. Liozu, Ph.D. is Chief Value Officer at Thales Group (www.thalesgroup.com). He is also an Adjunct Professor & Research Fellow at Case Western Reserve University, Weatherhead School of Management. He has authored and edited six books, and can be contacted at [email protected]. Ronald J. Baker he is the founder of VeraSage Institute and a radio talk-show host on the www.VoiceAmerica.com show: “The Soul of Enterprise: Business in the Knowledge Economy.” He is the author of six books, and can be contacted at [email protected]. This paper has been modified from its original version published in Chapter 5 of the Innovation in Pricing book published by Routledge in 2012.

Who is in Charge of Customer Value in your Organization? The Emerging Role of Chief Value Officer

The world of business and economics changes fast and is becoming more complex every decade. Firms are faced with the choice to adapt, reinvent, and differentiate them-selves or die. Over the past few years, the nature and

intensity of these changes in the business landscape have cre-ated organizational disruption and a realistic need to redesign organizational structure and leadership approaches. As a result, the nature and structure of the C-suite has also been changing to respond to these exogenous trends. Whereas traditionally C-level positions were focused on operations (Chief Operations Officer), on finance (Chief Financial Officer), on information systems (Chief Information Officer), and on innovation (Chief Innovation Officer), we have witnessed the emergence of a flurry of new C-level titles emanating from new management theory (Chief Learning Offi-cer, Chief Digital Officer), from increased business regulations (Chief Compliance Officer, Chief Ethics Officer, Chief Sustain-ability Officer, Chief Risk Officer) and from increased focused on markets and customers (Chief Customer Officer, Customer Experience Officer, Chief Growth Officer, Chief Commercial Of-ficer, and Chief Marketing Officer).

Today more and more firms realize that they cannot cut their way to prosperity and that their growth potential has been severely reduced due to the continued recessionary trends. More and more business are looking at their business models and rein-venting their value propositions in order to generate customer excitement, boost value-creation programs, and capture value through value-based pricing. This trend towards value begs the question of who is in charge of value-management processes and programs in firms and how they design and implement com-prehensive, systematic long-term value initiatives.

For the past decade, value experts have promoted the role of Chief Value Officer in professional firms to lead such programs and initiatives (Baker 2006). In this paper, we explore the need for the creation of a Chief Value Officer role for both service and manufacturing firms. We offer a practical comparison of the customer- and market-related CXO positions and propose two potential approaches for the role of Chief Value Officer (CVO).

Our goal is to recommend the creation and adoption of the CVO role and to elevate the value discussion to the C-suite. There has never been a better time to focus on the topic of business and customer value. Who is in charge of value in your organization?

Value at the Organizational Level“Value” is probably one of the most frequently used words in busi-ness. There is confusion between the terms of business value, shareholder value, financial value, and customer value. Value also might mean “cheap” for lots of people. In addition, customer value is difficult to define, to assess, and to fully capture through pric-ing. Given that most companies create their own definition and conceptualization of customer value, we propose to explore what it might mean and introduce some practical steps to increase your understanding of it.

Why is it that few suppliers in business markets are able to define and measure value? Ask 100 people what customer value means to them and you will get 100 different definitions. So we must start with a proper definition before we can even begin thinking about quantifying and capturing value. We adopt the definition of customer value proposed by Anderson and Narus in a 1998 Harvard Business Review issue:

“Value is the worth, in monetary terms, of the technical, economic,

12

The second approach proposes to design this role by grouping all functions associated

with value management (marketing, innovation, pricing, value, selling) and to fold them under

one function reporting to the CEO. This approach resembles a more traditional one, closer to

the role of Chief Marketing Officer with innovation and strategic responsibilities. We call this

approach a functionally focused CVO with direct responsibility and accountability. The

selection of one versus the other approach depends on the firm’s process orientation and its

capacity to change at the organizational level. Our opinion is that both approaches offer great

potential to put value management where it belongs, that is, in the C‐Suite. So there is not right

or wrong. Different organization designs, market dynamics, and company cultures will dictate

what CVO configuration to use: process, functional, or hybrid.

In this paper, we also propose to go further and to offer readers a potential job

Today more and more firms realize that they cannot cut their way to pros-perity and that their growth potential has been severely reduced due to the continued recessionary trends.

http://www.thalesgroup.com

mailto:sliozu%40case.edu?subject=

http://www.VoiceAmerica.com

mailto:ron%40verasage.com?subject=

mailto:ron%40verasage.com?subject=



Figure 1: Sustainable Value-Assessment Circleservice and social benefits a customer receives in exchange for the price it pays for a market offering, taking into consideration competing suppliers’ offerings and prices.”

That notion of value and price exchange is essential to be able to assimilate the concepts of value quantification and capture. Value and benefits are exchanged with utility and price. There are more difficulties than the issue of definition. In a 2008 survey of business executives, 79% attributed this difficulty to a lack of capabilities and skills needed to assess value, apply the appropri-ate methods, and extract the exact value differential between two products (Hinterhuber 2008). Second to the value-assessment issue, communicating value to the market was associated by 65% of the executives with difficulty in elevating the value mes-sage above the advertising noise in the market. A more recent survey conducted in 2014 with 144 value-based pricing experts revealed three top difficulties: 1) selecting the right value drivers to be included in the quantification process, 2) gathering com-petitive pricing information, 3) and conducting user-need seg-mentation. Interestingly enough, these experts did not find the quantification process difficult once the context of the customer value exercise was well understood.

Bottom line: there is a need for more research related not only to theory on value (Ulaga 2001) but also to marketing tools for understanding, assessing, and delivering value in business mar-kets (Cressman Jr 2010). Scholars agree that there are six char-acteristics of value that make value difficult to measure: value is 1) a subjective concept, 2) a trade-off between benefits and sacrifices, 3) multidimensional, 4) defined relative to competitors, 5) segment-specific, and 6) future-oriented (Hinterhuber 2008). These challenges are real in the day-to-day life of pricing and marketing professionals who are attempting to master customer value and pricing (Liozu 2016).

The business world is changing very quickly right now and value propositions are being challenged faster than ever before. Value-based pricing models need to be very dynamic and reflect this changing environment. The enemy of customer value is manual and static processes. That is why the management of change is essential during pricing and value transformations (Liozu 2015).

