Pricing workshop

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AFC Pricing Workshop

Basics of pricing put into practice24 November 2010

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Agenda

18h00-18h15 Intro

18h15-19h15 Basics of pricing

19h15-20h00 Continental Courier Case

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AFC and The House of Marketing: a win-win partnership

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Marketing expertise and support to AFC customer projects

Workshops to AFC members

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The House of Marketing: a strong concept fueling continuous growth

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History & Size

Geography & Nationality

• Founded in 1994 and growing• Privately owned, Belgium based company• 50+ marketing consultants / experts• Pool of experienced freelancers

• Serving clients based in Europe, Middle East and Africa• Team of consultants with different nationalities and cultural

backgrounds enabling us to easily integrate the local culture while managing the multicultural differences

Concept

Bridging

the Knowing-

Doing gap

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Located in Mechelen

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Marketing expertise delivered in both strategic and operational areas

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I. Strategic Marketing

II. Go-to-Market

• Market Intelligence & assessment• Segmentation• Branding & Positioning

• Pricing• Product/ Brand/ Category/Services

Management• Communication

III. Organization capabilities

IV. Performance Management

• Customer Process Management• Organizational design & Change

Management

• Marketing Audit • Marketing Dashboards & KPI’s• Customer Lifetime Value & Return on Marketing Investments (ROMI)

• Business & Marketing Planning• Innovation• Sustainability

• Online marketing• Sales & Channel Management• Customer Relationship Management• Customer Experience

• Marketing Audit• Marketing Coaching & Training• Employer Branding

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Clients across many different sectors

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ICT & Media

Utilities & Resources

Financial & Other Services

Consumer Goods & Retail

Healthcare & Public Sector

Transport & Logistics

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Agenda

18h00-18h15 Intro



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Name: Maarten Bosschem

Working @ THoM since 2007

Education: Commercial engineeringMaster in Marketing Management

Professional milestones:Marketing Consultant & Pricing expertise lead @ THoM• Travelled around Europe to help Microsoft with a reseller

engagement model• Assisted Electrabel with their websites, pricing &

channels• Analyzed and installed new pricing levels @ The House of

Marketing• Designed and integrated new websites for Zoo Antwerp• Launched new product for Netlog

Personal information:Live in Ghent, play soccer competitively, cannot choose between snowboarding and skiing, love electro and house festivals & parties, South-America is my favorite holiday destination.…

Who am I?

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Pricing in The NewsIncreasing price

Delhaize decreased prices of 1000 products 01/04/2010, De Tijd

Danone launches discount range of yoghurt 12/09/2008, Le Figaro

Solvay keeps on cutting costs in 201018/02/2010, De Standaard

VW stops its production for a week23/02/2009, De Tijd

* Note: Common reasons given are increased costs of raw materials and other resources., reduced sales and high inflation

Lowering priceor price image

Cutting Costs

$

$

InBev & Alken Maes increase beer prices*23/08/2010, De Tijd

NMBS increases tariffs*16/08/2010, deredactie.be

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Pricing is a huge lever to increase profit

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Total Revenue

= 100Fixed Cost = 65

Reduce Variable Costs

by 5%

Profit + 13%

Improved price realization of 5% generates 50% profit improvement*

Profit increase

Profit + 50%

Improve Price by 5%

Variable Cost = 25

Profit = 10

* Note: Assuming Average Fortune 500 Company

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48% agree that it is hard for them to introduce price increases

33% of respondents confirms that there are typically conflicting agendas or priorities around pricing decisions

THOM Pricing Survey: Pricing is top of mind & perceived as difficult to change in market

50% of marketers think their customers will become more price sensitive because of current economical situation

32% said prices will definitely have to be lowered in coming year

Only 14% of respondents said would raise prices, and in 10% of the cases, would raise prices less than the increase in costs, putting additional strain on margin

And yet… 62% of respondents say their customers perceive their product as offering a unique solution and are willing to pay a premium for it

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Source: THOM Pricing Survey 2009 – preliminary results of 700 participants

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From our experience, companies face many barriers to achieving higher price realization

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Value based pricing is about addressing these gaps to increase profitability

Target price Price realized

Organizational misalignment around pricing 1

Gaps in price execution and management (Unwarranted variance in field, reactive pricing...)

