Pricing Products & Servicesseeta.com/documents/PricingPradeepAnandHTC1611.pdf · President, Seeta Resources Accelerate Revenue & Margin Growth, Increase Market Valuation Oil & Gas,

Pricing Products & Services

Pradeep AnandPresident, Seeta Resources

+1 281 797 0797; [email protected]; www.seeta.com

Be Better…in Important Ways

November 2016

http://www.seeta.com/

© Pradeep Anand; [email protected]; www.seeta.com; +1 281 797 0797

Agenda

• Introductions

• Business Principles

• Briefly: Seven First “Go-to-Market” Steps

• Competitive Market Value Price

2

President, Seeta ResourcesAccelerate Revenue & Margin Growth, Increase Market Valuation

Oil & Gas, Engineering, Manufacturing, Software, Technology, Services

Bachelors Degree, Metallurgical Engineering/Material ScienceIndian Institute of Technology (IIT), Bombay, India

MBAUniversity of Houston

Adjunct Faculty MemberJones Graduate School of BusinessRice University

Mentor Startups in Houston AreaAccelerators, Incubators

U of Houston, Rice U

Helped CommercializeTwo Major Oilfield TechnologiesLWD & 3D Seismic Visualization

Sperry Drilling, Landmark Graphics

Member of Advisory BoardsU of Houston, Community, IIT Alumni

Speaker, WriterBusiness, India, FictionNovel: An Indian in Cowboy Country

Focus: Accelerate Revenue/ Margin Growth to Increase Market Valuation

• Vice-President, Marketing, Landmark Graphics

• Manager, North American Operations, Baker CAC, Baker Hughes

• Marketing/Business Development Manager, LWD/MWD, NL Sperry-Sun

• Co-Founder/President, PointCross, Inc.

• Oil & Gas – AirXChangers, Baker Hughes, Baroid Corporation, Daniel Industries, Dresser Industries, Dresser Oil Tools, Key Energy, InnovationNorway, Integrated Exploration Systems (Germany), Landmark Graphics, NL Industries, Numar, Oildex, OFS Portal, Oildex, Petrabytes, Photon, PGS-Tigress, Praxis, Preng & Associates, Sigma Cubed, Sperry-Sun, Object Reservoir (US Venture Partners), Volumetrix, WOM

• Engineering/Manufacturing — Aggreko, Astralloy, CompX, Continental Carbon, Excell Minerals, Express Integrated Technologies, Fabsco, Fort Lock, Gundle/SLT Environmental, Harsco Corporation, Harsco Industrial, Harsco Infrastructure, Harsco Metals & Minerals, Harsco Track Technologies, Hendrickson Trailer, IKG Industries, Metal Networks, MultiServ, National Cabinet Lock, Nutter Engineering, Ohmstede, OnePoint, Patent Construction Systems, Patterson-Kelley, Reed Minerals, SGB, SteelPhalt, VisionMonitor Aviation Software, Viswa Lab, Waterloo Furniture Components

• Technology — AMD, Sun Microsystems, Wipro, Syntel, WNS, LatentView Analytics, FuelFX, Gnosys, Management Controls, Metasolv, NobleTek, Avalon Imaging, Scicom, Silicus, Laversab, Facet, Zresearch

• Other — Kanaly Trust, Fort Bend Independent School District, American Sleep; Willy, Nanayakkara, Rivera & Goins

• Adjunct Faculty, Rice University’s MBA Program: Teach “Marketing in the Energy Industry”; Commercializing Technologies in the Oil & Gas Industry

• Engineer (IIT Bombay) + MBA (University of Houston)

Sin

ce 1

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© Pradeep Anand; [email protected]; www.seeta.com; +1 281 797 0797 4

Why am I here?

5© Pradeep Anand; [email protected]; www.seeta.com; +1 281 797 0797

Life of An Entrepreneur!



I am here to increase your firm’s market valuation through Pricing Excellence

•Businesses consistently undercharge for products

•80% to 90% of prices chosen are too low

•Methods used underestimate the “Competitive Market Value” of products to customers

•Today’s Focus: Discovering your Price Ceiling!

