Pricing for Profitable and Sustainable Growth June 2013

Pricing for Profitable and

Sustainable Growth

June 2013

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Introduction

• The role of pricing in enabling sustainable growth

• The importance of taking a consumer value based approach

• The importance of stopping the value leakage

• The Philips vision and approach to pricing

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Pricing plays a key role

in the marketing mix

• Product

• Communication

• Distribution

• Price

BUT....

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Why focus on pricing?

Example

Price €100

Variable Unit Cost €60

Volume 1M

Fixed Costs €30M

What is the most effective profit lever…?

…. in case of a 2% improvement

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…and the winner is Price

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Psychology of pricing – some principles

• Human thought is primarily emotional and intuitive

• The way in which Price is presented affects our perception of it

• Different people may assign a different value to the same product or

service

• The context that a price is presented in can significantly affect our

perception of whether that product or service offers value for money

• The competitive set you place a product or service in, is key to

determining whether you are getting relative value for money

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Human thought is emotional: Philips Avent

• Giving your baby the best possible start in life pre-occupies new parents

– and feeding in particular is a highly emotional category

• Philips Avent is the No. 1 recommended brand by UK Mums with its

products loved by Mums and Babies across the UK

• This enables Philips Avent to price its babies’ bottles at a premium to its

closest competitor

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We navigate using shortcuts:

sending flowers for Mother’s Day

• Highest and lowest prices signal an

acceptable range to help customers

navigate and decide

• We generally don’t choose the

cheapest flowers on the price-list.

Usually we make a choice mid-range.

• On-line sites know this behavior and

stock flowers accordingly.

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Parallel import of Milk as example that

concumers are prepared to pay more

• The 2008 Chinese milk scandal was a

food safety incident in China, involving

milk and infant formula, and other food

materials and components,

adulterated with melamine.

• Milk and infant formula is purchased in

European stores and send to China

• Restriction of 1 tin per person in Dutch

Store.

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The context affects what we pay

for a cup of coffee

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X 23

HKD 2 HKD 45

Twice?

Five times?

Ten Times?

How much do we spend

on a cup of coffee in our

kitchen?

So how much more would

we pay at a coffee shop?

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Strong brands command higher prices. Take 3

similar cars made by one manufacturer…

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and the price?

€ 36k

€ 19k

€ 32k

ADD EQUITY

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Blue

Label

HKD 1570

Johnnie Walker have developed different

value propositions within their portfolio

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Red

Label

HKD 240

John Walker Honour

HKD 17600

Gold

Label

HKD 730

Black

Label

HKD 350

Green

Label

HKD 500

King George V

HKD 5110

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80

120

100

110

90

80 120 100 110 90

Introducing the fair value line

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Relative Perceived Price

Rela

tive P

erc

eiv

ed

Ben

efi

ts

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120

100

110

90

80 120 100 110 90

There are three zones on the fair value line

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Relative Perceived Price

Rela

tive P

erc

eiv

ed

Ben

efi

ts

Better

Good

Best

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What if you are not on the fair value line?

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80

120

100

110

90

80 120 100 110 90

Good

Relative Perceived Price

Worse

Value

Better

Value

Better

Best

Market share likely

to be increasing –

good if launching

but lost profit

opportunity

Market share likely to be

decreasing – can only survive by

continual price promoting i.e.

dropping down the FVL

Re

lati

ve

Pe

rce

ive

d B

en

efi

ts

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Nikon have developed different value

propositions within their portfolio

Entry level

DSLR

HKD $23000

Compact with

inter-changeable

lens

HKD $8400

Flagship DSLR

HKD $60000

Compact

Camera

HKD $800-2100

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Special “Deal” products help to protect the

anchoring price points on the fair value line

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80

120

100

110

90

80 120 100 110 90

Good

Relative Perceived Price

Deal Better

Best Market share likely

to be increasing –

good for short term

opportunities to

protect other price

points

Re

lati

ve

Pe

rce

ive

d B

en

efi

ts

Deal

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80

120

100

110

90

80 120 100 110 90

Car industry example

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Relative Perceived Price

Re

lative

P

erc

eiv

ed

B

en

efi

ts

2005

2010

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120

100

110

90

80 120 100 110 90

Retailer margin differs by product

classification - Johnnie Walker

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Relative Perceived Price

Re

lati

ve

Pe

rce

ive

d B

en

efi

ts

Better

Good

Best

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High Margin

Higher Margin

Highest Margin

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Examples of consumer value based pricing

ReAura skin rejuvenation

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• Products launched at premium price point &

over time move to mainstream price points

• Especially relevant in a new category, or

where there is little competition

• Successor products launched again at

premium “high” to create another high

reference point, more desire for new version

WHEN SHOULD THIS STRATEGY BE USED?