2

Offer not aligned to different value requirements of segments or desired customer behaviors

3

Not effectively communicating value to change customer’s perceptions

5

4 Failure to drive and sustain value differential

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Organizational misalignment around pricingDiffering, and at times conflicting goals, relating to pricing within same company can limit the effectiveness of pricing strategies

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PresidentPresident

MarketingMarketingFinanceFinanceR&DR&D SalesSales BU General Manager

BU General Manager OperationsOperations

“Get me both higher market share and profit . . . now”

“This is the best product with the best technology on the market. It should be worth

millions”

“This product took years to

develop and our prices need to recapture this

huge investment”

“If we bundle in more services we can justify higher prices and drive market share”

“Customers are saying our price is too high and

competitors have and lowered

price”

“We are well behind this

quarter. Let’s do what it takes to

start driving volume now”

“Special requests from customers

are killing us. It’s driving our costs through the roof”

Pricing should be addressed strategically after finding common grounds and approaches on pricing and value management

Pricing should be addressed strategically after finding common grounds and approaches on pricing and value management

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Price execution gaps: Unwarranted variance across pricingSophisticated customers use your discounting policies to gain unwarranted discounts

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5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

€0 €100.000 €200.000 €300.000 €400.000 €500.000 €600.000 €700.000 €800.000 €900.000 €1.000.000

Acceptableline

Sales revenues

Act

ua

l d

isc

ou

nt

Results

Outliers

2

Outliers

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Price execution gaps: Unwarranted variance across pricing Companies can decrease these gaps by managing pricing proactively

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Example:• End-of-quarter discounts• Meeting competition

Reactive, exception-based price management, drives prices down

Proactive, policy-based price management ties pricing to value

Example:• “Loyalty” discounts for high store share• “On-line”, fast pay, low service discounts

Develop proactive policies that set proper customer expectations

Develop proactive policies that set proper customer expectations

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Offer is not aligned to different segments, value requirements or desired customer behaviors

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High

Low

Rec

eive

d V

alue

Segment Size

A B C D

Setting price here

….leaves money on the table for these customers and communicates that value does not have to be paid for…

1

2

….and misses growth opportunities by pricing these customers out of the market

3

• Offer configuration is necessary to serve all segments more profitably• Differences in value can be captured with product variations or service

augmentation that creates natural fences between segments



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Failure to sustain and drive differential value

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Traditional way

Product

Price

Cost

Customers

Value

Value-based way

Reference

Value€ 0.85 / kg

Next bestcompetitiveAlternative

internal mixing costs

Less Defective€ 0.08

Less WIP Scrap€ 0.07

Positivedifferentiation

Less Freight€ 0.03

Fewer Material Rejection

€ 0.05

Sustain differential advantage Drive differential advantage

Change approach for new product development to ensure delivered value

e.g. IKEA

Change approach for new product development to ensure delivered value

e.g. IKEA

Innovations sustain and expand differential valueInnovations sustain and expand differential value

Product

Price

Cost

Customers

Value

Example Carbon Black Producer4

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Not effectively communicating value to change customer’s perceptions

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FeaturesFeatures Product Focus“What do we offer?”

BenefitsBenefitsApplication Focus

“Why should the customer care?”

€ Value€ ValueCustomer Focus“What is that worth?”

Revenue Drivers

CostDrivers

Better product dispersability creates

more complete mixing that...

Our cleaner product creates output

reliability which...