We conjecture that customer value must be elevated to the orga-nizational level. Managing customer value projects at the product or divisional level might be useful but they do not fit in an overall value-based organizational strategy that is required to create a vision, to free up resources, and to align functional areas to wards customer value.

Firms must put customer value at the centre of their existence (Forbis and Mehta 1981, Slater 1997), make it part of their DNA (Liozu, Boland et al. 2011), and focus on creating sustainable value for all stakeholders including customers, end-users, and trade partners. Figure 1 depicts a framework for the creation and capture of business value. This framework highlights the fact that customer value exists at various stages of the commercial cycle and resides in multiple functions of the firm: innovation, strategy, marketing, pricing, and financial management.

By continuously creating, assessing, and capturing customer value, firms can reap the fruits of their holistic value-management

programs and can reinvest significant portions of their incremen-tal profitability into innovation. Simply put, enterprises need to innovate for growth and price for profit. Profit is the price an en-terprise invests in to create the future; both innovation and profit depend on systematic and formal customer value management. With this context in mind then, how do you manage customer val-ue holistically? And who should be in charge of customer value?

Who is in Charge of Customer Value?The final question needed in order to come to grips with busi-ness purpose and business mission is: “What is value to the cus-tomer?” It may be the most important question. Yet it is the one least often asked. One reason is that managers are quite sure that they know the answer. Value is what they, in their business, define as quality. But this is almost always the wrong definition. The customer never buys a product. By definition the customer buys the satisfaction of a want. He buys value.

—Peter Drucker, Management: Tasks, Responsibilities, Practices, 1993

Whenever this question is posed to a group of businesspeople — “Who’s in charge of value in your company?” — someone will inevitably shout out, “Everyone!” Really? If everyone owns some-thing, no one does. Adam Smith demonstrated that the division and specialization of labour were a central cause of the wealth of nations; they are also the central cause of the success of a business. Not everyone can be good at everything.

In a company, someone needs to own the value and pricing func-tions, someone who can be held accountable for creating and capturing value across the entire range of customers. When you consider how much executive attention the purchasing function receives in most organizations — with the elevation of a new title, chief purchasing officer (CPO) — shouldn’t the pricing function

5

FIGURE 1 Sustainable Value‐Assessment Circle

By continuously creating, assessing, and capturing customer value, firms can reap the

fruits of their holistic value‐management programs and can reinvest significant portions of their

incremental profitability into innovation. Simply put, enterprises need to innovate for growth

and price for profit. Profit is the price an enterprise invests in to create the future; both

innovation and profit depend on systematic and formal customer value management. With this

context in mind then, how do you manage customer value holistically? And who should be in

charge of customer value?

WHO IS IN CHARGE OF CUSTOMER VALUE?

The final question needed in order to come to grips with business purpose and

business mission is: “What is value to the customer?” It may be the most

important question. Yet it is the one least often asked. One reason is that



receive the same level of executive commitment, attention, and resources as a function designed to control costs?

A report by the London Business School and Ariba, a software company, claims that the new CPOs at 70 percent of European firms report directly to the board of directors, an increase of 20 percent over the prior year (The Economist, “A Rise in the C-Level,” February 26, 2005, 60). Many Fortune 500 companies have a chief revenue officer, or chief pricing officer; and while these appointments are a step in the right direction toward mak-ing pricing a core competency within a company, we posit that there still exists a lacuna in most companies: understanding, measuring, and communicating customer value.

Since price, ultimately, is determined by value—and now that we have explored in detail the subjective theory of value, we have a better understanding of this concept—shouldn’t someone within the company be in charge of comprehending, communicating, and capturing value?

All businesses talk about value, and all agree it is essential to cre-ate, and constantly add to, but who is in charge of it? Until it is elevated to the executive suite, it is not going to receive the atten-tion, resources, and alignment with overall corporate strategy that it merits. After all, a business exists to create wealth — value — out-side of itself, and until someone is held responsible and accountable for understanding the impact on customers, companies will continue to operate below potential in the value-creating function. Let us appoint a CVO in order to take a stand for customer value within the organization.

Unlike a biological organism, the true test of a company’s success lies outside of its four walls. As Peter Drucker wrote, “All results are external, there is no such thing as a profit centre”; there are only cost, activity, and effort centers. The only profit centre in your company is a customer’s check that doesn’t bounce.

Yet in many companies, according to McKinsey & Company, marketing is poorly linked to corporate strategy. According to a McKinsey survey of 30 large U.S. companies, more than a third reported that their boards spent less than 10 percent of their time on marketing- and customer-related issues. How can a company continually create value, let alone capture it with more effective pricing strategies, if it does not have someone overseeing this responsibility?

Any company that does not understand the value of its own of-ferings will, by default, perform a suboptimal job communicating it to its customers. Yet your customers purchase relatively infre-quently, while your company sells many more times. Is it not worth gaining a deeper understanding of value so you can leverage that knowledge across your entire customer base, rather than just a few sales? This is precisely why the role of CVO was created. The CVO role grew out an experiment conducted with professional knowledge firms around the world. Initially, a pricing council was

established, composed of a group of people who would have ul-timate responsibility for pricing across the entire firm.

In any company, pricing exists at the crossroads of almost every other discipline, such as marketing, sales, finance, project man-agement, and even research and development. Yet these various functions sometimes have conflicting objectives and priorities.

Marketing tends to focus on brand awareness and market share, while finance may insist on maintaining certain margins, and sales is interested in making the next sale. Pricing tends to become an afterthought, taking a backseat to these other functions that normally secure executive attention and clout.

CVOs understand that the hardest part of this value management is determining value. After all, cost is relatively easy to determine, since most companies employ cost accountants capable of allo-cating fixed and variable costs to each widget. Setting price above

cost is also not difficult — even the most inept businessperson should be able to accomplish this. In determining value, cost accounting provides little help, since customers purchase val-ue, not a bundle of allocated costs.

Since the CVO position is relatively new, more is being learned every day about this responsibility within firms. It is an unusual position, to say the least. The firms that have

implemented it so far have reported favorable results, so much so that the idea warrants further testing. One question that con-tinually arises is, what is the function of the CVO?

