Executive | Pricing Power | 130408 | Presentatie | Onno Oldeman

Amsterdam OfficeBarbara Strozzilaan 3801083 HN Amsterdam, The NetherlandsTel: +31 (0)20 753 1253, Fax: +31 (0)20 753 1277e-mail: [email protected]: www.simon-kucher.com

Achieving Pricing PowerFlevum

Onno Oldeman, Partner

Amsterdam, 8 April 2013

Agenda

Flevum_Achieving Pricing Power

1. About Simon-Kucher & Partners

2. Top of Mind 2013

3. Achieving Pricing Power

- 1 -

Simon-Kucher & Partners


Source: Simon-Kucher

Track record of > 25 years on Smart Profit GrowthTM

Focus on marketing, pricing, sales

Global strategy consultants

- 2 -

Simon-Kucher growth



3 4 5 7 13 18 19 22 27 35 46 56 7190

112130147

165187

220248

283

354

436446

500

585

650

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

# Employees from 1985 to 2012

- 3 -

Global presence with 25 offices



Australia, SydneyChina, BeijingJapan, TokyoSingapore, Singapore

USA, BostonUSA, MiamiUSA, New YorkUSA, San FranciscoBrazil, São PauloChile, Santiago de Chile

Italy, MilanLuxembourg, LuxembourgPoland, WarsawSpain, MadridSwitzerland, Zurich The Netherlands, AmsterdamTurkey, IstanbulUnited Kingdom, LondonUAE, Dubai

Americas Europe/Middle East Asia/South Pacific

New offices in 2013New offices in 2013

Austria, ViennaBelgium, BrusselsDenmark, CopenhagenFrance, ParisGermany, BonnGermany, CologneGermany, FrankfurtGermany, Munich

Santiago de ChileSantiago de Chile

São PauloSão Paulo

- 4 -

Leading the pack in marketing & sales


* Maximum 500; Source: manager-magazin August 2007/IMB & 2011 (Institute for Management & Consulting); Survey of 264 Top Managers

Rank Consultancy Score*

1 Simon-Kucher & Partners

2 Boston Consulting Group

3 McKinsey & Company

4 Bain & Company

5 Roland Berger

Best Consultancies in "Marketing & Sales"

401

370

346

344

338

- 5 -

Pricing

Commercial strategy Marketing

Sales & CRM

Clear focus: Smart Profit Growth



Stra-tegy

Sales & CRM

Marke-ting

� Market strategy

� Brand and assortment strategy

� Channel strategy

� Pricing strategy

� Competitive strategy

� Brand portfolio management

� Assortment optimization

� Innovation management

� Segmentation

� Marketing efficiency

� Value-based pricing

� Pricing process and organization

� Innovative pricing models

� Price architecture and trade terms

� Price communication

� Price increase programs

� Key account management

� Sales force effectiveness

� Management of distributors

� Promotion management

� KPI’s & incentive systems

� Negotiation training

Pricing

Smart Profit

Growth

- 6 -

How others describe Simon-Kucher



"…world leader in giving advice to companies on how to sell their

products…"

"…the world's leading pricing consultancy…"

"Simon-Kucher is the world’s leading pricing consulting firm."

"…world market leader on pricing…"

- 7 -

NL

USA

Simon-Kucher thought leadership



JapanUSA NL Hungary

Korea Germany GermanyChina

USA Brazil France

UK

Spain

Books (selection) Articles (selection)

- 8 -

Simon-Kucher works side by side with industry leader s


Source: Selection of Simon-Kucher references

Financial Services

Automotive Retail/CG

Life Sciences

Software / Technology

Media

Industrial Goods

Logistics / Travel

- 9 -

Industry specific pricing challenges we encounter ( 1/3)



Wholesale / Retail:

� How to influence, measure and capture the value per product category?

Consumer Goods:

� How to optimize pricing & trade terms across customers, channels and countries?

- 10 -




Industrial Goods:

� How to optimize list prices and discounts for >100,000 products and >3,000 customers?

Ingredients:

� How to structure product management and key account management?

- 11 -




Media:

� How to counter the discounting magnet in cross-media advertising?

Financial services:

� How to structure and monetize your products and services?

- 12 -

Agenda



2. Top of Mind 2013


- 13 -

Achieving profitable growth: Top of Mind 2013


Pricing power

Dedicated pricing function

C-level involvement

- 14 -

The dilemma


Source: Global Pricing Survey 2012

Largely exhausted

Profit = Price � Volume - Cost

Limited possibilities

Not yet optimized

- 15 -

Case example

What is the most effective profit lever?



