value-based pricing improves chemicals busin value-based marketing ... 5 steps to customer value...

February, 2009 © GEMS International GmbH, 2009 1

Value-Based Marketing

Value-Based Pricing ImprovesChemicals Business

ProfitsPhil Allen

President and Value CreatorGEMS International GmbH & MarketAbility

February, 2009© GEMS International GmbH, 2009 2

Pentadigm: 5 Steps to Customer Value

CUSTOMERVALUE

MANAGEMENT

IMPROVECUSTOMER

VALUE

CREATECUSTOMER

VALUE

COMMIT TOTHE

CUSTOMER

UNDERSTANDTHE

CUSTOMER

OBTAINCUSTOMERFEEDBACK

Source: De Bonis, Balinski & Allen"Value-Based Marketing for BottomLine Success", McGraw Hill, 2003


There is NO such thing as a Commodity


• Write your answer on a “Post-it“ inUS$ per liter

• Stick them on the flip chart inascending order from the bottom tothe top

What is the highest priced water for humanconsumption on this planet


7 P‘s – But only one captures value

• 6 P‘s that cost money• PRODUCT• PLACE• PROMOTION• PEOPLE• PROCESS• PHYSICAL EVIDENCE

• 1 P that captures value• PRICE

• 1% on price can produce10+% on margin

• 1% off costs produces <5% onmargin

SO – HOW MUCH TIME DO YOU ALLOCATE TO EACH P?HOW MUCH TIME SHOULD YOU ALLOCATE TO EACH P?


Get the Basics Right

Eliminate Unprofitable Products andCustomers

Challenge those making generating little or noprofit

Price through the Product-Market Life Cycle

February, 2009 7

MARKETINTRODUCTION

MARKETGROWTH

MARKETMATURITY

MARKETDECLINE

+

-

0

$

TIME

HIGH VALUEOR

PENETRATION

VALUEOR

GROWTH

VALUEOR

COSTREDUCTION

OR

CHALLENGE

Market Sales

Market Profit

RAISEOR

ELIMINATE

© GEMS International GmbH, 2009

Before We Start – Fix The Dispersion

February, 2009 8

Price

Volume

Why?

Why?

Normally there is a relationship between priceand volume– a simple analysis can highlight anomalies that need fixing


Example

February, 2009 9© GEMS International GmbH, 2009

Product Line Profitability Analysis

February, 2009 10

Product Lines

Cumulative Margin €000/yr

KILLCHALLENGE

INCREASE PRICE

GROW

160/400 make 95% of the profit 200/400 make 5% of the profit40/400makeloss


Customer Profitability Analysis

February, 2009 11

Gross margin byGross margin by customercustomer-- PercentPercent

Cumulative volumeCumulative volumePercentPercent

100

116

0100

850

55% of volumeaccounts for

100% of grossmargin

1 3

15% ofvolume

destroys 16%of grossmargin

30% of volumeaccounts for16% of gross

margin

2

55

FIXCHALLENGE


It’s not easy to be a Price Buyer

• Choice: 3 – 5 suppliers all qualified

• Confident about quality and reliability

• Knowledgeable user of the product

• Experienced in their market and use ofproduct in the application

February, 2009 12© GEMS International GmbH, 2009


Case 1: Create Customer Value

Calculating Customer ValueCreative Pricing to Capture value

Pricing: Plasticizer in PVC Toys

• Current solution sells for around $0.45/lb• Our solution costs to make $0.85/lb

• Current solution is under threat of possible healthissue

• What should we price at??


Client wanted to go at $ 0.96/lb – cost plus pricing- We disagreed and proposed value-pricing


Customer Segmentation: Target Leaders

• Leaders– Lead the thinking in the industry– Likely to consider alternatives without

legislation• Fence-sitters

– Undecided and unlikely to decide• Followers

– Only switch if forced by legislation


Target Segment: Leaders

• What value our offer?• Hypothesis

– Fears about health risks could impact 10% ofcustomers not to buy their product

– Results in 10% loss of sales and earnings– Look up company results in internet– Earnings from relevant toys $MM 60– Potential loss of earnings $MM 6


Value of Safe Plasticiser

Margin per toySell PriceCost to makeCost to ship and market

50%US$ 30US$ 1US$ 14

Plasticiser per toyProportion of total toy cost

0.2 lb = US$ 0.0910%

Hypothesis: Toy marketer willinvest up to 20% of cost to maketo save 10% of margin

