customer satisfaction & value creation - icf · 2013-01-24 · customer satisfaction &...

Customer Satisfaction & Value Creation – Kai Bandilla– page 61

Ladies and Gentlemen, it’s a great privilege for me to have the opportunity to share with you this afternoon some of our experiences on the issues of customer satisfaction and value creation. In my presentation I would like to talk about:1.Value extraction: What’s at stake? 2.How to measure customer value?3.How to realize it?

Customer Satisfaction & Value Creation

Kai BandillaManaging Partner

Simon . Kucher & Partners, France


?+ + - / o

Value Delivery (What value do we deliver ?)

Value Extraction(How do we get

the counter-value?)

The challenge : value extraction

Corporate strategy Price

When I look today at the offers proposed by each of the companies present in this room, I see players providing value. Indeed, when browsing through your internet sites, I can read of the many efforts you employ to satisfy your customers: New products and new supply chain services to name just a few of them.The crucial question is however whether each of you manages to get value extraction right i.e. to get back the value that you deserve from your clients. This is what my speech will be all about.


Price as the most effective profit driver for the cable industry

+ 140

+ 90

+40%

+35%

+6%

+4%

EBIT (in millions of $) EBIT improvement (in millions of $)

A 2% improvement of the performance on …

… would provide an EBIT increase of …

2 500

2 500

2 500

+ 840

+ 985

Fixed costs

Sales

Variablecosts

Price

2 500

2007 figures : (in millions of USD) Turnover = 49 500 EBIT = 2 500 Assumption : Fix costs = 4 600 Variable costs = 42 300

Figures based on the 2007 financial statement of the following companies : Nexans, Prysmian, General Cable, Furukawa Electric, LS Cable, Draka, Fujikura, Hitachi Cable, Sumitomo Electric (Only the Electric wire & Cable, Energy Business segment). Currency rates as of 14.10.2008: 1 EUR = 1,3678 USD / 1 EUR = 139,995 JPY

To frame the context, let me share with you a quick analysis that SKP has done taking publicly available P&L’s of the main players of this industry and simulating what a 2% performance increase would yield as profit.More precisely, we have taken the consolidated profits of the industry as represented by the 9 big players in 2007. If we were to increase our performance on the fixed cost side, this would mean that our fixed costs would go down by 2%. Profit impact, keeping all other elements stable (ceteris paribus clause), would be 90 millions US $. A profit increase of only plus 4%. If we now increase sales by 2%, again keeping all other elementsconstant, profits would go up by 6%. Obviously, we have to also take into account the impacts of the variable costs.The highest leverage can be observed with regard to pricing. A 2% price performance increase raises profits by 985 millions US $, i.e. plus 40%.


Price as the most effective profit driver for the cable industry

- 21 %

To get 985 mio $ of additional EBITTo get 985 mio $ of additional EBIT

2007 figures : (in millions of USD) Turnover = 49 500 EBIT = 2 500 Assumption : Fix costs = 4 600 Variable costs = 42 300

Figures based on the 2007 financial statement of the following companies : Nexans, Prysmian, General Cable, Furukawa Electric, LS Cable, Draka, Fujikura, Hitachi Cable, Sumitomo Electric (Only the Electric wire & Cable, Energy Business segment). Currency rates as of 14.10.2008: 1 EUR = 1,3678 USD / 1 EUR = 139,995 JPY

Fixed cost reduction by …Fixed cost reduction by …

+ 2 %

If we put the very same amount that could be generated by a 2% price increase in relation to the required industry-wide decrease in terms of fixed costs in order to reach the iso-profit level, we come to an astonishing 21%.This, ladies and gentlemen, shows the power of pricing and the importance of the subject. Ask yourself, how much time you spend with performance indicators to manage the cost side and how much time you spend to measure the capability of your organization to increase the prices by 2 points?

Conclusion 1•Price is the profit driver - and will be more so in the futurePricing intelligence must become a core competency of any business


Pricing : most common practices

Cost + Value Management

… not enough What is the

willingness-to-pay ?

Competition matching

High risk !

