Date post: | 04-Apr-2018 |
Category: |
Documents |
Upload: | clientresources |
View: | 215 times |
Download: | 0 times |
of 19
7/29/2019 Price Tools
1/19
Abbey Road [email protected] -1-
What Does a Fully-Equipped Pricing FunctionLook Like, and Do You Know the Best Short-Cuts?
Miami, FL October 30, 2008
White Paper
203/972-0000www.abbeyroadassociates.com
7/29/2019 Price Tools
2/19
Abbey Road [email protected] -2-
Summary: The right price tool ties to the market issues and context
The purpose of a tool is to link internal decision-making to market opportunities.
There are price tools for all elements of pricing many choices Do not pick a tool because it presents itself first, or is the most all-inclusive.
Often, tools are more expensive than expected, and deliver less than promised.Starting small helps focus tool:
On business mission, strategy and overall price strategy
To the skill set and organizational context To the tasks and resources available
Off-the-shelf tools offer advantages, but also disadvantages. Look closely at thealgorithm or methodology of the tool compared to your business.
Some high-impact, low resource tool choices include:
Improved costing to fit products, segments or customers Comparison to competitor offers
Bundling
Risk of loss
Demand Curves
7/29/2019 Price Tools
3/19
Abbey Road [email protected] -3-
The purpose of a tool is to link internal decision-making to marketopportunities
The purpose of a tool is to link internal decision-making to market opportunities. We believemarket pricing tools are complementary to, but distinct from, internal management tools:
Good agreement on need for tools on the left. Less universal on right
Internal Management Tools
General Ledger, e.g.revenues and standard
costs
Cost accounting forprojects and products
Sales force Management
Customer records, e.g.help desk, usage, etc.
Market Insights andOpportunities
Segments
Price sensitivities
Value and decision-process
Branding and message
Competition and channel
Hooks
7/29/2019 Price Tools
4/19
Abbey Road Associates
Choice of where to apply the tool what part of pricing?
There are price tools for all parts of the pricing constellation
Competitors
ValueCreation
PriceCapabilities
and Structure
Brand
PriceLevel for
Each
Segment
7/29/2019 Price Tools
5/19
Abbey Road Associates
The trick is a cohesive approach to tool selection
Reduce
Churn and
Improve Margins
Extend
and
Grow
Business
Objectives
PriceSegmentsand
Drivers
PriceStructure,Tools andInitiatives
SegmentA.
New
Segments
Global
Price
Mngmt.
Cultivate
Current
Base
Seg-ment
B.
Segment C.
Most of thetool
discussion
happens uphere with littlereference to
foundation forbusinesssuccess
7/29/2019 Price Tools
6/19
Abbey Road [email protected] -6-
How to deploy a tool? The hazards
Tools vary in the effort, discipline, authority and skill to use them.
Deploy tools where they will work. Avoid a mis-match between a tool and its users!
Revenues, Costs and Margins
(Done Right)
RevenueOptimization
Customer
Behavior
Tracking andDiscipline
EffortWhere arewe today?How big a
leap isfeasible?
7/29/2019 Price Tools
7/19
Abbey Road Associates
Centralization vs. distributed pricing impacts tool implementation
Who is more in touch with the market and who canbe more in touch with
the market headquarters or operating units? How do cultural issues, e.g.: flexibility and creativity, play a role?
What is the role of a matrix organization?
Can brand, and brands impacts on pricing, be localized?
How doestalentvary between HQ and divisions?
Will HQs strategy be implemented at divisions and regions, or is it NIH?
What are risk management objectives which cannot be distributed?
Which is more important, global or local competitors?
Is there trust among the internal players?
What sort of tools are required? Can they be templated?
7/29/2019 Price Tools
8/19
Abbey Road Associates
# Products x # Prices per product x % Major price changes/year
Number of Products per Price Manager=
Headcount Needed
Also linked to this choice are resources requireda rule of thumb
Pricing resources can be distributed, or centralized. Stockholders may benefit from either,but rarely do companies see the choice as neutral.
Often, there is noattempt to actually quantify what needs to be done. We find a good rule ofthumb for staffing and FTE estimates asks how many prices there are to be managed:
Roughly, we find that one middle level manager can handle from 2 to 70 majorpricechanges per year. (Bids not included).