… reduces total raw materials used.

decreasing input cost by

… allows you to target supply – sensitive

segments. generating improved revenue of

€ 0.06 / kg € 0.10 / kg

Concept

Better articulating value helps to change price perceptions and justifying price points

Better articulating value helps to change price perceptions and justifying price points

FeaturesFeatures

BenefitsBenefits

Example Carbon Black Producer

Example

Carbon black particles

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A classic example of value selling…5

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Three elements need to be considered to pricing

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Identify how your offer compares to competition and develop

competitive scenarios

Understand cost to serve and how these

change over time

Determine value needs, perceptions and price

sensitivities of customers or segmentCosts Customers

Competition

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Costing: deciding on the most profitable activities

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Determine contribution margin1

Identify incremental costs2

Identify volume/price trade-offs3

4 Evaluate the market context to understand profit implications

Cost

Comp

Cust

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Contribution margin: variable & fixed costs

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Total Contribution=3.000

(Per Unit = € 3).......................................

PriceEx. € 10

Unit variable cost

Ex. € 7Fixed Costs

Ex. 1.500

Unit SalesEx. 1.000

Profits= 1.500

Total Contribution = Sales revenue – Total Variable Cost

ContributionMargin

= 3.000/10.000

= 30%

Company XYZ:

Contribution Margin (%) = Total Contribution / Sales Revenue

1 Cost

Comp

Cust

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Identifying The Incremental Costs

Incremental costs: Cost of production for one additional unit

Variable cost: Cost of last produced unit NOT average variable cost

Fixed costs: Most seen as incremental BUT be careful of step changes…

Opportunity costs: The contribution foregone when an asset is used for one purpose instead of another

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Cost

Comp

Cust2

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Identify relevant costs for pricing decision:

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- General & admin costs € 500 € 700

- Direct Fixed Costs € 1,000 € 1,400

- Direct Var. Costs € 7,000 € 10,350

Costs

Revenues € 10,000

Units

Total Euros

Total Costs

€ 8,500 € 12,450

Profits € 1,500 € 1,550

1,000 = 1,500

€ 200

€ 400

€ 3,350

€ 4,000

+ 500

€ 0.5

€ 1

€ 7

€ 10

Euros per unit

€ 8.5

€ 1.5

1,000

€ 0.47

€ 0.93

€ 6.9

€ 9,3

€ 8.3

€ 1.0

Full cost

€ 14,000

Costs

Revenues € 10,000

At Company XYZ, there’s an opportunity to sell 500 more units at a price of € 8/Unit.For this, additional capacity is required at a cost of € 400 and admin costs would increase with € 200. Variable production costs would only be € 6.7 per unit….

Cost

Comp

Cust

€ 0.4

€ 0.8

€ 6.7

€ 8

€ 7.9

€ 0.1

+500 (Incremental)

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Identify volume/price trade-offs: Breakeven analysis

Unit Breakeven Sales

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Total ContributionPer Unit = 3

.........................

PriceEx. 10

Unit variable

costEx. 7

Fixed Costs

Ex. 1.500

Unit Sales= 1000

Break-Even

Example

Current price: € 10

Variable cost/unit: € 7

Current Weekly Sales: 1.000 Units

How much would sales have to increase to make a 10% price reduction profitable?

% Breakeven sales change

3

Break-Even Sales = Fixed Costs / Total Contribution per unit

Break-Even Sales = Fixed Costs / Total Contribution per unit

-Δ Price%BE =

(CM + Δ Price)

-Δ Price%BE =

(CM + Δ Price)

- (-10)%BE =

(30+ (-10))= 50%

Cost

Comp

Cust

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Strategic guidelines when facing different cost types

High Variable costs

High Fixed Costs

Opportunity Costs

Low Contribution Margin

High Contribution Margin

Contribution Margin foregone

Drive Price

Drive Volume

Capacity Optimization

Cost Type Cost Type Strategic Objective

Example:

Example

Wholesale distributionOffice supplies, Technology distribution

Chemical plant, Pulp and paper. …

4 Cost

Comp

Cust

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Price competition can be a very dangerous game Think before you step into prices wars…

Sports Competition Price Competition

• The more intense, the better

• Play as hard as you can

• Goal is to win, regardless of the cost

• The more intense, the worse

• Weigh the cost of each confrontation

• Goal is to profit, considering all costs

Cost

Comp

Cust

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The value received and thus the willingness to pay is not the same across all customers