Inquiring about the potential to increase prices quite naturally leads to the question: How do we measure value today?Based on our experience, we generally find that companies do it in 3 ways with the most common one being the first one: Cost+. Cost+ means that you are pricing essentially within an inbound view. Controlling provides you with a cost estimate to which an acceptable margin is being added. This method is necessary but it’s only the beginning. Please also consider that this method bears dangers. We have come through companies that have reduced their costs thus reducing the basis on which their prices were/are being calculated. Lower costs led to lower prices! It’s like heating in the winter and keeping the windows open.The second method is competition matching which is a fancy way of saying that you hope the competition will gie you insights on prices. I often use this comparison: competition mapping is as risky as following too closely the car in front of you in the fog. You just risk ending up in his garage.Value management, i.e. understanding your customer’s willingness-to-pay of should be the prime method and is dissociated from costs.This method aims at understanding what customer value really is all about.


Importance of Price Price elasticity

Eye-Catchers

Commodities

Captive parts

Volume (Index)

Price increase

Captive parts

Commodities

Eye-Catchers

Price elasticity – case study

ε ≅ 0,5 - 1

ε = 1-2

ε >2

Value management rests on understanding what drives price elasticity. Price elasticity is defined as the indicator measuring how volumes react to price increases or decreases. In industrial companies, it is quite important to understand these price elasticitiesby product groups or even better by reference bases. Sometimes, as this example shows, we have strong differences between product groups. Knowing them, allows you to understand where you should be careful and which are the areas where price increases can be done without impacting volume.


Evaluate price elasticity/price-response function by ...Evaluate price elasticity/price-response function by ...

A. Historical data

C. Indirect questions

B. Experts judgements

Pricing Methods

Let me share with you a quick first overview of the methods that will allow us to better understand price elasticities. Historical data analysis is a method of transaction data over a long period of time in order to isolate through regression analysis factors influencing price volume changes. This method is difficult to put into practice in our industry. The key method for understanding value drivers of customers are indirect pricing methods also called conjoint analysis.


Starting point: Where is the optimum ?

Target Price

Target Costs

Optimal level

Optimum

Technical performance& development level

Value (in $)

Net Value!

Cost to Make (and to develop)

Value-to-Customer= Willingness to Pay

The underlining principle is to identify upfront buying factors and to understand which trade-offs are being done by clients evaluating those different buying factors. Obviously the price is a buying factor but as you can see not the sole one. Brand and perceived quality or technical support are other criteria, which do matter.


Trade-off analysis

How the buyer sees the marketBuying factors

Supply capabilities

…

Brand & Experience

Customer service

Quality

Technical Support

BuyerJM

What is the willingness to pay

for you ?

Your value proposition

Competitor value

proposition

The conjoint analysis then presents choices to clients in order to evaluate that trade-off. The example of buying a car gives us insights into this method.


Offre A:

- …- …

Nette préférencepour A

-4

Trade-Off #1

OffreA:

- …- …


-4

Trade-Off # 2

OffreA:

- …- …


-4

Trade-Off #...

OffreA:

- …- …


-4

Trade-Off #...

Offer A:

- …- …

-4

Trade-Off # 9

Offer A:- …- …

Offer B:- …- …

Strong preference for Offer A

Strong preference for Offer BIndifferent

-4 -3 -2 -1 0 1 2 3 4

Trade-Off # 10

Or

Customer preferences are determined by presenting a succession of trade-offs between hypothetical products

Using conjoint analysis to calculate perceived value

• Presentation of 10-15 choices between hypothetical products presenting different advantages and trade-offs to determine the respondent’s compromises

• Determine preferences through conjoint analysis

In the case of telecom cables for instance, we could define that the choices to be made by a client between offer A and offer B to bedefined by 5 attributes: Brand, type of insulation delivery terms, certificate and price, with each attribute having a different level. Rather than simply doing this conjoint on a cable, I am going to take you through a demonstration for a car. This example looks fancy. It is, however, designed purely as a demonstration and is based on the same rational choices made by your clients who also make trade-offs between different attributes.


Case Study

Offer A1. Brand : Company A, B , C,..2. Type on insultation: paper vs plastic3. Delivery terms: 24h, 2 days, 2 weeks4. Certificates: yes versus no5. Price: 100$/km, 200$/km, 300$/km.....