The Framework for the Chief Value OfficerCVO versus Other Commercial-Oriented C-Level PositionsOur intention in this paper is not to propose a detailed and final description of various C-level positions. We intend to launch a conversation about the role of the CVO compared with other C-level positions that are related to market and customer activities. The Chief Marketing Officer (CMO) and Chief Commercial Of-ficer (CCO) positions have been more widely accepted over the past decade. While the role of CCO is relatively new, about 200 CCOs have been appointed worldwide since the role emerged (Abele and Stevenson 2009). Similarly, the number and presence of CVOs is accelerating around the world. In 2006, Spencer Stu-art identified more than 30 CMOs in FTSE top 50 companies. In the USA, among Fortune 100 firms, 23 had a CMO as the head of marketing in 2008 (Grewal and Wang 2009).

The acceptance of the roles of Chief Pricing Officer (CPO) and Chief Value Officer (CVO) has a long way to go. First of all, in most companies, the pricing and value-management function receives limited attention. Data from the Professional Pricing Society, the world’s largest organization dedicated to pricing, reveal that fewer than 5% of Fortune 500 companies have a full-time function ex-clusively dedicated to pricing (Mitchell 2011). After an in-depth

According to a McKinsey survey of 30 large U.S. companies, more than a third reported that their boards spent less than 10 percent of their time on marketing- and customer-related issues.


Figure 2: Two Options for CVO Role Design


review in Google, only two or three firms have a clearly iden-tified CVO function.

Reviews of the published roles of CVO, CPO, CMO, and CCO allowed us to prepare the summary data shown in Table 1.

We propose that all four roles are different but present some overlapping characteristics or critical functions. While job descriptions might differ from firm to firm, we find that the CVO function best captures the systematic and holistic creation, assessment, and capture of value. This level of dedication and specialization is required to put customer value at the heart of strategy or at least at the same level as cost and competition.

The key question that is necessary to answer is the following: do you want to reach pricing excellence or do you to have reach customer value excellence? Some companies might include cus-tomer value into their marketing function and leave pricing with the Chief Pricing Office. Others might prefer to have value and pric-ing into a CVO role. What is better? We have no scientific data demonstrating that one approach is better than the other. What matters is the need for skill specialization on value and/or pricing.

Chief Value Officer Job DescriptionCVOs are focused on systematically creating, assessing, and capturing value across all processes and functions of the firm. SAP’s CVO supports our view: “Value is created in three stages — value discovery, value realization, and value optimization. We believe partners can look at these three areas and offer services around them, such as change and program management to help customers unleash the potential of what is being offered.” CVOs make sure that all programs, actions, initiatives, new products, services, and investments create and capture customer value. They challenge the decision-making process to bring forward customer needs, value propositions, and value models as well

as how value is captured in the process. CVOs live and breathe value management, as the eyes, ears, and voices within the organization advo-cating value creation for the customer. They focus on cul-ture, mindset, and languages of value.

There are two options for de-signing the role of the CVO, as shown in Figure 2. A first way is to establish a Project Management Office (PMO) dedicated to the management of value and driving all strate-gies, processes, and organi-zational dimensions (culture

and mindset) associated with value management. We call this approach a process-focused CVO.

The second approach proposes to design this role by grouping all functions associated with value management (marketing, inno-vation, pricing, value, selling) and to fold them under one function reporting to the CEO. This approach resembles a more traditional one, closer to the role of Chief Marketing Officer with innovation and strategic responsibilities. We call this approach a function-ally focused CVO with direct responsibility and accountability. The selection of one versus the other approach depends on the firm’s process orientation and its capacity to change at the orga-nizational level. Our opinion is that both approaches offer great potential to put value management where it belongs, that is, in the C-Suite. So there is not right or wrong. Different organiza-tion designs, market dynamics, and company cultures will dictate what CVO configuration to use: process, functional, or hybrid.

In this paper, we also propose to go further and to offer readers a potential job description for a process-focused CVO. For this we build on the work of Deloitte (Dalton and Wortman 2004) and add additional dimensions to the position, as shown in Figure 3.

While the initial job description was well designed and captured more important elements of the role, we added the dimensions of learning and knowledge management as well as added required skills in change management. Putting value at the centre of the firm’s DNA requires an organizational transformation (Liozu, Bo-land et al. 2011). The CVO will be required to drive this difficult transformation with passion. He or she will act as a champion of value in the firm and will reinforce collective efficacy by ex-pressing positive evaluations (Tasa, Taggar et al. 2007), show-ing confidence in people to perform effectively and to meet value challenges (Nadler and Tushman 1990), awakening spirits to rally the troops (Hacker and Roberts 2003), and energizing members across the organization (Nadler and Tushman 1990, Thompson 2009:100). Finally, the CVO is also the protector of the value culture. He or she will nurture and grow that culture to be able to create irreversible change in the mindset of people in the or-ganization. Culture matters. Mindset does also.

12

The second approach proposes to design this role by grouping all functions associated

with value management (marketing, innovation, pricing, value, selling) and to fold them under

one function reporting to the CEO. This approach resembles a more traditional one, closer to

the role of Chief Marketing Officer with innovation and strategic responsibilities. We call this

approach a functionally focused CVO with direct responsibility and accountability. The

selection of one versus the other approach depends on the firm’s process orientation and its

capacity to change at the organizational level. Our opinion is that both approaches offer great

potential to put value management where it belongs, that is, in the C‐Suite. So there is not right

or wrong. Different organization designs, market dynamics, and company cultures will dictate

what CVO configuration to use: process, functional, or hybrid.

In this paper, we also propose to go further and to offer readers a potential job

Chief Marketing Officer Chief Pricing Officer

Product Management Firm Pricing Orientation

Market Management Pricing Strategies & Tactics

Strategic Marketing Excellence Pricing Realization Excellence

Strategic Pricing Management Value Management Process

Marketing Communications Systems, Tools & Infrastructure

Chief Commercial Officer Chief Value Officer

Commercial Strategies & Tactics Value Management Process

Commercial Excellence Strategic Pricing Management

Product Management Value Communication Management

Market & Customer Insights Market & Customer Insights

Customer Experience Management Value Culture & Mindset

Table 1: Critical Function of Commercially Related C-Level Positions


ConclusionsIn this paper we have attempted to bring forth arguments for why firms should comprehensively and systematically manage cus-tomer value at the organizational level. We have also highlighted the need to have customer value managed centrally through the creation of the position of Chief Value Officer. We make several strong points related to marketing, value, and pricing manage-ment.