Helps compare process improvement to tool investment.
7/29/2019 Price Tools
9/19
Abbey Road [email protected] -9-
Off-the-shelf, or Self-Build?
Questions and pattern:
Regarding Off the Shelf
How does it fit your needs?
Does it exceed your actual needs?
Is it cost effective?
Have you fully incorporated costsof readying data?
Will it work for you?
Can you trial this in-house?
Can it be customized?
KEY
Benefit
Cost
$
BetterAdm
in.
Improved
Data
Enhanc
ed
Analys
is
Cost/Benefit Trade-Off
7/29/2019 Price Tools
10/19
Abbey Road [email protected] -10-
Factors for Choosing Off the Shelf tools
Some well-developed off the shelf tools, but we find the best are those which grew up in anindustry vertical. Applications claiming to apply everywhere are suspect. (Its the algorithm,
Stupid) Sometimes buyers forget the mission of pricing, focus on secondary detail.
Some factors in choosing:
The Business
The Business Objective,e.g. Promotions vs. List
Price?
Degree of change inMarket?
How many transactions?
How many segments?
Transaction value?
Availability of Data
Quality of Data
The Tool
Looks at history, or does it usetrials?
What sort of sample does it require(at what cost?)
Can it manage a messy market,
e.g. competitors rationale?Can it handle your data
idiosyncrasies? How expensively?
Overall cost of tool?
Match to long run pricing needs?
7/29/2019 Price Tools
11/19
Abbey Road [email protected] -11-
Partial list of tools
Tools
Basic: revenue and cost estimation
Market segmentation demographic, behavioral, needs,lifecycle or evolutionary
Competitive strategies, e.g. War Games, patents, etc.
Price strategy and Demand curves ( elasticity)
Value measures and proxies, e.g. in some markets usage= value
Bundles design and product tiers
Intro pricing strategies
Risk of customer loss
Price structures, e.g. fixed vs. variable
Channel impacts
Messages and brand
Tactical and administrative tools
Elasticity and trials
Tracking
Promotions
Focus ofmany
off-the-shelftools
7/29/2019 Price Tools
12/19
Abbey Road Associates-12-
Case Study: Tool for Adjustments to Standard Costs
Many service businesses enjoy gross margins of 30%+, and cost of incremental sale dollar isvirtually zero, e.g.: electronic services, software licensing, etc.
For rest, need to get the costing right. More important than getting cost to the third decimal
point is understanding which costs apply when:
Std Mnfcg.Cost
Adjusted
Std Costs
Training +Literature
CarryingCosts
ProductDevelopment
Warehouse+ Storage
ToolChange-
Over Costs
SKU Specific Costs
Sum ofAboveCosts
Credits,Write Offs
etc.
SpecialServices
andCarrying
SellingCosts
Freight toCustomer
Customer Specific Costs
+
SKU 123
SKU 234etc.
StandardAdjusted
Costs
Deal Specific Costs
OR
OverheadAllocations
MINUS
7/29/2019 Price Tools
13/19
Abbey Road [email protected] -13-
Case Study: Value and cost comparison to competitor
Where competitive, channel and customer economics are complex, a toolmodeling costs outside your company may be the only way to address pricing:
Example of Client, Transport Provider
Medium
Large
Small
Intra city Regional Hub and Spoke
CLIENT 10% CostAdvantage
COMPETITOR wasAdvantaged
TIE in costs
and Efficiency
TIE in costs
and Efficiency
CLIENT 10% CostAdvantage
CLIENT 30%+Advantaged
Depends
7/29/2019 Price Tools
14/19
Abbey Road [email protected] -14-
Case Study: Bundle design-- the market requires coherent bundle design
Many products are really bundles consisting of different benefits and services.
Customers and agents evaluate bundle elements rationally. They value coherent bundles,where all elements are complements to the core (i.e. elements they believe apply to theirneeds) and negatively value elements which do not complement the core element.
We have found that correlation techniques accurately predict the value of bundle elements.Often, this technique out-performs expert judgment:
For one client we developed a bundle of legal information in competition with their own
editorial staff. Compared to that expert bundle, we cut the number of bundle elements,and increased the price materially. The client released both bundles to the market, andour version outsold the alternative bundle 2X. Offered less, doubled revenue.