US$ 0.09 + US$ 0.20 = US$ 0.29

Work back to per lb price 0.2lb = US$ 0.29x 5 = US$ 1.45 per lb


Value of Safe Plasticiser

US$ 1.45 per lbWhich is THREE TIMES the price of the current plasticiser in use

and 50% higher than our client’s proposed price


Target the RIGHT Customer

• Approached CEO with the hypothesis of potential earnings lossesof US$ MM 6

• He did not know what a plasticizer was nor that hiscompany used them

• Got his IMMEDIATE ATTENTION• Met with CEO and COO – no purchasing• CEO and COO instructed purchasing to change to our

solution• Price negotiated with purchasing• We started at US$1.50 and won the business at US$1.32• After 5 years price is still at $1.15 despite attempts by

strongest competitor to penetrate on price

February, 200920

GEMS: Profitable Results

• We started at US$1.50 and won the business atUS$1.32 (40% above client’s original cost-plus price)

• Improved negotiating and selling skills of sales force

• Added several millions US$ to bottom line profit in oneyear

• After 7 years price is still at $1.15 despite attempts bystrongest competitor to penetrate on price



Case 2: Value Pricing a Commodity

In an Undifferentiated Product-MarketCustomer Value Segmentation leads toSustainable Differentiated Pricing whichsignificantly boosts Bottom-Line Growth

February, 200922

A chemicals company

• 12 major players• Undifferentiated products• All equal on product quality, service, delivery,

competitiveness

• Needs and value-based segmentation• Leads to new offering elements identified as

differentiators• Leads to differentiated pricing strategy


Alternative Buying Behaviour Segments

February, 2009 23

Low Size of Spend HighLo

wC

riti

calit

yo

fP

urc

has

eH

igh


February, 200924

Why am I under price pressure?

SECURITY OF SUPPLY

COMMITMENT TO MARKET

CONSISTENT QUALITY

GEOGRAPHY COVERAGEPROGRAMMED PURCHASE

RELIABLE, REPUTABLE

SUPPLIER, EASY TO DO

BUSINESS

STRATEGIC PARTNER

SECURE SUPPLY

TRUST

COMPETITIVE PRICELOWEST PRICE BUYER

DRIVE PRICE DOWN

Size of SpendAbsoluteRelative to other raw materials

CriticalityofPurchase


February, 200925

Alternative Buying Behaviour Segments

Security ofSupply

StrategicPartner

Easy to doBusiness

Price Buyer


wC

riti

calit

yo

fP

urc

has

eH

igh


February, 200926

Security ofSupply

StrategicPartner

Easy to doBusiness

Price Buyer

Segmenting to Capture the Value


wC

riti

calit

yo

fP

urc

has

eH

igh

100

105 - 115110 - 130

125 - 150


February, 200927

GEMS: Significantly Boosts Profits

• Successfully differentiated pricing to different customer

segments and sustained it over time

• Improved market share in higher value segments

• Improved negotiating and selling skills of sales force

• Added several millions Euro to bottom line profit in one

year

• Sustained the pricing differentials to the segments



A Simplified ProcessANALYZE

SEGMENT

TARGET

DEVELOPOFFERING

(CVP)

IMPLEMENT(7 P’s)

MEASURE/BENCHMARK

I

M

P

R

O

V

E

UNDERSTANDCUSTOMER

VALUE

QUANTIFYCUSTOMER

VALUE

CAPTURECUSTOMER

VALUE

CHECKCUSTOMER

VALUE


Prepare to Meet the Customer

EXPLORE AND PREPARE EXPLORE ANDPREPARE

EXPLORE ANDPREPARE

Recent account history andquantify customer valuedelivered

Key elements of customercharter relevant tocustomer

Interpersonal plan and innerintention

Briefing on your product(s)market and trends

Key differentiators vscompetition specific to theaccount

List of personal benefits andvalue to customer(individual)

Questions to improve customerunderstanding – needs andvalue

Choice of offerings –including prices

I-statements, yes messages,praise and recognition

Search and probe for unmetand poorly met needs

Business argument –company, department

Personal arguments –feelings, personal

About us


Phil AllenGEMS International GmbH and

MarketAbility

February, 200931

Pentadigm: 5 Steps to Customer Value

VALUEBASED

MARKETING

IMPROVECUSTOMER

VALUE

CREATECUSTOMER

VALUE

COMMIT TOTHE

CUSTOMER

UNDERSTANDTHE

CUSTOMER

OBTAINCUSTOMERFEEDBACKSource: De Bonis, Balinski & Allen

"Value-Based Marketing for BottomLine Success", McGraw Hill, 2003


How to do it: Read the book, call us


• Further information from

• Phil Allen, GEMS InternationalGmbHTel: +41 7 9423 1390

Email: [email protected]

URL: www.gems-europe.comURL: www.pentadigm.comURL: www.marketability.org

Phil Allen

• Phil Allen, a career marketer, graduated in International Marketing in 1975.• During his 25-year career, he has developed his marketing expertise with

hands-on experience in sales, market research and marketing in multi-national corporations including Albright & Wilson Ltd, Bayer AG, EnglishChina Clays, Hilti AG and The Dow Chemical Company. His responsibilitieshave ranged from national to continental and global roles.