First, we propose a clear definition of customer value and also support the need to elevate the value discussion to the C-suite. Many CEOs believe that it is their role to manage value day in and day out. We take a different position and argue that CEOs cannot improvise and focus fully on comprehensive value man-agement. They need a full-time pool of resources that will make value leadership a priority project with the intent to create, assess, and capture value. CEOs need to put business at the centre of the firm’s existence and delegate that mission to value experts. CMOs, CPOs, and CCOs may be able to assist in the manage-ment of value but they will also suffer from the same issues of multitasking, attention misallocation, and lack of dedicated ex-pertise that CEOs contend with.

Second, we propose a couple of different design options for CVOs as well as a potential job description based on Deloitte’s 2004 work (Dalton and Wortman 2004:31). We hope that fur-ther research will be conducted on the role and function of the CVO and that practitioners will draw from our work to advance the cause of value management in the C-suite.

Third, we clearly establish a separation between pricing man-agement and value management in the firm. While they are not separated in the overall process, they must be managed differ-ently and cannot be integrated with each another. Pricing strat-egies and tactics are used to capture value in the marketplace with customers. Prior to being captured, however, value must be created and assessed. Reciprocally, value cannot be captured without sound pricing strategies. Therefore, we posit that pricing belongs in the value-management process led by a CVO, and not simply a CPO reporting to the CEO or working in the C-suite.

If you are competing against a company with a CVO — either for customers or talent — you may be at a severe competitive disadvantage. The Roman God Janus had two sets of eyes, one set to see what lay behind and the other to see what lay ahead. A CVO is an outward-looking position, with duties carried out in a world of risk, uncertainty, innovation, and faith in the future, where value is solely determined by the customers your company is privileged to serve. If the only set of eyes you possess look behind you — at historical costs and efforts — you are destined for a perilous future.

So, who is in charge of value in your company?

References

Abele, J. M. and J. M. Stevenson (2009). “The Rise of the Chief Commercial Offi-cer.” Heidrick & Struggles White Paper: 1-4.

Baker, R. (2006). Pricing on Purpose: Creating and Capturing Value, Wiley.

Cressman Jr, G. (2010). “Selling Value-based Pricing Strategies: Making Pricing Strategy Work.” The Journal of Professional Pricing (First Quarter 2010): 16-19.

Dalton, B. and B. Wortman (2004). “The Value Habit: A Practical Guide to Creat-ing Value.” Straight Talk 6: 1-34.

Forbis, J. and N. Mehta (1981). “Value-based strategies for industrial products.” Business Horizons 24(3): 32-42.

Grewal, R. and R. Wang (2009). “The Chief Marketing Officer: New Vintage, or Just Old Wine in a New Bottle.” The Chief Marketing Officer Journal 1: 29-33.

Hacker, S. and T. Roberts (2003). Transformational leadership: creating organiza-tions of meaning, ASQ Press: Milwaukee, WI.

Hinterhuber, A. (2008). “Customer value-based pricing strategies: why companies resist.” Journal of Business Strategy 29(4): 41-50.

Hinterhuber, A. (2008). “Value delivery and value-based pricing in industrial mar-kets.” Advances in Business Marketing and Purchasing 14: 381-448.

Job Title:

Job Title: Chief Value Officer (CVO) Reports to: CEO and Board of Directors Objective of the Role: To lead the development and execution of an integrated performance management process focused on the creation and capturing of long term business value. Scope: This role encompasses all elements of performance management, including development and update of strategic plans, management of the project portfolio, determination and approval of capital investments and new product introductions, establishment of performance measures and targets, and the evaluation and reward of performance. Organizational scope includes an overall corporate perspective, with responsibility for providing direction to all business units, aligning their strategies within the context of enterprise value, and optimizing the enterprise portfolio Main Responsibilities: - Lead the continuous assessment of the business environment, customer trends and value models, and assessment of possible scenarios, as well as the changes in direction implied by potential changes. - Review and approval of all plans, projects, investments, measurements, targets, and performance assessments for completeness and consistency with overall corporate value-creation and value-capturing goals and objectives. - Establishment, review, and maintenance of a consistent, integrated performance management process across all parts of the organization – including timelines, outputs, and systems to be used. - Review and approval of all compensation and reward programs for consistency and alignment with corporate goals. - Develop training and intellectual capital management programs to promote the value management. Experience & Skills Required A demonstrated knowledge of marketing, value assessment, pricing and finance. Excellent business acumen including a passion for delivering superior outcome. The ability to lead and direct diverse cross-functional teams to a common goal. Strong experience leading value-creating and capturing processes. A passion for holistic thinking and continuous improvement. An ability to manage and direct the corporate and multi-functional project portfolio.

Figure 3: Proposed Process-Oriented CVO Job Description



Liozu, S., R. Boland, A. Hinterhuber and S. Perelli (2011). Industrial Pricing Ori-entation: The Organizational Transformation to Value-Based Pricing.

Liozu, S. M. (2015). The Pricing Journey: The Organizational Transformation To-ward Pricing Excellence. Stanford, CA, Stanford University Press.

Liozu, S. M. (2016). Dollarizing Differentiation Value. Sewickley, PA, VIA Pub-lishing.

Mitchell, K. (2011). The Current State of Pricing Practice in U.S. Firms (Opening Speech). Professional Pricing Society Annual Spring Conference, Chicago, USA.

Nadler, D. and M. Tushman (1990). “Beyond the Charismatic Leader and Organi-zational Change.” California Management Review 32(2): 77-97.

Slater, S. (1997). “Developing a customer value-based theory of the firm.” Journal of the Academy of Marketing Science 25(2): 162-167.

Tasa, K., S. Taggar and G. Seijts (2007). “The development of collective efficacy in teams: A multilevel and longitudinal perspective.” Journal of Applied Psychol-ogy 92(1): 17-27.