Offer B

Demonstration

Conjoint analysis

O f f r e A

D is p o n i b i l it é : 8 h - 1 7 h

D é la is d e ré p o n s e : 4 h

H o t lin e t é lé p h o n iq u e : N o n

O f fr e B

( 0 ) (1 ) ( 2 ) ( 5 )( -5 ) ( -3 ) (- 1 )( -4 ) ( -2 ) ( 3 ) ( 4 )

N e t te p r é fé re n c e p o u r A

N e tte p r é fé r e n c e p o u r BIn d if f é re n t

Q u e l le o f f re p r é f é r e z - v o u s ?

D is p o n i b i li t é : 8 h - 2 1 h

D é la is d e ré p o n s e : jo u r s u iv a n t

H o t lin e t é lé p h o n iq u e : O u i

O f f r e A

D is p o n i b i l it é : 8 h - 1 7 h

D é la is d e ré p o n s e : 4 h

H o t lin e t é lé p h o n iq u e : N o n

O f fr e B

( 0 ) (1 ) ( 2 ) ( 5 )( -5 ) ( -3 ) (- 1 )( -4 ) ( -2 ) ( 3 ) ( 4 )( 0 ) (1 ) ( 2 ) ( 5 )( -5 ) ( -3 ) (- 1 )( -4 ) ( -2 ) ( 3 ) ( 4 )

N e t te p r é fé re n c e p o u r A

N e tte p r é fé r e n c e p o u r BIn d if f é re n tN e t te p r é fé re n c e

p o u r AN e tte p r é fé r e n c e

p o u r BIn d if f é re n t

Q u e l le o f f re p r é f é r e z - v o u s ?

D is p o n i b i li t é : 8 h - 2 1 h

D é la is d e ré p o n s e : jo u r s u iv a n t

H o t lin e t é lé p h o n iq u e : O u i

S K P C o n jo in t A n a ly s isS K P C o n jo in t A n a ly s is


Value pricing: types of applications

The conjoint analysis is especially suited for B2B situations, as clients make very rational choices

Launch of a new major innovation for an industrial supplier

Launch of a low cost line for a special coatings producer

Optimization of the price policy for services for an engine supplier

Conclusion 2Cost+ is not good enough – value pricing matters

Getting the price right requires a deep understanding of price elasticity

The willingness-to-pay can be measured systematically


What’s at stake?

Price setting, i.e. defining the profit optimal price, of new

products is the beginning

But : 80 % of your profits come from day-to-day transactions

Better managing day-to-day pricing is the second challenge !

Let me now turn the price realization issues. By this, I mean the capability of organizations to really get those prices through to the market, once budgets have been set. It is about making sure thatthere is no leakage along the price value chain.


Discount

Revenue

Profit

0%

100 $

45 $

10%

90 $

35 $

To maintain profit levels, sales need to increase by almost 30 % ! Is this realistic ?

How much do sales need to raise to compensate a

10% price discount ?

Day to day price negotiations - what is at risk ?

New Sales X 35 = 45 New Sales = 45/35 =1.286

AfterBefore

Simple calculations highlight the need to control price leakages. In this example, we have a product which sells for $100 and costs $55 to produce thus generating $45 in terms of unit profit. If sales reduce the price of this product by 10%, we will now only sell it for $90. As costs do not go down as quickly as a salesman can negotiate price reductions, we now only have a profit margin of $35 which now must be compensated by achieving additional sales volumes in order toreach the initially set margin target of $45. Here it is 30%. How often do we reach those volumes to offset the reduced prices? Given potential volume implications of price reduction, we should indeed be very cautious.


Pricing Process

Key Issue:

What sources of data do we use?

When and how do we analyze and aggregate data?

What are ourpricing rules(can/must)?

How do we implementand monitor pricing

decisions?

Historical data

Analyticalprocess

Pricingdecisions

Discounts

Price differentiation

Signaling

Feedback process

PricingI.Q.

Benchmarks

Expert judgement

Cost data

Better controlling of leakage and unnecessary discounts calls for management of the pricing process. Yet, let me ask you the question: Do you have today real pricing processes in place, that embrace all the key issues as highlighted here? Given what is that stake in terms of profitability, it is even more interesting to notice that all of your companies do have purchasing processes. By introducing purchasing managers, you signal to your supplying markets your intention tocarefully manage your purchases. Is the same true vis-à-vis your markets? Do you have value managers who manage the pricing process and indicate to the market which value you want to defend?