Price

€60

1 m

€100

€30 m

Variable unit costs

Sales volume

Fixed costs

- 16 -

Profit driver

Price

Old

€60

1 m

€100

€30 m

Variable unit cost

Sales volume

Fixed costs

Price as the most effective profit lever


* Assuming ceteris paribus; Source: Simon-Kucher

New

€57

1.05 m

€105

€28.5 m

A 5% improvement of …

+50%

Profit

New

€13 m

€12 m

€15 m

€11.5 m

... leads to a profit increase of …

+30%

+20%

+15%

- 17 -

Obtaining pricing power



Pricing power is the ability

of a company to get the

price it deserves for the

value it delivers.

- 18 -

Pricing power


Source: Simon-Kucher research

"The single most important

decision in evaluating a

business is pricing power ."

Credit Suisse: Pricing Power Ranking Warren Buffet

- 19 -

Pricing power: Strong impact on profits



Low pricing power reduces profits by

25%

Average profit margin of last three years (index)

100

75

Companies with high pricing power

All others

- 20 -

(Reported) reasons for low pricing power



1. "We are a commodity"

2. "We are a distress –purchase / low involvement product"

3. "Our competitors are stupid"

- 21 -

"We are a commodity"… so?



₤1.55/litre ₤4.52/litre₤0.50/litre₤0.01/litre

- 22 -

"We are a low involvement product"… so?



Sensor Excel"1G"

Sensor 3"2G"

Mach 3"3G"

M3 Power"4G"

Fusion"5G"

Fusion Power"6G"

Blades 2 3 3 3 4 4

Electric – – – �� – ��

Trimmer – – – – ��

Priceat launch

€7.99 €9.99 €9.99 €14.99 €15.99 €19.99

- 23 -

5%7%

88%

We did – intentionallyWe did – unintentionally

Who started the price war?

"Our competitors are stupid"… really?


Source: Simon-Kucher & Partners Global Pricing Study 2012

Yes58%22%

19%

Is your company currently engaged in a price war?

No- there is a price war, butwe are not affected

No- there isno price war

- 24 -

1. No systematic pricing approach

2. Strategy and leadership deficits

3. Insufficient pricing know-how (methods, people, "real" value pricing)

Real reasons for lack of pricing power



- 25 -



Pricing power


C-level involvement

- 26 -

No clear pricing ownership = chaos



"I know what our competitors charge"

Pricing complexity is a fact of life, because it almost always involves:

… too many people

… too many opinions

… too many interactions

… too much data

… too little time

Sales

"I know what our costs are"

Finance

"I know what our customers say"

Value pricing

Marketing

"I know how great our product really is"

Product

Low prices

Target margins

Brand premium

- 27 -

Dedicated pricing function improves price performan ce



…27% more often "high pricing power"

…15% more often successful price increases

…11% higher price implementation success

…14% more often optimistic EBITDA expectations

Pricingpower

Priceincreases

Price implementation

Profitable growthexpectations(increase)

127

100Others

With pricingfunction

Companies with dedicatedpricing function are/have…

115

100Others


111

100Others


114

100Others


- 28 -

Pricing organization: Where should it sit?



High hierarchy level

Signaling

Decision competence

Distance to customer

Long decision flow

Low hierarchy level

Customer proximity

Flexibility

Customer proximity

Flexibility

Missing co-ordination

Inconsistencies

Bundling of pricing concepts

Focus on total company goals

Distance to customer

Missing flexibility

Missing decision competence

Central

Decentral

- 29 -

What is the right type of pricing organization? It d epends



Central pricing Hybrid Divisional/regional pricing

� Strong, global brands, transparent prices

� High risk of arbitrage

� Need for standardization of pro-cesses to increase pricing quality

� Local inputs to capture different local willingness to pay

� Market differences/regulations between decentralized units too different for standardized pricing

� High standardization degree of pricing processes to ensure consistency

� Local inputs to differentiate local willingness to pay

� Central price control important for brand image

� Brand assures same quality everywhere

� Easy for consumers to buy products elsewhere

� High international transparency of prices

� High arbitrage risk

� Central pricing competence center within marketing

� Regional pricing units in contact with national sales

� Heterogeneous business units (e.g., healthcare vs. office)

� Low level of standardization possible

� Pharmaceutical wholesaler

� Different health systems by country, high need for local differentiation

- 30 -



Pricing power


C-level involvement

- 31 -

C-level involvement drives pricing performance



Pricingpower

Priceincreases

Price implementation

100Others

C-level

…35% more often "high pricing power"

…18% more often successful price increases

…30% more often optimistic EBITDA expectations

…7% higher implementation success

Companies with increased C-level involvement in pricing are/have…

118

100Others

C-level

107

100Others

C-level

100Others

C-level 130

135

Profitable growthexpectations(increase)

- 32 -

Porsche & General Motors: different leaders, differ ent strategies


* for Porsche partly estimated

"We have a policy of keepingprices stable to protect ourbrand. When demand goes downwe reduce production but don’tlower our prices ."