Thompson, M. (2009). The Organizational Champion: How to Develop Passionate Change Agents at Every Level, Columbus, OH: McGraw Hill.

Ulaga, W. (2001). “Customer Value in Business Markets An Agenda for Inquiry.” Industrial Marketing Management 30(4): 315-319.

From pricing strategy to margin realisation

www.pwc.be/profitability

We help you realise your full value potential

Most executives name pricing as their major challenge and major weakness. Have you fully tapped your pricing potential?

Whether you want to develop a value based pricing approach, establish better pricing controls, or embed a “best in class” pricing strategy, we can help you realise your full value potential.

PwC is the world’s largest professional services firm, with 180,000 people in 158 countries, active in audit, tax and consulting.

As used in this document, “Deloitte” means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright © 2012 Deloitte Development LLC. All rights reserved.Member of Deloitte Touche Tohmatsu Limited.

At Deloitte, we cover all of the above. Contact us to learn how.

[email protected]

www.deloitte.com/us/pricing

In pricing, just one won’t do

technology

strategy

execution

all of the above



How do we support our salespeople, through compensation plans, tools, and mes-saging, to become the champions of the organization’s pricing strategy? How do we get their buy-in to do so? These are the crucial questions that every company must address, as the author explains. Author Dr. Reed K. Holden, Founder of Hold-en Advisors, is a world-class pricing expert who helps clients build go-to-market strategies to drive price leadership, selling backbone, and profitable growth. In 2015, he published the 2nd edition of Negotiating with Backbone: Eight Strate-gies to Defend your Price and Value and in 2008, he co-published Pricing with Confidence: Ten Ways to Stop Leaving Money on the Table, a top selling pricing book for the executives. He can be reached at [email protected].

Making Salespeople Champions of Price Strategy

Can Sales Execute Pricing Strategy?Within the first ten minutes of a pricing training session, a se-nior salesperson stood up and asked, “We are compensated on revenue. How is anything you teach us going to make us more money?” It was a great question. “It isn’t,” I replied. Revenue plans conflict with pricing for profit objectives. After the training, we suggested better aligning sales compensation with profit to the company leaders. Though they felt strongly about improving margin, they did not act on our advice. Within six months, this large national bank had failed. If salespeople are compensated to achieve sales volume, they will drop price and even go to dis-count floors to close a deal.

This story is too often repeated in small and large companies around the world.

Yet, they all really have the same goal — to grow both revenue and profits. Initially, problems start because functional groups talk about growth differently. Marketing has a goal to grow market share, product managers must deliver innovative products, and the pricing team is goaled on improving margins. For salespeo-ple, credibility and personal service are key and getting the best discounts for customers keeps the business coming in. Execu-tives wrestle with showing Wall Street both revenue and profit growth. Yet, it’s the salesperson that brings in the business and sets the pace for how well the company fares in growing revenue.

How do we support our salespeople, through compensation plans, tools, and messaging, to become the champions of the organization’s pricing strategy? How do we get their buy-in to do so? These are the crucial questions that every company must address.

Snakes in the WoodpileIn the past, companies that were successful in growing both top line and profit took control of pricing away from salespeople. Apple and Intel have historically been good examples. Today, selling approaches are in transformation. Insights into customer operations, determining where the selling company can make

an impact, and showing real financial value are crucial. So why do so many companies still struggle, even after receiving ad-vice, software tools, or sales force effectiveness programs to solve the root causes? Years ago, there were reports of Ross Perot in a discussion with a manager at General Motors. Perot had just sold EDS to GM, and after getting a seat on the board, Perot decided to walk the factories to uncover opportunities for improvement. While in one factory, he spoke to a line manager about solving company problems, advising: “When you see a snake in the woodpile, just kill it. Don’t appoint a committee on snakes.” The manager responded, “Mr. Perot that will never work at GM.” Decades later, GM is still appointing committees to dis-cuss snakes - and ignition switches.

Many companies don’t see the snakes hiding in the woodpile that cause the obstacles to creating sales champions that drive growth in both revenue and profits. There are four common rea-sons that cause salespeople to advocate for more discounts for customers, rather than profit for the company:

• Sales incentives are misaligned with the company’s finan-cial goals

• Limited understanding of value compared to competitors

• Lack of visibility into how and why prices are set

• Lack of insights into the negotiation games that customers play

These are not the salesperson’s fault. They are victims of inter-nal processes that no longer work and buyers that are savvier than ever. Companies must kill the snakes, as Perot says, by empowering sales to be champions of price and deliver on their company’s potential. The objective is to close sales at profitable prices without leaving money on the table. How does the com-pany leadership team change behavior to enable salespeople to be champions?

mailto:RHolden%40Holdenadvisors.com?subject=



When a salesperson has any level of control over price, is compensat-ed (even partially) on volume, or is pushed to close an important sale too soon, they are incented to squander valuable profits to accomplish their mission.

Building the Sales ChampionLet’s start by considering the teams that support salespeople – marketing, sales managers, pricing, legal, solution architects, delivery people, etc. Is there alignment across these teams to provide value to customers? Are prices aligned with value? Is compensation aligned with pricing? Complex projects to cut or streamline operations, big data analytics, pricing software re-ports, and segmentation studies provide no explanation or sup-porting tools that reach salespeople.

Let’s consider these four steps to arm salespeople to realize value and better prices:

• Rationalize individual performance goals

• Build sales confidence in the company and the financial value created for customers

• Make price easy to understand and support

• Help salespeople identify negotiation tactics and plan re-sponses

1. Rational Individual Performance Goals

When a salesperson has any level of control over price, is com-pensated (even partially) on volume, or is pushed to close an important sale too soon, they are incented to squander valuable profits to accomplish their mission. The incentive mismatch prob-lem goes beyond salespeople. Product and factory managers, who are compensated to keep the factory full or to achieve rev-enue or market share goals, can put pressure on salespeople to close last minute deals by dropping price.

Senior executives are often the worst offenders--especially those executives who are only incented to meet quarterly revenue ob-jectives purely for the sake of Wall Street. Customers delight in leveraging this end-of-quarter desperation.