This technique may allow you to trim your products of low-value benefits, or any componentwhere the market value of the benefit is less than cost:
Market Value of Component < Cost to Company = Candidate for Elimination
7/29/2019 Price Tools
15/19
Abbey Road [email protected] -15-
Case Study (Cont.): Tool for bundle design
All structured bundles have a core, useful add-ons, marginal add-ons, and often elementswhich destroy value (= substitutes -- people hate to pay for substitutes or elements they do
not think they need, e.g. gastric by-pass?)
Bundle Taxonomy
Core
Solid Add-Ons
Marginal Add- Ons
Bundle Taxonomy
Core,
e.g. PPO??*
Solid Add-Ons
Marginal Add- Ons
Negative Value
Gastric By-Pass Coverage?
Personal Care FSA?
e.g. Eye Care?
Possibly helpful incontrolling adverseselection bundle
based segmentationcan check if it is anundesirable element
7/29/2019 Price Tools
16/19
Abbey Road [email protected] -16-
Case Study: A price scorecard takes market events and rates risk of
cancellation due to price identifies where price matters
20% 13%
38% 29%
Price and Risk(Distribution of Accounts)
Price KeyFactor (PriceRelevance
Scorecard >400)
Not At Risk
(Score 200)
At Risk
(Score >200)
Price not a KeyFactor (Price
Relevance Score
400)
Loss Rates by Scorecard Output -- Complete Scores
0.00%1.33%
3.02% 3.81%
0.00%
50.00%
1 00 .0 0% 1 00 .0 0% 1 00 .0 0%
0%
20%
40%
60%
80%
100%
120%
0 100 200 300 400 500 700 800 900
RISK FORMULA SCORES
%C
ANCE
LLATIONS
Price Risk Scorecard (Results)
Low price risk
Not AtRisk
(Score 400)
At Risk
(Score>400)
Price Relevance
Scorecard
7/29/2019 Price Tools
17/19
Abbey Road [email protected] -17-
Case Study: Demand Curves can drive new product pricing
Segments should add-up to the range of observed pricing behaviors, as demonstrated by ademand curve. Demand curves will tell Product Development the estimated long term
sales volumes at different price levels. Demand curves need not be static. Demand curvesdiffer from elasticity estimates.
Useful strategic tool, e.g. for New Product Development. Example of an actual demandcurve:
Online Population
$XXX/yr.
$1X.X Million
Willingness to Pay(Disguised)
Price
? Battle-ground
7/29/2019 Price Tools
18/19
Abbey Road [email protected] -18-
Conclusion: The business context determines the price engines (tools)
Rank-order the price tools by impactdont put all your eggs in one basket!
Big software projects provide more than just a tool. Brings attention to pricing, but often at a
high cost
After you look at the total costs, perhaps you should try building a tool in-house
Different tools do different jobs. Not all work. Dont confuse different functionalities within a
tool
No standard tool-kit, but this presentation contains some of the usual suspects
Tools work in context. Consider: Needs
Business objectives
Skills
Organization
The best tools link internal decision-making to market opportunities. This does mean theyneed market information.
Many tools try very hard to avoid the need to gather external information, e.g. Elasticity versusDemand Curves. Creativity can often surmount data limitations, and works best with in-housecustom tools.
7/29/2019 Price Tools
19/19
Abbey Road Associates
About Abbey Road Associates
Abbey Road Associates is a business consulting firm specialized in pricing. We
offer highly evidenced recommendations on tactical and strategic pricingrecommendations to companies across a wide range of industries
Recent assignments have been in the software, information services,entertainment, financial, telecom, consumer goods, publishing andtransportation industries. They have focused on new price structures, newproduct pricing, pricing processes, discounting reduction/improvement, new
market penetration, bundle configuration and pricing, countering price attacks,and various aspects of price strategy implementation. We do not do systemswork.
Our principal offices are at 75 Thayer Drive, New Canaan, Connecticut 06840.Tel: 203/972-0000.
Please visit our website at www.abbeyroadassociates.com which describes our
work and contains much of our intellectual capital. Please ask us for copies ofour articles in various leading business journals.
Abbey Road Associates was founded in 2001, and currently consists of sixprincipals and several associates.
http://www.abbeyroadassociates.com/http://www.abbeyroadassociates.com/