7


I am here to increase your firm’s market valuation through Pricing Excellence

•Pricing is the fastest most effective way to increase profits• 1% increase in price=8% increase in operating profit at an

average S&P 1500 company• 50% better than a 1% drop in variable costs• 300% better than a 1% increase in volume

•There’s not much room for improving profitability with operational cost controls

8

Go-to-Market Principles


Principle 1. Purpose of a Business


Deliver Value to Customers

Realize Value for Stakeholders

• Revenue Addition• Cost Reduction• Improve Return on Capital

Benefits

Value

Products Services

Pricing Effectiveness

Price on Valueand

What the Market can Bear

Get & Keep Right Customers

Principle 1. Purpose: Create Value Growth





Benefits

Value

Products Services


Price on Valueand



Principle 2. Execute on Five Gears of Growth


Market Value

MultipleX

Earnings

IncreaseMargins

IncreaseQuality Revenue

Introduce New Products

Enter New Markets

Increase Market Share

Improve Pricing Effectiveness

Take Advantage of Market Drivers

Principle 2. Five Gears of Growth



Principle 3: Aim Before You Shoot!

14

Shoot!Aim!

3. Market Value focused Go-to-Market Process


Market Value

SHOOTAIM

3. Go-to-Market Process: Answer 3Qs, Start with 4Cs to Execute 5Gs

16© Pradeep Anand; [email protected]; www.seeta.com; +1 281 797 07973Qs

4Cs 5Gs

Principle 4. Use Go-to-Market Process to Mine Your Team’s Tacit Information & Tribal Knowledge


Competition

Customers

Company

Climate

7 First “Go-to-Market” Steps

Without sacrificing your future value


Seven First “Go-to-Market” Steps

1. Where’s the money?• With your customers• With your competition

2. Why do customers buy from you or your competition?

• A unique, trusted source who delivers value


3

4

5

6

7

Today’s Focus: Improve Pricing Effectiveness

1. Where’s the money?• With your customers• With your competition

2. Why do customers buy from you or your competition?

• A unique, trusted source who delivers value


3

4

5

6

7

Step 4. Improve Pricing Effectiveness







Benefits

Value

Products Services


Price on Valueand








Benefits

Value

Products Services


Price on Valueand



Three Layers of Pricing

• Industry Strategy• Lead, Follow

• Product/ Market Strategy• Price on Value and What the Market can Bear• Price/Benefit packages for customer segments• Position and reposition products on price/benefits

• Transaction Strategy• Productive terms, conditions and schedules• Pricing architecture—perception & performance• Account level management


Three Layers of Pricing

• Industry Strategy• Lead, Follow

• Product/ Market Strategy• Price on Value and What the Market can Bear• Price/Benefit packages for customer segments• Position and reposition products on price/benefits

• Transaction Strategy• Productive terms, conditions and schedules• Pricing architecture—perception & performance• Account level management


Industries

•Oilfield Equipment

•Oilfield Services

• Iron & Steel

•Construction Services

•Power Plant Services

•Petrochemicals

•Software

Countries

• USA • Germany• UK• Canada• France• The Netherlands• Belgium• Czech Republic• Poland• Slovenia


Improving Pricing EffectivenessCase Studies

26


Improving Pricing Effectiveness“Great Recession” Case Studies

27

CountryCompetitive

PriceHeadroom Headroom Price Ceiling

(Local Currency) (Local Currency) % (Local Currency)

Belgium 30,000 13,433 45% 43,433

Czech Republic 700,000 218,500 31% 918,500

Czech Republic 700,000 301,000 43% 1,001,000

France 50,000 88,554 177% 138,554

Germany 900,000 740,000 82% 1,640,000

Netherlands 90,000 70,297 78% 160,297

Poland 50,000 10,000 20% 60,000

Poland 520,000 354,400 68% 874,400

Slovenia 35,000 14,464 41% 49,464

UK 50,000 81,302 163% 131,302

UK 22,500 21,102 94% 43,602

USA 30,000 30,260 101% 60,260

Case Study: Oilfield Equipment

• Challenge• A client’s distributor wanted a 35% discount on a $50,000 air-cooling

equipment for gas compression industry• Competition was selling a similar product at $30,000

• Solution• Brought teams from distributor and manufacturer together• Guided them through the process to determine Ideal Competitive

Selling Price/Price Ceiling!

• Result/Value• The Ideal Competitive Selling Price was about $60,000• “Pricing Headroom” was $10,000 or 20% more than then current

selling price• Distributor made efforts to get closer to $60,000• Significant impact on Net Margin and EBITDA


Case Study: Construction Services

• Challenge• Competitive price was €900,000• General belief that we commanded a 20% premium or a price of

about €1,100,000 in the market

• Solution• Brought internal team together

• Management, sales, service delivery• Guided them through the process to determine Ideal Competitive

Selling Price/Price Ceiling!