• In 1997, Phil founded his own marketing excellence practice, GEMS/MarketAbility - creating value for clients by helping them to apply marketingexcellence to their businesses.

• Phil also runs popular marketing workshops specialising in chemicals andplastics markets both for ECMSA and the German chemicals industryassociation, VCI and is a consultant and trainer at Cranfield Market PlanningCentre, Management Centre Europe and ECMSA.

• Clients praise Phil for his pragmatic, down-to-earth approach to marketing.”Phil has a talent for converting the marketing concepts into practical,actionable business strategies and plans.”

• Phil is co-author of the book “Value-based Marketing for Bottom-LineSuccess“, De Bonis, Balinski & Allen, published by McGraw Hill 2003

• A fluent German speaker, Phil lives near Zürich, Switzerland and worksaround the World.


GEMS International GmbH and MarketAbility

• Add value to client’s business with marketing, sales and Value-Based Marketing excellence in strategy, process and culture

• Deliver improved business performance through tailoredcustomer-driven strategy development and implementationservices to global clients in business-to-business markets

• Impart value-based marketing, sales and customer valueskills to client through applied interactive workshops

• Measure marketing effectiveness with VBM Diagnostic

• Marketing and sales excellence for sustainable, profitable growth.


GEMS Europe GmbH and MarketAbility

• A global marketing and sales excellence practice, based in CH• A global network of marketing and sales expert practitioners and

associates• Add value with true marketing and sales excellence in strategy,

process and culture of the client• Action-oriented, practical marketing and sales for sustainable,

profitable growth

• Creativity and Innovation in Market Strategy and Planning• Market Mapping, Value Chain Analysis, Customer Value

Segmentation• Competition Analysis, Positioning, Differentiation• Value Propositions, Value Creation, Value Capture• Value-Based Pricing• Value-Based Marketing, Key Account Management• Value-Based Selling

• Workshops: Learn Practice Apply ImplementFebruary, 2009© GEMS International GmbH, 2009 35

GEMS/MarketAbility for Results

• At the insistence of our practitioner, client’s business pursued a market-based pricing strategy and gained a price of $1.32/lb instead of $0.96/lbon a large volume

GEMS/MarketAbility added value $2,500,000

• Following a VBM workshop, client’s business manager used the newlycreated Customer Value Proposition at a key account to save the businesshe had been told (by the customer) he would lose

GEMS/MarketAbility added value $ several million

• Using the newly developed Market Plan from a series of VBM workshopsclient’s business retained accounts against lower priced competition andfocused on target segments to grow business

GEMS/MarketAbility added value Euro > 1 million

• Using the Value-Based Marketing model, GEMS/MarketAbility client re-segmented their customer base, developed new customer offerings andintroduced new business models. New offerings increased customerretention to > 97%. New business models attracted significant newbusiness from accounts previously dealing with competitors.

GEMS/MarketAbility added value US$ > 3 million


Measure Your Marketing Effectiveness


Benchmark against VBM Best Practice


CVM: Current and Best Performance vs Best Practice

0

5

10

15

20

251: Understand The Customer

2: Commit To The Customer

3: Create Customer Value4: Obtain Customer Feedback

5: Improve Customer Value

Source: MarketAbility

GEMS/MarketAbility: Coaching, Consulting


Practical Marketingdelivered

in a series of“hands-on“workshops

Coaching ofindividual business

or marketingteams

to tackle specificmarketing challenges

and topics

Mentoring ofindividual managers

and executiveson

marketing andbusiness management

challengesand issues

Clients on GEMS/MarketAbility


“Very good balance betweentheory, example from other

companies and practicalexercises

“Well-structured, Well-organized, Practical.

Considerable materials to usein everyday working life”

“We needed a means ofeducating our customers toget to what the customer

really needs. This is a reallycustomer related

approach…..totallyworthwhile”

“GEMS/MarketAbility….openedfor me an awareness of thingsI had no awareness of before...

Interactive, high impact, Philunderstands the self-discovery

process.”

“Phil does not think like everyoneelse and he got us to think

differently and out of the boxtoo.....

Very good at getting people tothink outside the box....

It’s changed my job completely.”

“GEMS/MarketAbility….openedfor me an awareness of thingsI had no awareness of before.“Ah Ha! It’s starting to make

sense…”

““Relevant, lively, clearlyexplained and to the point...

If we don’t do marketing well,our business will not survivethe way it needs to survive.”

“Relevant, lively, clearly explainedand to the point.

“Some really useful material we canuse back at the company.”

THANK YOU


value-based pricing improves chemicals busin value-based marketing ... 5 steps to customer value...

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