Wendelin Wiedeking, CEO Porsche 1992-2009

Year

Operating margin %*

-15%

-10%

-5%

0%

5%

10%

15%

20%

'00 '01 '02 '03 '04 '05 '06 '07 '08"Fixed costs are extremely highin our industry. We realized thatin a crisis weare better off with loweringprices than reducing volume."

Richard Wagoner, CEO GM 2000-2009

- 33 -

Clear direction from top management



Søren Skou,CEO Maersk Line

"In terms of size and market share we are where we want to be.Therefore our strategy changes:From 'growing faster than the market' to 'grow in line with the market'.We hope that our competitors are also satisfied with their position. If that is not the case, we will defend our position with all means."

FTD, March 2012

- 34 -

Maersk: Turn around after change of top management


Source: Bloomberg April 25, 2012

"Back to black" program:

� Stop market share growth goal

� Capacity reduction

� Systematic price increases

� Clear communication of new strategy

0

100

200

300

400

500

600

700

800

900

1000

16-8-2010 16-2-2011 16-8-2011 16-2-2012

HARPEX (charter rates)

Entire boardof Maersk

exchanged

- 35 -

Leaders' task: Sales can't always be "nice"



You have to get what you deserve!

... when he sees your service offer?

... when he sees your price?

How should your customer react ...

- 36 -

Summary


Obtaining pricing power brings you higher profits. Look for the real reasons of missing pricing power and develop the solutions.

A dedicated pricing function significantly improves price performance. Setting the right pricing organization depends on your ambitions, culture and strategy (e.g. on hierarchy and customer proximity).

C-level involvement severely increases the ability to successfully implement pricing improvements. C-level should provide direction and set the example (e.g. Porsche, Maersk).

- 37 -

Agenda



2. Top of Mind 2013


- 38 -

Where does it go wrong in daily practice?



"We don’t really know what premium we

deserve"

"Our prices are cost-plus and mainly

historically grown"

"Do we charge for everything we

deliver?"

"We communicate and sell too much on price, instead of on

value"

- 39 -

"With our stupid competitors attacking

us, we end up in a price war"

Building Pricing Power calls for action on three co re disciplines



Typical deficiencies and leakages

What the customer is

willing-to-pay…

… and what we actually get

Product offerings that do not fit the

market requirements

Prices which are either too high or

too low

Value not defended, discounts based on gut-feel and ‘fear’

Portfolio & pricing strategy

Value based pricing

Value selling

- 40 -

Pricing Power Framework



� Segment market and customer base, clarify price strategy

� Determine value drivers per segment and willingness-to-pay

� Differentiate offering, pricing & sales approach

1

2

3

� Develop value based pricing approach , tools and rules

� (Un)bundle portfolio to maximize willingness-to-pay

� Reinvent your price model and metric

4

5

6

� Optimize value selling competence , from gut-feel to structured decisions

� Optimize value communication , set anchor prices

� Improve pricing control , setup KPIs and monitoring framework

7

8

9

Simon-Kucher & Partner’s Pricing Power framework

Value pricing awareness and capability development

Value selling

Value based pricing

Pricing & portfolio strategy

- 41 -

Know the value: Understand your premium and brand s trength



� New filter innovation

� Structured value-driver analysis

� Price increase in prices in 3 steps by 36%

� Marginal loss of market share

Project example

- 42 -

Identify the key value drivers and evaluate perform ance



� …

� …

� Quality of content

� Search engine usability

� Archive function

� Content depth

� Author reputation

� Price level

� Flexibility of offering

� After sales process

� …

Identify value drivers Rank on importance Assess performance

Customer X Competition

4,2

4,1

4,1

3,7

3,5

3,1

2,6

1,6

1,6

1,6

1,1

- 43 -

Project example

Use customer insights to challenge internal beliefs



Strategic Disadvantages

StrategicAdvantages

ConsistencyOver-

Performing

Relative Performance

Impo

rtan

ce

9

1

2

3

4

5

6

7

8

10

11 12

13

14

Low High

Low

Hig

h

Strategic Disadvantages

StrategicAdvantages

ConsistencyOver-

Performing

Impo

rtan

ceRelative Performance

2

1

8

9

10 4

11

6

3 14

5

7

Low High

Low

Hig

h

Customer perspectiveInternal perspective

6 Price

�

Project example

- 44 -

Assess premium and brand strength per segment



0%

10%

20%

30%

40%

On-pressperformance

End-useperformance

Serviceprograms

Technicalsupport

Speed ofdelivery

On-timedelivery

Price

% of sales

Relative importance of value driver

Want price only 23%

Want no risk 9%

Want the best 29%

Want it now 39%

Size of customer segment

Project example

- 45 -

Develop a differentiated proposition for each client segm ent

- 46 -

Price

Volume

Willingness-to-pay notexploited!

