defining the customer experience to inform value based pricing
DESCRIPTION
Blue Canyon Partners Principal Axel Leichum on September 18 presented to MAPI's Division and Marketing Councils on how the customer experience can inform value-based pricing. The topic was one of the questions asked during the MAPI-Blue Canyon webinar on strategic pricing (Pricing Trends and Tools: How Companies Set Prices to Optimize Business Outcomes).TRANSCRIPT
© 2014 Blue Canyon Partners, Inc. All rights reserved.
September 2014
Defining the Customer
Experience to Inform Value-
Based Pricing
© 2014 Blue Canyon Partners, Inc. All rights reserved.
What is the customer experience?
How defining the customer experience informs
value-based pricing
A framework for using customer experience to drive
pricing decisions
The framework in action: 2 case studies
Agenda
2
© 2014 Blue Canyon Partners, Inc. All rights reserved.
What is the Customer Experience?
3
Effect Experience
Product Experience
Supplier Experience
Three dimensions that define the total
customer experience
© 2014 Blue Canyon Partners, Inc. All rights reserved.
The Supplier Experience
4
Effect Experience
Product Experience
Supplier Experience
Customer’s experience
interacting with the supplier
Marketing/Sales Campaigns
Sales Calls
Solution Design &
Engineering
Quote/Order Process
Inventory Management
Customer Support
Advisory Services
© 2014 Blue Canyon Partners, Inc. All rights reserved.
The Product Experience
5
Effect Experience
Product Experience
Supplier Experience
Customer’s experience
interacting with the product
Installation
Set Up/Configuration
Customization/Modification
Use
Maintenance
Updating/Upgrading
Removal/Decommissioning
© 2014 Blue Canyon Partners, Inc. All rights reserved.
The Effect Experience
6
Effect Experience
Product Experience
Supplier Experience
Customer’s experience of
the effect the offering has
on their business
Process
Inputs
Outputs
Resources
Decision Making
Differentiation
© 2014 Blue Canyon Partners, Inc. All rights reserved.
How Defining the Customer Experience
Informs Value-Based Pricing
7
Defining the customer
experience and understanding
how the offering impacts the
customer experience informs…
The value you are
delivering to the customer
The customer’s willingness
to pay
The price you can charge
Effect Experience
Product Experience
Supplier Experience
© 2014 Blue Canyon Partners, Inc. All rights reserved.
Effect Experience
Product Experience
Supplier Experience
How Defining the Customer Experience
Informs Value-Based Pricing
8
But there is a piece missing…$
$
$
$
$
$
You must not only define the
customer experience but also
the economics of the customer
experience to successfully
value and price the offering
© 2014 Blue Canyon Partners, Inc. All rights reserved.
A Framework for Using Customer Experience
to Drive Value-Based Pricing
9
Our Current
Offering
Economic Impact/
Value Delivered
Value Captured
(Price)Our Future
Offering
Competitor
OfferingOur Offering
“Existing”
Customer
Experience
“New”
Customer
Experience
Change or difference in…
Supplier Experience
Product Experience
Effect Experience
As determined by…
Costs reduced
Productivity
improved
Time saved
Risk avoided
Revenue generated
Share gained
Driven by…
Supplier vs.
customer power
Supplier vs.
customer
contribution
Strength of proof
Competitive
dynamics
Our Standard
Offering
Our Premium
Offering
© 2014 Blue Canyon Partners, Inc. All rights reserved.
The Framework in Practice: Case Study #1
10
Case Study #1:
Product Experience
Company: Manufacturer
of Appliances
Challenge: Develop and
price new solution to
penetrate retrofit market
© 2014 Blue Canyon Partners, Inc. All rights reserved.
Case Study #1: Product Experience
11
Current Offering
Existing Retrofit Customer
Product Experience – Installation
Future Offering
Appliance Installation Work
Plumbing Work
Electrical Work
Customer Time
Coordination/Complexity
Cost Uncertainty
Increase Appliance Installation
Work
Reduce Plumbing Work
Eliminate Electrical Work
Reduce Customer Time
Reduce Coordination/Complexity
Eliminate Cost Uncertainty
Define the customer experience for the current and
future offering
New Retrofit Customer Product
Experience – Installation
© 2014 Blue Canyon Partners, Inc. All rights reserved.