When W. Edward Deming, the father of the Total Quality move-ment, delivered one of his final public presentations, he left us with this message: “Any time you measure someone at the indi-vidual level, they probably won’t work to achieve goals that are best for the firm.” That message still resonates today. Individual performance goals conflict with revenue and profit budgeted for the firm or fail to address both. Half measures that mix revenue, individual objectives, and profits are often shrugged off by sales-people, especially if revenue is the major metric. They will default to what is most effective for them to keep customers happy.

Before changing compensation, consider this research from Eric Maurer at The Alexander Group, a sales effectiveness consult-ing firm, that explains that “by adjusting the sales compensation plan to include margin as the main measure (of performance), a company achieved a 5% increase in contribution margin” and that “the sales reps were spending up to 60% of their available selling time on products with the highest margin.”

If you can’t change the compensation system, or if such change will take some time, give more control to pricing managers work-ing with salespeople to oversee company profits. Again, be sure

incentives are aligned, so that everyone is collaborating to win profitable business. We worked with a company whose forward thinking president gave his pricing department complete con-trol over pricing with compensation incentives — the PRICING PEOPLE — on profits they generated for the firm. Everyone won — and after a few years, their stock price rose 600%.

The process of rationalizing compensation structures reveals con-flicting objectives and can begin moving functional teams away from infighting to unifying them to positively impact customers. Salespeople need to be compensated to achieve pricing objec-tives, as well as sales objectives. In most cases, that equates to sales and profits. That can be accomplished by using a measure of sales dollars that is heavily weighted by contribution margin. With this plan, as contribution margin declines to zero, sales com-pensation should decline or be zero. Any mixed packages that weight sales revenue equal to or higher than contribution margin rarely work, because salespeople still focus on the sales dollars.

2. Build Sales Confidence in the Company and the Finan-cial Value Created for Customers

Ask salespeople how they feel about the products and services they sell. Don’t do research or set up a committee (remember Perot’s advice about snakes). Go to lunch, and ask for their views. Often what we hear from salespeople is: our products and ser-vices are commodities. This may be because customers, whose sole agenda is to set the stage for getting lower prices, reinforce or “pound” this message into salespeople at every chance. They want sellers to know there are plenty of “good enough” alterna-tives. While savvy companies understand and correctly dismiss these claims as negotiation ploys, too many other companies don’t help salespeople defend their value to the customer. In-stead, they allow the customer to set the price and then react to the fallout.

For many sellers, gaining confidence comes from knowing that they are selling better products and services that deliver more value than competitors. This is not about the word value and cool rhetorical value propositions; it is about understanding why cus-tomers choose certain companies over others. What does the firm do better than competitors and why do customers care? How does it help them sell their products or improve their operations? Customers choose vendors for very specific reasons. Go on a


Salespeople, perhaps with support of their product specialists, work with customers to build a solution that makes the difference to their customers.

value hunt to find out why. During these customer conversations, work to uncover ways to have bet-ter interactions with them, further improving quality and strengthen-ing the relationship.

Why is understanding and le-veraging value important? It is because it changes the conver-sation with customers from price to performance, innovation, or better solutions for customers. Salespeople become partners to customers, instead of customer service specialists. They report insights back to their company and continually drive better of-ferings. Value gives them confi-dence that the price set is right, and EVERYONE in the firm stands behind it.

What happens if you believe your company doesn’t do anything special for customers? The customer value hunt will confirm it. Then the question is whether the firm should focus on being the low-cost producer in their market or if innovation is required to bring a more valuable solution to customers.

Value can often be in the services wrapped around a product, even if that product is a true commodity. Understanding what services are valuable and the associated cost to deliver them can drive more profitable pricing than the product itself. When salespeople know their company has greater value in their prod-ucts or services compared to a competitor, they are confident throughout the selling cycle.

However, trying to package undifferentiated products or services with a value story will fail with the sales team. This can put their credibility with customers on the line. If they sense they are being given a weak hand, their first thought will be around preserving credibility, and they will ignore “value” and take the safe route of using price discounts to close sales.

If unique value is understood and the seller knows which custom-ers care about it, don’t stop there. Train salespeople to qualify customer’s value needs and then have value conversations with them. Once they buy into a value-based approach, tools will be needed to explain that value and support the offered price. Those tools can be software or even simple spread sheets where the salesperson fills in information from the customer and determines the value in use. Or they can be discovery tools which encour-age the salesperson to have value conversations with customers about how their solution can do a better job meeting their needs.

This begins the sales transformation to explain how a firm’s prod-uct or service will impact the customer’s operation in a positive and more profitable way. It can be via a new innovation, involve special technical skill, or providing services that guarantee re-duced supply chain risk. That value conversation changes the game from customer service to partnering for success. Sales-

people, perhaps with support of their product specialists, work with customers to build a solution that makes the difference to their customers. Part of the value con-versation includes understanding the financial impact the solution will make. This can be done col-laboratively, if the customer be-

lieves value is there.

3. Make Price Easy to Under-stand and Support

To most salespeople, pricing is a black box. They are not clear on why the price is what it is and how it compares to a com-petitor. Internally, sales, market-ing, and pricing teams may be in disagreement over the value of their products/services and in-

fighting on price becomes a time-consuming step in every deal. Salespeople lobby for lower prices, pricing people plan for higher prices, and marketing expects their value rhetoric will close the deal. Each group pulls a report to make their point. The pricing team’s analysis shows how bad discounts are getting, based on past deals. Marketing colleagues have research that shows their messages are spot on.

Salespeople – the voice of the customer – say that the solution is no different than every other offer out there. This compromises time that should be spent on getting the best solution specified and the value quantified for the customer on how the solution is a better fit than the competitive alternative. Strategic planning or positioning value is lost in the shuffle. Without this understand-ing, sales will think any price for their good customer is too high.

Here is an important question: Why are prices set as they are? The right answer should be based on the company’s price strat-egy: one that is developed considering the firm’s objectives, the product’s costs, value to customers, and how that value com-pares to competitors. To get salespeople to become supporters and eventually champions of price strategy, start by explaining prices in the context of the company’s strategy and the current market environment.

