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Pricing for Profitable and
Sustainable Growth
June 2013
Confidential
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
2
Confidential
Pricing plays a key role
in the marketing mix
• Product
• Communication
• Distribution
• Price
BUT....
3
4
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
5
…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
6
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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.
8
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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
10
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
12
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
80
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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
80
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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• 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
Confidential
Source: SKP, Philips
- 32 -
Philips CL, November 2011
Customers will benefit as well from reduced cross-channel trade
Confidential
Source: SKP, Philips
- 33 -
Confidential
. . . which leads to both value leakage, potential
risks, and a reduction in NPS
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Confidential
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 -
36
– 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
38
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
39
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
40
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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