Case Study #1: Product Experience
12
Define the economics of the customer experience for the
current and future offering to determine the value-based price
premium
Price Premium @ Different
Value Capture Ratios
Supplier/Customer
60/40: +$234
50/50: +$195
40/60: +$156
Base Retrofit Customer Product
Experience – Installation
(Most Difficult)
New Retrofit Customer Product
Experience – Installation
(Most Difficult)
Current Offering Future Offering
Note: Not actual figures, data has been
altered for confidentiality purposes
Total: $840 Total: $840
Current
Product Price:
$500
Future
Product Price:
$695
© 2014 Blue Canyon Partners, Inc. All rights reserved.
Case Study #1: Product Experience - Takeaways
13
Impact on Pricing Decisions and Overall Strategy
▫ Pricing Decisions
• Recognized new solution should be sold at a premium, not at discount as
originally assumed
• Established price premium for new solution, above what initially thought
appropriate
▫ Overall Strategy
• Defined solution requirements to drive increased adoption in retrofit market
• Determined target cost to drive R&D decisions
• Identified potential need for new channel/business model
Key Learnings
▫ There isn’t just one customer experience – understand what experience you are
targeting and price accordingly
▫ Need to understand tradeoffs in value-based pricing – what extra effort/costs are
you imposing on the customer as well?
© 2014 Blue Canyon Partners, Inc. All rights reserved.
The Framework in Practice: Case Study #2
14
Case Study #2:
Effect ExperienceCompany: Supplier of
Solutions for the
Refrigerated Container
Market
Challenge: Determine price
and available market for
next generation container
monitoring technology
© 2014 Blue Canyon Partners, Inc. All rights reserved.
15
Understanding the Effect Experience required detailing the customer’s
overall operational experience with refrigerated containers – activities,
economic factors, and players/roles
In OperationOwnership
Example of
Economics Details
•Energy
•Maint & Repair
•Monitoring
•Acquisition
•Storage & Prep
•Inland Transport
•Loading/Unloading
•Handling at Terminal
•Vessel Transport
Case Study #2: Effect Experience
Capital Cost
Operating Cost
Claims Cost
Handling Cost
Economics
Vessel & Overhead
Cost
Example of
Activities Details
•Monitor
•Maint & Repair
•Claims Admin
•Claims Payout
Activities
Shipping Line
Terminal
Shipper/Receiver
3rd Party Trans
Reefer Depot
Leasing Firm
Players/Roles
© 2014 Blue Canyon Partners, Inc. All rights reserved.
Case Study #2: Effect Experience
16
See Decide Act
Who
• Shipping line – Reefer Operations • Shipping line – Reefer Operations
• If container in depot: Depot Tech
• If container in terminal: Terminal Tech
• If container on vessel: Ship Tech
What
• Request for data log/temperature history
• Container number
• Location of container
• Who to contact to download data log
data
• Locate container
• Wait (if container is inland or at customer)
• Lift/move containers to access and power
(if necessary)
• Download data log information
• Send data to Reefer Operations
Where
• Shipping line offices • Shipping line offices • Dependent on container location
When
• Claim filed
• Customer request
• Internal operations request
• When request for temperature history
received
• When request to retrieve data log is
received
How
• Shipping line system
• Manual request
• Shipping line system
• Experience
• Shipping line guidelines
• Manual locating
• Manual download at container
• Upload to shipping line systems or email
Develop a set of use cases for the next generation monitoring technology
and document how the solution would effect the customer’s operations
© 2014 Blue Canyon Partners, Inc. All rights reserved.
Case Study #2: Effect Experience
17
Who
• Shipping Line – Reefer Operations • Shipping line – Reefer Operations • Shipping line – Reefer Operations
What
• Request for data log/temperature history • Container number
• Login to monitoring system
• Select container
• Download temperature history
Where
• Shipping line offices • Shipping line offices • Shipping line offices
When
• Claim filed
• Customer request
• Internal operations request
• When request for temperature history
received
• When request for temperature history
received
How
• Shipping line system
• Manual request• Shipping line system
• Download temperature history from
monitoring system database through
web-based interface
RED=Change in Process
The new customer experience using the next generation monitoring
technology changed who, what, where, when, and how the temperature
history is accessed
See Decide Act
© 2014 Blue Canyon Partners, Inc. All rights reserved.