Strive for simple, easy to understand pricing that documents the factors that determine current prices and levels. Importantly, highlight the differences from competitors’ products, if prices are higher. Prices and pricing strategy must be summarized simply and transparently. The better a salesperson understands why the particular price is set, the better they can explain and defend the price during customer conversations. One successful company put their pricing organization on the road with salespeople. Their job was to present the basis for the price strategy and actively collaborate with sellers to determine how best to make it suc-cessful in winning deals. It worked and both teams were much happier with the process and the outcome.



The ultimate job for the pricing pro-fessional is to drive buy-in with the people who execute price strategy. This is more than a technical presen-tation. Pricing leaders must show why the prices are fair, consider value to the customer, understand the com-petitor value, and demonstrate how to have value conversations with all members of the customer buying cen-ter. When salespeople face procure-ment in tough negotiations, they have the proof points on how they deliver value and the confidence to hold firm on price. This is the path to building pricing champions in the sales force.

4. Help Salespeople Identify Ne-gotiations Tactics and Prepare Correct Responses

Price negotiations are often a shot in the dark, and after some back and forth, the final price comes in at a distance from the initial target. Because salespeople con-sider their real job as taking care of their best customers, giv-ing great discounts often is part of that customer service. They have not had the deep value and financial impact conversations along the way. When the sales person arrives at procurement’s office, they are blindsided by sophisticated negotiation tactics buyers have spent years developing. The sales person may think the customer will be so upset with the offered price that they fold quickly and think they have saved the relationship. In these cases, salespeople may completely miss the cues in negotiating games that customer play and end up discounting too much.

For salespeople to be effective at communicating value and price, give them the backbone and tactics to stand up to pro-curement games. For example, the most common procurement ploy is to dismiss products and services as “commodities” and to claim that all competitors are the same. They may even pro-duce scorecards or claim to have Excel models that “prove” that the price is too high. These are all well-practiced tactics to get lower prices. Despite what procurement claims, there is almost always a difference among suppliers that provides financial value to the customer. Successful salespeople can articulate that value and stand firm on price.

To prepare for a negotiation, start by decoding specific customer buying behaviors, qualify the role of procurement, and learn to identify the tactics that are used solely to get discounts. These procurement tactics can include delays, approving other sup-

pliers, threatening to or actually going out to bid. In most cases, their pur-pose is to get lower prices from an al-ready selected and preferred supplier.

Proactive planning keeps salespeople from being blindsided and from get-ting angry and frustrated at the situa-tion. Recently, a sales person working with banking customers was in a ne-gotiation for a large contract. He was getting delayed and thought the cus-tomer was truly disorganized in bring-ing the deal to a close. He had planned to go in with another discount until his eyes were opened to the tactics they were using. Instead he held his price, called their bluff, and closed the deal at a profitable price for his company.

An important tool to help during this stage of customer interaction is a set

of “give-gets,” small adjustments in value. For example, switch-ing to a call center or an automated chat service rather than pro-viding a dedicated customer service rep can better match value delivered to the price the customer is willing to pay. If a customer wants a lower price — no problem — but take away something of value. This tactic can expose procurement people and cause them to be frustrated, because salespeople aren’t falling victim to their price objection.

Without good processes, salespeople may react in ways that compromise profits, revenue, or both. With good analysis, plan-ning and tactics, they are guaranteed to leverage their position and protect both. Importantly, if you want the salespeople to hold on price, executives must have confidence in the price and stand behind them.

Get Started NowIt’s time for leaders to foster alignment with sales and pricing people to win profitable business. These functions must team to execute pricing and “value” initiatives to yield promised results of increased revenue and profit. World-class companies recog-nize that while the process of building salespeople to be price champions can be quite transformational, the rules that drive the process are simple: know your value, communicate it to your cus-tomer, and defend your price. The elbow grease is in driving the behavior changes needed for value selling and getting alignment with all functional constituents that impact the customer. The win is to make salespeople the champions of the company, products, and prices in the often difficult world of customer negotiations.

Copyright 2016, Holden Advisors, Concord, MA Page 5 Not for Quotation or Redistribution without the Written Permission of the Authors

Here is an important question: Why are prices set as they are? The right answer should be based on the company’s price strategy. One that is developed considering the firm’s objectives, the product’s costs, value to customers, and how that value compares to competitors. To get salespeople to become supporters and eventually champions of price strategy, start by explaining prices in the context of the company’s strategy and the current market environment. Strive for simple, easy to understand pricing that documents the factors that determine current prices and levels. Importantly, highlight the differences from competitors’ products, if prices are higher. Prices and pricing strategy must be summarized simply and transparently. The better a salesperson understands why the particular price is set, the better they can explain and defend the price during customer conversations. One successful company put their pricing organization on the road with salespeople. Their job was to present the basis for the price strategy and actively collaborate with sellers to determine how best to make it successful in winning deals. It worked and both teams were much happier with the process and the outcome. The ultimate job for the pricing professional is to drive buy-in with the people who execute price strategy. This is more than a technical presentation. Pricing leaders must show why the prices are fair, consider value to the customer, understand the competitor value, and demonstrate how to have value conversations with all members of the customer buying center. When salespeople face procurement in tough negotiations, they have the proof points on how they deliver value and the confidence to hold firm on price. This is the path to building pricing champions in the sales force.

4. Help Salespeople Identify Negotiations Tactics and Prepare Correct Responses Price negotiations are often a shot in the dark, and after some back and forth, the final price comes in at a distance from the initial target. Because salespeople consider their real job as taking care of their best customers, giving great discounts often is part of that customer service. They have not had the deep value and financial impact conversations along the way. When the sales person arrives at procurement’s office, they are blindsided by sophisticated negotiation tactics buyers have spent years developing. The sales person may think the customer will be so upset with the offered price that they fold quickly and think they have saved the relationship. In these cases, salespeople may completely miss the cues in negotiating games that customer play and end up discounting too much.

Customer Spotlight

A global Information Services Company was seeing a significant trend in shrinking margins, due to widespread discounting and inability to demonstrate value for the customer. With tools and training to decode buyer behaviors, they introduced value conversation and exposed customer’s tricks during negotiations, and salespeople began to stand up for the value of their services. By recognizing buyers’ tactics and with new found confidence in their ability to hold their ground, salespeople were able to counter requests for price concessions and negotiate win-win deals. For one particular salesperson, after being shown a competitor’s bid for $1MM less, the salesperson reviewed the value add by their company and won the bid based on their value proposition.