Discount structure: the starting point

PriceUnit

To be

Discount SystemThe bigger the customer,

the lower the price

Price/Unit

Customer size / -worth

Reality

Price RealityCustomer size and price

are not related

. ....

.. . .. ... ..

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

. .. ...

.. ... .. ..

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

Customer size / -worth

Obviously this discounting practice is the most important issue in this price process. Here we have the example of high transaction items. Very often, we find a reality like that on the left hand side where prices have little correlation with customer size. To bring order into this cloud of dots, is a difficult task, because every salesman will strongly defend his own performance and argue that pricing reflects the uniqueness of his customer relationships.


Case study – Price Discounting & Controlling

Best practice : Value managementSteel industry

This is why we want to take you through some quick case studies that highlight this type of difficulty and show solutions.Let me take you through the example of a tube manufacturer who operates under market conditions which are similar to yours. In this case, we do not only face the usual problems of sales people defending their prices, but moreover we have the situation that is similar to many of you in this room: The company leading its market. In that case, where do you get an indication for what is the right discount? Player n° 2 finds it easy to determine the price: If you look at n° 1 and add a few percentage to it on top. N° 3 in the market will do the same, he will first look at n° 2 who will look at n° 1 and so on. In the case of companies leading markets, it is much more difficult to decide how much they should give away to get the deals. They have no one in front of them to lead them. Based on this “dilemma”, we developed the concept of “Peer Pricing”.


Context

What is the right discount for a

market leader?

One answer :

Your own performance

Peer Pricing

“Peer Pricing” calls for an approach that systematizes best price performances within the organizations leading their markets by making sales comparable to others to deduct where good sales have been made vs. less good ones.


Starting situation

50%

5 %

25%

Price sellersCumulated Sales

How to anchor value thinking inside the sales organization ?

Value sellers

Profitability

“Peer Pricing” starts with the classical dilemma faced by many executives which is to anchor value thinking inside the organization. For each given product group or transaction group, we will always find the same situation: value sellers manage to sell at high prices and thus have much profitability whereas price sellers quickly give away their pricing power and usually make sales with little profitability. How can we optimize this situation?


Step 1 - Best Internal Realized Price as reference point

Realized Price (€/km)

Length Distribution (km)

Averagerealized price

Worstrealized price

Cumulated Length (%)

100 %

0 %

95 %

Best internal realized price

Step n° 1 consists of identifying the organization with the best internal realized prices as a reference point. This approach starts with the simple idea that working only with an average price destroys incentives for high performers, as it will only be an incentive for performers who sell below the average price to increase their performances. With average prices, however, you under-manage the right hand side of the bell curve. This is why SKP created the concept of best internal realized prices to give clear indications on what best performances could be reached on an accumulated basis, excludingexceptional transactions.


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

8 20

1 €

9 77

0 €

11 3

38 €

12 9

07 €

14 4

76 €

16 0

44 €

17 6

13 €

19 1

82 €

20 7

51 €

22 3

19 €

23 8

88 €

25 4

57 €

27 0

25 €

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Price distribution type cable A

Best Internal Price at 12.518 €/km

0%

2%

4%

6%

8%

10%

12%

14%

16%

3 26

0 €

3 38

3 €

3 50

6 €

3 62

9 €

3 75

2 €

3 87

5 €

3 99

8 €

4 12

1 €

4 24

4 €

4 36

7 €

4 49

0 €

4 61

3 €

4 73

6 €

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Illustration Price distribution cable B

Best Internal Price at 4.686 €/km

Using this best internal realized price on the left hand side of the price distribution for a cable maker is not necessary as we see almost with the naked eye that €9,770 is a performance reached by 40% of the sales force, or to be more precise by sales. Yet the best internal price is at 12.518 €/km. With the price distribution for cable B on the right hand side this is however even more difficult. We have an erratic price performance which without the concept of the best internal realized price could never be properly managed.


Step 2 – Peer groups for each product

Cumulated Sales

Very good price performance

Minimal price performance

Peer Pricing allows to distinguish the value sellers from the price sellers among the salesmen

Best internal performance(factored with margin)

Once this best performance is set, we can now use with a simple color coding to detect good and bad performances for each product segment. Salespeople are no longer operating against a numeric margin but have been provided with an indication of how good or how bad, how green or how red their pricing performances are in comparison to those of their peers.