• Result/Value• “Pricing Headroom” was €500,000 or 45% more than initial

assumption of €1,100,000• Helped client in negotiating and winning the contract• Significant impact on Net Margin and EBITDA


Barriers to Pricing Excellence

• Anchors/Magnets/Bad Habits• Customer-defined price; sellers are drawn to that price• Internal cost structure• Minimum ROI expectations

• Effort/Expertise• Time/Discipline/Practice/Diligence• Technology, Customer/Consumer Behavior, Competition,

Economics, Negotiation, Finance


Barriers to Pricing Excellence

• Blind Spots• Institutional

• Limited understanding of Competitive Positions• Limited understanding of Competitive Responses• Limited Historical Knowledge• Limited Processes and Tools to Improve Individual Performance

• Business case framework• Escalation

• Individual• Innumeracy (numerical illiteracy)• Limited comprehension of product’s Monetary Value to customers in

the local context• Lack of Best Practices and Processes• Inadequate training and support in Negotiation• Limited knowledge of Economics


35% GM-10%

40.0%

35% GM-7%

25.0%

-30%-25%-20%-15%-10%

-5%0%5%

10%15%20%25%30%35%40%45%50%55%60%65%70%75%80%85%90%95%

100%105%

Vo

lum

e C

han

ge R

eq

uir

ed

Volume Changes Driven by Price Changefor Break-Even by Gross Margin

30% GM

35% GM

40% GM

Price Change

In order to Breakeven with a 35%

GM:

A 10% decrease in

price requires

40% more volume

A 7% decrease requires

25% more volume


Barriers to Pricing Excellence: Cost-Based Pricing

OptimumSale

Price

PoorNegotiations

CompetitiveAdvantages

Value toCustomer

CompetitivePricing

Poor Knowledge

FinalSelling Price

XX

Consequence: Profit Leaks


Profit Leak

33

Pricing Exercise

•A Product’s Price is $100

•Gross Margin is $35

• If we give a 10% discount, how much more volume in % would we have to sell to generate the same $35 GM?


Pricing Exercise


Pricing Exercise


New Product Failure ModesIncumbents/Value Chain Acceptance

• Underestimation of inertia in organizations and value-chain players

• Benefits to the end user do not always equate to benefits to incumbents in the buying center and value-chain players leading to resistance to adoption

• Product’s performance along the complete value chain creates risk of unexpected delays in uptake

• Buying Center and Value-Chain complexity influences adoption time



The Bright Side

•Knowledge usually exists within a company

• It is distributed across employees and other stakeholders in a business

•The Challenge: • Draw out and organize tacit and tribal information to

create astute pricing hypotheses

• Test these hypotheses with customers

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1. Golden Rule of Pricing

Pricing is a function of alternatives


Make aReasonable Profit

Pricing Sweet Spot

Value-based Market-based

Cost Plus

2. Process: The Pricing Pyramid


3. Cost-Plus Pricing

Any method used to derive a price based upon your cost to make the product or deliver a service


3. Cost-Plus Pricing Destroys Value Created by Cost Savings Efforts

$65.00 Cost$54.19

$100.00Price

$83.37

Margin35%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

$80.00

$90.00

$100.00

1 2 3 4 5 6 7 8 9 10

Cost-Plus Pricing Over Time with a Constant 2% Cost Improvement

Focus on Pricing based on Value and What the Market can Bear


4. Market Based Pricing

• Market pricing is like hurricane tracking

• Historical data is used to forecast its next location

• The exact location is not as critical as the range

• As newer data arrives the model is revised

• Need good competitive intelligence



Historical data is used to forecast the next location Pricing Curves are derived by segment, market, service to

derive Price Guidance (High, Median, Low) Trajectory and Seasonality of price are estimated for the

next set of ranges



• The exact location is not as critical as the range

• Sales Management is issued advice for negotiating deals/contracts

• As new data arrives the model is reviewed and rates may be updated

• New competitors may change the range

• A strategic opportunity may not change our pricing curves

Quarter1 Quarter2 Quarter3 Quarter4

Ceiling (High) € 999/K € 1025/K € 1050/K € 1000/K

Market (Median) € 900/K € 950/K € 975/K € 925/K

Floor (Low) € 825/K € 875/K € 900/K € 850/K

Segment 1, Service A:


4. Summary: Market Based Pricing

Market Based Pricing…

•Derived through using existing prices that worked in the market

•Going to be inaccurate, thus requires that we provide ranges of price and allow for negotiation and/or soft factors; e.g. is it $4.99 or $5.00

•Moving target, requiring updating on a regular basis

•Needs great market intelligence!