Pri

ce

Pa

id

Value Received

high

low

low medium high

medium

Missed Opportunities

UnharvestedValue

Price relative to Value

One size fits all

Cost

Comp

Cust

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Offer is not aligned to different segments, value requirements or desired customer behaviors

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High

Low

Rec

eive

d V

alue

Segment Size

A B C D

Setting price here

….leaves money on the table for these customers and communicates that value does not have to be paid for…

1

2

….and misses growth opportunities by pricing these customers out of the market

3





Cost

Comp

Cust

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Tiered offerings are creating fencesdemonstrating value and increasing profits

Marriott – Consumer choices

Dell – Consumer ChoicesDuracell

BMW - series

Cost

Comp

Cust

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Reinforce & communicate the value you provide in the market

Goal: Frame the reference

Cost

Comp

Cust

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Evaluating the 3 C’s as a first step towards strategic pricing

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Costs Customers

Step 1: Determine contribution margin

Step 2: Identify incremental costs

Incremental costs = Cost of production for one additional unit

Variable cost of last produced unitNOT average variable cost

Most fixed costs are incrementalBUT be careful of step changes

Do not overlook opportunity costs= The contribution foregone when an asset is used for one purpose instead of another

Step 3: Identify volume/price trade-offs

Step 4: Evaluate the market context to understand profit implications

Competition

Sports Competition:

• The more intense, the better

• Play as hard as you can

• Goal is to win, regardless of the cost

Price Competition:

• The more intense, the worse

• Weigh the cost of each confrontation

• Goal is to profit, considering all costs

Pric

e P

aid

Value Received

high

low

low medium high

medium

Missed Opportunities

UnharvestedValue

Price =

Value

Align value and price by:• Adapt price according to value for

customer

• Create offering aligned with segment needs

• Improve perception through communication and marketing actions

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Agenda

18h00-18h15 Intro



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Common opportunity areas we see that can result in enhanced price realization

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Price Opportunity # 1:

COLLECT MORE ON ALL OFFERINGS BY REDUCING

PRICING VARIABILITY


MAKE MORE MONEY ON DIFFERENTIATED SERVICES


IMPROVE BUSINESS MIX TO IMPROVE PROFITS

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Continental Courier Case: explanation

Company profile

Continental Couriers, the international division of a postal incumbent, was established in 1937 and is a small player within the European business mail market.

• Revenues in 2010: € 97 million• Estimated marketing budget for 2010: $1.5 million• Goals for 2011: increase sales by 20% and increase margins realized

Questions

1. Are there types of customers which are more/less profitable than others?2. Are there account managers with lower or higher margins?3. What does price band analysis tell us?

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Some customer types seem to be more profitable than others. All account managers set on average higher prices than expected (negative avg discount)

ValuesRow Labels Average of EBIT Average of MarginsCustomer 68.479 € 11%DM Handler 55.361 € 9%Postal Operator 63.846 € 14%Grand Total 67.375 € 11%

ValuesRow Labels Average of EBIT Average of Margins Average of Total DiscountYves 74.723 € 13%- 64.283 € Antoine 59.922 € 11%- 44.169 € Bart 71.136 € 10%- 46.486 € Frederik 59.462 € 10%- 32.899 € Ludovic 48.899 € 9%- 24.819 € Eva 57.634 € 9%- 24.407 € Emily 105.666 € 8%- 27.630 € Grand Total 67.375 € 11% -46741,88983

1. Are there types of customers which are more/less profitable than others?

2. Are there account managers with lower or higher margins?

Solutions case

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Step by step how to price band

Plottingdiscounts

over volume

• Select discount and volume columns• Click: insert – scatter plot• Look at the created graph

Analyzing foundresults

• Is a correlation present between volume and discount given? If so, that’s a good thing.

• Are there a lot of outliers or is everything scattered across a single band?

• Outliers mean that policies are not always adhered to. Every outlier would need to be checked and evaluated individually.

Price banding can help identify customers with a too high or too low discount

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2

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Very small positive correlation shows too many unwarranted price variances3. What does price band analysis tell us?