Customers notreached yet!

Price

‘One-size-fits-all’ Price


One-size fits all price

Volume

Super Eco

Super Premium

Differentiated Prices

Eco

Standard

Premium

Differentiation= from rectangle totriangle

Differentiated price

Differentiation works!

Flevum_Achieving Pricing Power - 47 -


DUS �� BAR

www.klm.de:€492 per seat

www.klm.nl: €284 per seat

Private tariffs

SIM-only 50 : €2.95/month + 6 ct/min. (incl. 50 min.)SIM-only 500 : €17.95/month + 4 ct/min. (incl. 500 min.)

Bottle of water

Airport : €3.45 per liter

Supermarket : €0.50 per liter

B2B : €4.10 / consignment

C2X: €8.90 / consignment

< 10kg, Germany

Combine three pricing methods



Cost-plus Competition-oriented Value-based

Challenge: just costs are high or low, the perceived value is not

Challenge: determine your main competitor and benchmark

Challenge: understand willingness-to-pay and price elasticity

Costs

% mark up

€ 160

€ 100

€ 40

Competitor product A

Competitor product B

Competitor product C

Our productVolume

Low elasticity

High elasticity

Price level

- 48 -

Pitfall of cost-plus pricing, potential of value pr icing



Non-metallicpaint

If the automotive industry sets prices according to the cost-plus approach,metallic paint would cost €30 – but the automotive i ndustry does not!

Power/Value Pricing

Willing-ness

to pay

Cost

770 €

20 €

Cost-Plus

Profitpotential

Metallicpaint

- 49 -

Issue with competitive pricing: price wars


"They are aggressive and

want to steal market share!"

Company

A

Company

B

"We have to defend our volumes at all

costs."

Aggressive price behavior

of market leader

Fear of market leader to loose

volume

Followers feel threatened

Price reactions by followers to

defend market share

Crisis leads demand to drop

Vicious cycle

Culture of market share Vicious cycle of price decreases

Price the value: Do real value pricing



€83,000

€54,700

911

Boxster S

Success factors:

� "Don't follow the crowd!"

� Know and quantify thevalue drivers!

- Design

- More power (15hp)

- Handling

€60,300Cayman S

Project example

- 51 -

Measure willingness-to-pay, use multiple sources an d methods



IndirectConjoint analysis

van Westendorp

Data analysis

PriceStrat/ ComStrat

Expertknowledge

(PriceStrat)

Historical transaction data

Benchmarks: SKP projectexperience

Available competitor information

Gabor Granger/ Neuropricing

Merchant questionnaires Sources

Methods

- 52 -

Re-invent your price model



� Change of price model: from price per tire to price per km

� Customer perspective: costs are aligned with revenue basis (per km)

� Customer gets stable price per km

- 53 -

Value-based price metric: Enercon charges for the yi eld


� Founded in 1984; Revenue: $ 4 billion;42% of patents world wide in this field.

� Enercon partner concept: Price of service contract depends on yield of wind park; 86% of customers sign 12-year service contract.

� Price for wind tower depends on wind situation in specific region.

Use pricing to differentiate or to redefine revenue models


P = total price; Min = minutes; PPU = pay per use; MRC = monthly recurring costSource: Simon-Kucher project experience and analysis

Pay per use Buckets Flat fees

PPU with max. charge

Pro-gressive /decliningPPU

PPU w/ or w/o MRC

Incre-mentalbuckets

Bucket + PPU w/ max charge

p

Min

p

Min

p

Min

Bucket +PPU

Pure flat fee

Fair-use flat fee

Adaptive flat fee

p

Minp

Min

p

Periods

p

Min

p

Min

p

Min

Examples simple PPU: � Price per min. / MBExamples innovative PPU:� Price per session � Price per workplace