Pricing Sweet Spot


Cost Plus




Pricing Sweet Spot


Cost Plus



Customer Cares Customer Cares

Customer Cares Not!

5. Competitive Market Value-Based Price

• Define Value in Monetary Terms• Define a Relevant Alternative to your product/service• Discover its price

• Determine Ideal Competitive Selling Price (ICSP)1. Create Competitive Product Positioning2. Monetize your product/service’s Incremental Benefits compared

to defined Relevant Alternative 3. Monetize its competitive deficiencies4. Subtract (2) from (1)5. Add Price of Relevant Alternative + Result from Step 4

• That’s the Price Ceiling!


Determining Your Price Ceiling!


For the: (Target Segment)

Who Needs:

Firm/Product is a: (Category)

That provides: (List of compelling reasons to buy)

Unlike competition (Name), the company/product, also provides:

– List of key differentiators

•Features

•Benefits


Create Competitive Product Positioning

51


Value: Defining Value

Value=Benefits – Cost

52

$Cost Reduction

Revenue/Margin Increase

Return on Capital Improvement

$

Total and Net Value to Customers

• Sellers deliver total value to customers

• Buyers receive Net Value

• Buyers want to maximize their Net Value

•Use alternatives to create competitive pressures

• Practical solution is to Price on Value and What the market can Bear



Create Competitive Product PositioningAdd the Monetized Value

For the: (Target Segment)

Who Needs:

Firm/Product is a: (Category)

That provides: (List of compelling reasons to buy)

Unlike competition (Name), the company/product, also provides:

– List of key differentiators

•Features

•Benefits

Value

Cost Reduction

Margin Increase

Others

54

Value Contributors

Total Valueto Customer

Net Value To Customer

Cost of Search,Acquisition, etc.

Supplier MarginSale Price

Supplier Cost

Total Customer Cost

Features

&

Functionality

Process

Knowledge

Risk

Relationship

Market

Others


PositiveDifferentiation

Value

Our NegativeDifferentiation

Value-$

Our Added Value to the Alternative

+$

Cost of Relevant Alternative

$

ReferenceValue

The Price Ceiling!


Pricing Models

•Freemium

•Consumption

•Tiered

•Perpetual License

•Other Options


Freemium

• Value is learned through customer experience• Core services or features for "Free"• Sophisticated components at a "Premium"• Free + Premium=Freemium

• Capacity based: free version up to a capacity or number of users

• Feature-based: key features locked until customer converts

• Time-based: free trial expires after a period•Use-case: free for certain categories


Freemium

•Quickly establishes adoption and market share, gain customer insights

•But:• Make sure the market is large• Make sure people convert to premium and become

repeat users• Know your conversion rates and times for profitability• And there are network effects—more users, exponential

effects


Consumption

•Value varies with usage

•Price tied to usage

•Scale up or down at will, without significant penalty

•Useful for scaling-up products

• Lower revenue predictability

•Trade off adoption versus stable revenues


Tiered Model

• Value varies with volume of usage

• Common for Service• Seats, Modules, Data Volumes, Servers, and other scale

dimensions• Longer sales cycle but predictable revenue•Need predictable, long term relationship with customer• Segment customers by value metrics and customer

expectations of service level• Lower average customer acquisition cost•Higher customer lifetime value through renewals and

up-selling


Perpetual License

•Value varies with volume of usage

•Upfront payment + "maintenance and support" + professional services

•Assumption was 3 to 5 year payback period

•Works for:• Investments >3 years• Cost of Capital is low• Customers prefer CAPEX to OPEX


Other Options

•Packaging• Tied to product features and functionality

•Bundling• Put Complementary Products together• Leverage off "Star" products• Pulls in non-core products• Helps transition out core on premium products without

sacrificing revenues

•Capex & Opex considerations


Pricing Proficiency comes through Practice!

I hear and I forget

I see and I remember

I do and I understandConfucius



Competitive Price Ceiling!

65

Price Ceiling created by a solid, logical, reasonable and simple methodology based on:

“Price on customer value and on what the market can bear”

THANK YOU!Pricing

Products & Services

Pradeep AnandPresident, Seeta Resources

+1 281 797 0797; [email protected]; www.seeta.com

Be Better…in Important Ways

November 2016

http://www.seeta.com/

Documents

Pricing Products & Servicesseeta.com/documents/PricingPradeepAnandHTC1611.pdf · President, Seeta Resources Accelerate Revenue & Margin Growth, Increase Market Valuation Oil & Gas,