0 20000 40000 60000 80000 100000 120000

-250,000 €

-200,000 €

-150,000 €

-100,000 €

-50,000 €

- €

50,000 €

100,000 €

150,000 €

200,000 €

250,000 €

R² = 0.119067441202603

Discount vs Volume

Total DiscountLinear (Total Discount)

Volume

Discount

• Very small positive correlation between sold volume and offered discounts, which means discounts are given out without volume reasons

• Outliers should be investigated and pricing policies monitored

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Looking for price misalignments relative to cost or value delivered

What to do?1) Reduce Price2) Provide More Value3) Evaluate why these

customers are willing to pay more

What to do?1) Communicate Value Better2) Increase Price3) Remove Some value

Unharvested Value Accounts: 160 Missed Profit Opportunity Accounts: 299

VALUE

0

1

2

3

4

5

6

7

8

9

10

0 2 4 6 8 10 12 14 16 18 20

PRICE

L

H

L H

UnharvestedValue

Missed Profit Opportunities

Price = Value

= A Customer Account

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Pocket PricePocket Price

The List Price net of all known adjustments (discounts etc)

The actual revenues realized

The List Price net of all known adjustments (discounts etc)

The actual revenues realized

(2) About Waterfall Analysis

What it is:A price waterfall is an analytical tool that diagnoses the following:

• How much money is being deducted from the list price in the form of discounts and potential giveaways to arrive at a “Pocket Price” for a product. customer or segment

• Helps process improvement initiatives by linking quantified price “leaks” to specific points in the price management process

6.00 0.200.12

5.68 0.200.37

0.360.20

0.09 4.47

0

1

2

3

4

5

6

7

List Price Order SizeDiscount

CompetitiveDiscount

InvoicePrice

PaymentTerms

Discount

AnnualVolumeBonus

Off-InvoicePromo's

Coop Ad's Freight PocketPrice

Price (Euros)

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Waterfall analysis is usually based on data and input from interviews

Interviews

Identify possible leakages

- Salespeople- Customers- …

- Order size discount?

- Competitive discount?

- Payment term bonuses

- Yearly bonuses- Promo’s- …

Data analysis

Check correlation volume - discount

Check correlation discount - country

Correlation discount - salesperson

Interviews for yearly rebates. promo’s.

payment term discounts. etc.

Difference between list price and pocket price can sometimes even be so big that costs are no longer covered

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Closing Arguments: 3 C’s Best Practices

COSTING BEST PRACTICE

• Understand the incremental costs of product/service elements. enabling company to profitably offer multiple product/service offerings at different price levels

• Understand which sales drive incremental capacity costs and which do not. enabling company to price to profitably recover capacity cost from the former. while pricing to drive incremental contribution from the latter

• Adjust non-negotiable price levels based on the ability to improve contribution from all customers who would qualify for that price level. not based on the value of an individual deal

COMPETITION BEST PRACTICE

• Identify current/potential competitive advantages and capabilities that leverage those advantages

• Target customers (or jobs) that most value capabilities for profitable growth and focus your resource investments of service to those segments

• Anticipate and plan for changes in competitor and customer behavior that could threaten your competitive position in your target segments

• Collect and communicate competitive information to minimize the impact of negative-sum competitive confrontations

• Evaluate your competitive success by your ability to grow profits. not market share.

CUSTOMER BEST PRACTICE

• Understand how the products and services that you sell generate value for customers (revenues or cost savings). noting particularly differences between the value delivered by you and by the competition

• Sell “value delivered”. not features. and grow markets by educating more customers on the value that your company can deliver

• Segment your market for pricing by offering different product/service bundles at different price levels to reflect differences in the value that you deliver.

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Your personal point of contact

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Pricing: Maarten Bosschem

Mobile: +32 (0)15 444 015

E-Mail: [email protected]

Other: Pieter Lievyns

Mobile: +32 (0)15 444 045

E-Mail: [email protected]

The House of MarketingKardinaal Mercierplein. 2

B-2800 Mechelen

Belgium

Office +32 (0)15 444 000

Fax +32 (0)15 444 044

www.thehouseofmarketing.be

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mailto:[email protected]

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http://www.thom.eu/