© 2013 EY

GM

Limited. A

ll Rights Reserved.

Talking at customers is over. The new customer relationship is about dialogue. EY’s Customer team can teach you how to use data in new ways, driving insights that improve experiences, foster trusted relationships and drive growth. Your customers are talking. Be sure you can hear them.

To fi nd out more, visit

ey.com/advisory.

The most important part of a conversation is listening.


In this article, the author examines the delayed revolution of the adoption of internet alternatives to traditional experiences – such as shopping and consuming traditional media and newspapers. The author posits that only five or ten percent of the internet’s potential has been tapped so far and predicts future trends of how increased adop-tion of internet offerings will affect several industries in the coming years. Hermann Simon is Founder and Chairman of Simon, Kucher & Partners Strategy & Market-ing Consultants. He can be reached at [email protected]. His lat-est book, Confessions of the Pricing Man, tells his story from student to professor to global pricing guru.

The Delayed Revolution


In 2006, the late Steve Jobs predicted that newspapers would cease to exist in five years. We know now that Jobs was wrong. After all, there was no shortage of newspapers in 2011 nor in 2016, even though several have disappeared

or switched over to digital editions. Why was Jobs so far off base? The reason is clear. He underestimated how long it takes for users to get devices that allow them to read digital editions. At the IT and telecommunications fair CeBIT in spring 2001, the so-called “wireless web pad” was introduced – bearing a striking resemblance to the Apple iPad. Still, it took another nine years until Apple was able to bring the iPad, the first tablet computer, to the market in April 2010. Finally, a product with the potential to reach the mass market.

Back to the internet: What are its true capabilities? The internet has two (and only two) unique skills:

• The ability to offer to a high number of customers digital products at zero marginal costs

• The ability to network

Where do we stand in terms of the commercial use of these revo-lutionary capabilities? At the beginning! Only five or ten percent of the internet’s potential has been tapped so far, that much is for sure. The commercialization of the networking capability is more advanced than the distribution of digital goods. In this re-spect, internet usage is much greater than the amount of digital products distributed so far. But even in this field, there is only one truly major commercial success: Google. In 2014, it achieved revenues of $66 billion and profits of $14.1 billion. Its enterprise value per December 2015 was around $446 billion. Facebook is only a distant second with an enterprise value of $280 billion per December 2015. Regarding the distribution of digital content, there has been only one major success so far: iTunes.

In the US, iTunes offers approximately 20 million songs. So far, Apple has sold in total more than 20 billion songs. If you assume an average price of about one US dollar, Apple is doing pretty

good business. But this is still lower than what Google is earn-ing from the internet. And it’s definitely lower than what can be earned in content.

Why do these two internet capabilities generate such different revenues and profits? The answer is the same as the one re-garding the wrong forecast of Steve Jobs. Until now, the usage of digital networks has primarily taken place on computers that everyone owns. To comfortably use digital content, however, you need special devices that have yet to become widespread. This is precisely why the music of iTunes has generated such high cumulated revenues: The iPod was released as early as in Oc-tober 2001 – hundreds of millions of users, i.e. potential iTunes customers, own one already.

What has changed? The number of devices necessary for using digital content has exploded in recent past. In Q32015 alone, Apple sold 48 million iPhones and 10 million iPads: Apple’s rev-enue grew by 22 percent. At the same time, Samsung sold 84 million smartphones to customers worldwide. And Amazon, typi-cally reserved about their results, recently announced in Decem-ber that they are selling one million Kindles per week, totaling 30 million cumulated units sold.

Experts estimate that the number of devices for digital content is growing by two million per day. Simultaneously, the prices are dropping. As a result, in about five years there will be about as many of these devices in the hands of users as there are of mo-bile phones today. The revolution will be in full swing by then and the consequences will be dramatic.

Today you already find on Amazon a selection of over 30,000 electronic books for free; mostly they are classics for which the copyrights have expired. Gutenberg.org even tops this by of-fering 50,000 plus titles free of charge. That is how we started our personal Kindle library of classics covering everything from Homer’s Odyssey to Shakespeare’s Hamlet to the poetry of Rainer Maria Rilke. The cost? Nothing! Who is going to keep buying these books when you can get them for free? Who still

mailto:hermann.simon%40simon-kucher.com?subject=

http://Gutenberg.org


Newspapers will not disappear, but their print editions will and so will the entire logistics operations of distribut-ing them.

needs an encyclopedia or a dictionary? No one – not anymore! Publishers and bookstores will not survive this trend. The good times for printed newspapers are over. A Harvard graduate re-cently laughed out loud at us when we asked him if he read the print edition of the Wall Street Journal. Newspapers will not dis-appear, but their print editions will and so will the entire logistics operations of distributing them. Weekly and monthly magazines will not be hit as hard. For one, their distribution costs less than that of daily newspapers. And two, presentation, print quality and other factors play an important role. By the way, we have no intention of reading our newspaper on a Kindle. We are waiting for electronic paper, which is essentially a flexible electronic dis-play. We recently saw electronic paper at Samsung Electronics in Seoul. It is still being fine-tuned and costs too much, but it is only a question of time until it is ready for the mass market. In this respect, devices such as Kindle, iPad and consoles are likely to be temporary solutions.

Publishers are not the only ones who will suffer from these trends; traditional retail stores will struggle as well. They simply do not offer exactly what customers need. They have inconvenient open-ing hours. You have to find a parking spot. And so on. Ordering online saves us from all of this. We would estimate that our fami-lies purchased easily 80 percent of our Christmas gifts online last year. We hear the same from other people. This will have a dramatic impact on the demise of inner city stores. We estimate that one-third to one-half of the current floor space capacities become superfluous due to online retail. Which retailers will suffer the most? Those with large assortments, little customer service,

standardized products, and an internet affinity. Express delivery service providers such as DHL and UPS are already profiting immensely from this trend. Every internet order passes through their hands. That is life – as unfair as it may seem. The revolution is happening right now. Now let us see what comes next.

the journal of professional pricing - shopify€¦ · the journal of . professional pricing. 10....

Documents