When you have a breakthrough product with no competitive offer

When there is a limited number of products / pool of consumers

This is especially relevant for technology products

Price skimming

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Examples of price skimming – Apple iPhone

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Examples of price skimming – Air Floss

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• This strategy is about setting prices low and

promoting heavily, to drive penetration

• Revenue would then be recouped on follow-on

products, services or accessories

WHEN SHOULD THIS STRATEGY BE USED?

When you need to strategically drive Penetration and early adoption

of your brand to: a) lock consumers into your system

b) maximize volume / market share from launch

Penetration pricing

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Examples of penetration pricing

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• This strategy is about pricing and promoting in

line with your nearest competitor

• Suitable for categories with little differentiation

WHEN SHOULD THIS STRATEGY BE USED?

In categories with little differentiation

When your discriminator is not unique

Competitor based pricing

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Examples of competitor based pricing

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The optimum pricing strategy will change across

the product life cycle P

rod

uc

t S

ale

s

Time Pricing

Strategy

Options

Skim Consumer

Value Based

Competitor

Based

Consumer

Value Based

Penetration Competitor

Based

Consumer

Value Based

Penetration

Pricing

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PRICING

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The situation Unilever faced in 2007

• Margins were under pressure because a global increase

in raw material prices

• The team looked at how prices were set, realized and

tracked for their portfolios of products across five

continents

• Their key learning was that Unilever did not have a

uniform global pricing strategy

• Big differences in level of Pricing capabilities across

different parts of the organization

• Lack of consistency and clarity on who owned the pricing

process and who was responsible for price setting

• Lack of consistency in price positioning globally across

key powerhouse brands

Source: The 1% Windfall – How successful companies use price to profit & grow, by Rafi Mohammed

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The action taken by Unilever and the results

• Developed and implemented a global pricing approach, with clear roles and

responsibilities and capability building program to build skills across the organisation

• Addressed price gaps involving powerhouse brands such as Dove, Hellman’s and Lipton,

stemming significant value leakage

• One of the early pilots delivered 11% increase in operating profits for products at risk from

inflation

• Price growth of 7.2% in 2008 versus 1.8% in 2007 prior to the program

Source: The 1% Windfall – How successful companies use price to profit & grow, by Rafi Mohammed

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Philips CL, November 2011

Customers will benefit as well from reduced cross-border trade

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Source: SKP, Philips

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Philips CL, November 2011

Customers will benefit as well from reduced cross-channel trade

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Source: SKP, Philips

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. . . which leads to both value leakage, potential

risks, and a reduction in NPS

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Key legal considerations when building a PPWF

• We need to have a logical and objective build-up of Pricing, Discounts

and Rebates, taking into account the value a Customer adds, or the

discounts they offer

• It will also drive us to invest in customers who invest in their relationship

with us, that lead us to the principle of Pay-for-performance

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Confidential CL Legal & Antitrust Section, April 2013

Antitrust & Pricing

- The Basics -

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– The basic rules:

1. Prohibition on agreements between companies that restrict competition

(cartels, information exchange, etc.)

2. Prohibition on abuse of a dominant position (market share of >40%) by a

single company

Note; Cutting antitrust corners might bring small benefits in the short term but

will do tremendous damage in the long term

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What is happening in CE Retail?

Retailers who compete on convenience, assortment, &

price are losing to the internet

Apple has reinvented consumer expectations for

physical retail

Traditional retailers have been slow to adapt to

multichannel retail

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Consumer trends are changing the retail landscape and the

way CL serves them through our Commercial policy

Online/mobile revolution and

increased transparency

Consolidation of retail landscape

Harmonization of trade terms

Trend Trade Philips

€221.16 €349,99 €219,17 €304,00 €264,00

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Consumer trends are changing the retail landscape and the

way CL serves them through our Commercial policy

Online/mobile revolution and

increased transparency

Consolidation of retail landscape

Harmonization of trade terms

More complex consumer

decision journey

Traditional retailers starting multi channels

Clear and coherent pricing

strategy

Trend Trade Philips

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Consumer trends are changing the retail landscape and the

way CL serves them through our Commercial policy

Online/mobile revolution and

increased transparency

Consolidation of retail landscape

Harmonization of trade terms

More complex consumer

decision journey

Traditional retailers starting multi channels

Clear and coherent pricing

strategy

Trend Trade Philips

Price transparency

across country borders

Shift from local to international

purchasing and decision making

Central deals

Best Better/good Deal

Volume drivers

Objectives:

• Activate with limited

marketing spend & activity

• FOB efficient distribution

Examples: Home Audio, Home

Cinema Sound, DVD players

Focus areas

Objectives:

• Drive conversion by bring

excitement back in store

• Distribution: selective or

standard

Examples: CitiScape & O’Neill,

Android Docking, Appcessories

Objectives:

• Build our brand

• Long term Selective

Distribution

Examples: Fidelio range

Heroes

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