SKP Project

Case Study

Product families

Source: SKP project example (anonymized and rescaled)

Price defence compared to the best internal

performance+ 3 % points

of EBIT

Discounting tool

In the case of an industrial company, peer pricing resulted in providing the sales support with an important price decision tool. The salesman could, when negotiating with his clients, see whether the discount that he negotiated was above or below that of his colleagues engaged in comparable deals.In a very mature market this support tool together with training and increased awareness of salesman on the impact of discount generated considerable results. The company gained 3 points of EBIT, which is significant.


Case Study – Key Performance Indicators

Best practice : Project Pricing1st tier automotive supplier

The second case study on discounting methods considers a totallydifferent starting situation. Here, a first tier automotive supplier had different product lines each operating autonomously out of different factories. Given the product heterogeneity, there was no common ground to optimize discount behavior and the price process based on products. And, by the way, car manufacturers source their suppliers by product groups. The idea of bundling is totally non-existent in that industry.


Pricing Tactics in the Acquisition and Offer

Automotive suppliers face challenging RFQ’s

Phase 1Request of customer

Phase 2Short listing

Phase 3Awarding of contract

1 outgoing supplier

2 – 3 suppliers with a "real chance"

1 - 2 suppliers as "price dumpers"

3 – 4 remaining suppliers

2 preferred suppliers

Choice

Nevertheless, in order to improve the pricing process, in a first phase look for communalities in the pricing process, in each of these different business units (BU’s). Similarly, the cable industry, we can distinguish at least 3 phases for every request for quotation (RFQ).


Pricing Semantics

Price

r a n g e

"List"price

First offer price

Winning price

Walk-away price

Minimum price

Signal to the market

Based on• Expected discounts• Customer history / existing contracts• Competitors• Offer strategy• Regional aspects

Escalation steps

Price

Defines the last escalation step to top management

Once the process is clarified, we can begin to harmonize pricingsemantics i.e. develop a common understanding what type of pricewas being offered at which state of the RFQ. By having a common language, we could then start developing escalation rules. Obviously, a much better understanding of walk-away prices as well as minimum prices to be defended could be developed.


Process-based Key Performance Indicators

Information basis Price setting Price

negotiationPost RFQ-

price handling

Feedback loop

In a last step, we looked at the RFQ process by defining different indicators for each process step. We found that there is an important post RFQ pricing phase. This means that time passes by between the moment when the RFQ is being awarded and the start of production. Sometimes months, for selected products even up to almost 2 years. During this time however, very often vehicle manufacturers modify the original specifications. So far, generally cars became bigger, wider, faster in the process. For suppliers this very often means making their equipment lighter, cheaper and faster.


Price Monitoring - Example

Between negotiation end and start of production the price moves due to additional demands of the OEMs

Indicator allows to follow capability to upsell. Here by 30%

Post RFQ indicator

Post RFQ-price handling

NEP - Negotiation End Price

SOP – Start of Production PriceI =

Source: SKP project example (anonymized and rescaled)

Obviously, this represents a pricing opportunity. Having an adequate indicator, makes it possible to renegotiate the price based on the change of specifications, thereby gaining a delta in price. Thisindicator measures the up-selling capability of your organization. Conclusion 3Better managing of day-to-day pricing actions yields high profitsMarket leaders need reference points to plan for the future – “Peer

Pricing” brings new solutions Insure proper pricing processes and key performance indicators

(KPIs) can help unleash hidden profit potential


General Conclusion

“All processes we tackled systematically

have led to strong profit increases.

We just have to handle pricing just as systematically as everything else we do.”

CEO of a German machine manufacturer

Let me finish with the conclusion that quotes the words of another client of SKP. This example shows, more than ever, that pricing is a key capability to be managed by corporations.Thank you very much for your attention.

Paris Office128, rue du Faubourg Saint-Honoré, 75008 ParisTél: 01 56 69 23 90, Fax: 01 56 69 23 [email protected]

customer satisfaction & value creation - icf · 2013-01-24 · customer satisfaction &...

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