� Competitive intensity

� Product comparability

� Price structure differentiation

� Customer's (wrong) estimation of usage

� Product life cycle stageExamples: � Full flat� Adaptive flat� Company flat

Examples: � Minute buckets� GB buckets� Increment buckets

Influencing factors

- 55 -

And create clever bundles to boost earnings per cus tomers


* WtP: Willingness-to-pay, ** VC: Variable cost

Budget 150 €

Quantity

€

WtP

VC

120 € 50 €

€

WtP*

VC**

Quantity

ProfitProfit

Hotel room Dinner

Quantity

€

VC

WtP

150 €

Profit

Room & dinner

Win-Win situation

� Customer has a price advantage of nearly 12%

� Hotel’s profit increases by 25%

Bundle

- 56 -

Use multiple bundles to address differences in cust omer needs



Basic Standard Premium

� Bug fixing � � �

� Correction of typographical errors � � �

� Helpdesk (response time) 2 days � 12 hours � 2 hours �

� Upgrades bi-annually � quarterly � as released �

� Updates bi-annually � quarterly � as released �

� Additional service fees/hour € 35 � € 30 � € 25 �

� Remote technical support (localization) 100 hours � 250 hours � 500 hours �

� Remote technical support (exploitation) 100 hours � 250 hours �

� Maintenance services bi-annually � quarterly �

� Monitoring systems logs �

� Project Management of content activities �

� Software training �

� Software consultation �

Annual SLA payment € 50,000 € 70,000 € 90,000

Recommended

- 57 -

Project example

Sales reps will tell you: "Every deal tells its own story"

- 58 -


… it's a very small customer and from the

pharmaceuticals industry where you can

always get a little extra…

… their purchaser was really tough. We had to

give in a little…

Selection of responses from sales reps.

"Which factor had the biggest influence in

determining the deal's final price?"

… we had to lower the price because of

increased competition…


Product-specific base

price

Product specific

Customer specific

Order specific

Targetprice

Peer Pricing: Definition of price drivers as basis for a structured price logic

Target prices are calculated sequentially by applying mark-ups / discounts for defined price drivers.A defined price corridor serves as a negotiation space for the sales reps.

- 59 -Flevum_Achieving Pricing Power

� Differentiation of prices according to product, customer and order related factors

� Realized prices as reference points for future price setting

� Expert judgment as reference for future price setting

…

Format

Specialty

Target price

Thickness

Basis

Customer potential

Customer size

Payment terms

…

…Small order surcharge

Min. price

Product price

Customer price

Order price

IndustryOrder

volume

Achiever price

1 2 3

Project example

To boost win rates a systematic pricing & value selling process is required

- 60 -

Source: SKP Project Database


Base price

Product specific price 1

List price

Product Value

Client price2

List price

Client Discount

0

Final Price

Order Surcharge

Net Price

Order specific price

Net Price

3

e.g.- Thicker beams- Extra protection

e.g.- High volume client- Good payment terms

e.g.- Small orders- Specials requiring research

Project example

Sell value: Anchor prices highly influence purchase decision



68%

32%

Base scenario (print implicit) Alternative scenario (print explicit)

16%

0%

84%

- 61 -

Steer behavior through right value communication…



Price communication

1 month

29,95 €

3 months

59,85 €

6 months

95,85 €

1 month 3 months

You save33%

6 months

You save47%

Select 1 month

Select 3 months

Select 6 months

19,95 €per month

29,95 €per month

15,95 €per month

0%

10%

20%

30%

40%

50%

60%

Changes in sales volume

Time

Volume distribution (%)Introduction of new

price communication

3 months

1 month

6 months

Before

After

Project example

- 62 -

…and value selling



"If needed, could you also deliver on short notice the next day?"

"No problem – this is covered in all of our service contracts."

Before…

Customer

Cost mindset:"This doesn’t cost us more,

so the customer doesn’t have to pay more!"

…after

"Of course, it will cost €30 more for the added

planning work."

Value mindset:"Service is important to the customer, so he should be willing to pay extra for it."

- 63 -

Project example

Four steps to build Pricing Power



� Segment market and customer base, clarify price strategy

� Determine value drivers per segment and willingness-to-pay

� Differentiate offering, pricing & sales approach

1

2

3

� Develop value based pricing approach , tools and rules

� (Un)bundle portfolio to maximize willingness-to-pay

� Reinvent your price model and metric

4

5

6

� Optimize value selling competence , from gut-feel to structured decisions

� Optimize value communication , set anchor prices

� Improve pricing control , setup KPIs and monitoring framework

7

8

9

Simon-Kucher & Partner’s Pricing Power framework

Value pricing awareness and capability development

Value selling

Value based pricing

Pricing & portfolio strategy

- 64 -

Thank you!


Date post:	03-Nov-2014
Category:	Business
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Executive | Pricing Power | 130408 | Presentatie | Onno Oldeman

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