Reefer Trips - $XX,000 Dry Backhaul Trips - $X00
Revenue
Costs
Annual Revenue/Cost Per Refrigerated Container
Capital Cost
$X,445
Operating Cost
$X,520
Claims
Cost
$X85
Handling Cost
$X,645
Case Study #2: Effect Experience
18
Detail operating economics to determine economic impact and value delivered
by the next generation monitoring technology use cases
Note: Figures disguised for
confidentiality purposes
© 2014 Blue Canyon Partners, Inc. All rights reserved.
Case Study #2: Effect Experience
19
Use Case Description Market
Interest
Viability Value Potential
(Benefit Per Container Per Year)
1
On-Demand
Temperature
History
End-to-end temperature record
stored in the global monitoring
system and available via on-
demand remote download
•Reduce claim admin costs by 50% = $XX
•Reduce claims paid by 25% = $X4
•Total value potential = $X9
2 Use Case 2Description 2 • Reduce claims rate (% of trips with claim) by 5% =
$X
• Total value potential = $X
3 Use Case 3Description 3 • Eliminate monitoring costs of $X0/day while in
terminal = $X00
• Total value potential = $X00
4 Use Case 4
Description 4 • Reduce maintenance labor costs by 10%: = $X6
• Reduce claims rate (% of trips with claim) by 5% =
$X
• Total value potential = $X5
5 Use Case 5Description 5 • Reduce energy costs by 5% = $X3
• Reduce maintenance labor costs by $X0 = $X0
• Total value potential = $X03
6 Use Case 6Description 6 • Increase annual trips per container by 5% = $X33
• Total value potential = $X33
Total Total Value Potential = $X42
Aggregating the economic impact and value delivered by each use case
defines the total potential value of the next generation monitoring technology
Note: Figures disguised for
confidentiality purposesHigherLower
© 2014 Blue Canyon Partners, Inc. All rights reserved.
Price Per Container
% of Annual Value Delivered Captured
20% 30% 40%
$X44 $X66 $X88
Case Study #2: Effect Experience
20
Create scenarios with various value capture and market penetration
assumptions to establish price per container and estimate annual
available market
Annual Available Market
$ Millions % of Annual Value Delivered Captured
Market Penetration (% of
Reefer Population) 20% 30% 40%
20% $X8 $X3 $X7
30% $X3 $X09 $X46
40% $X7 $X46 $X95
Note: Figures disguised for
confidentiality purposes
© 2014 Blue Canyon Partners, Inc. All rights reserved.
Case Study #2: Effect Experience - Takeaways
21
Impact on Pricing Decisions and Overall Strategy
▫ Pricing Decisions
• Detailed economic impact and value delivered of monitoring technology, well
beyond what initially thought
• Established well supported price per container, to confidently price to customers
▫ Overall Strategy
• Identified higher economic impact use cases for prioritizing development and
marketing focus
• Defined annual market opportunity to determine investment levels
• Identified barriers to address for successful adoption
Key Learnings
▫ The most obvious benefits of a solution do not always deliver the most value –
detailing the economic impact is critical
▫ The value delivered can differ significantly by customer – pricing should differ
accordingly as well
© 2014 Blue Canyon Partners, Inc. All rights reserved.
Define the customer experience to determine if value-based pricing is
appropriate
▫ Do you have an offering that provides a unique or different customer experience?
▫ Examine supplier, product, and effect experience
Map out the “existing” and “new” customer experience
▫ Define your base – current offering, competitor’s offering, etc.
▫ Focus on the key aspects of the experience, don’t get lost in the details
Define the economics and your offering’s impact
▫ Remember to consider tradeoffs, rarely is there a “free lunch”
Be realistic in deciding how much of the value you can capture to set price
▫ Consider customer’s power and contribution, strength of proof, and competitive
dynamics
Defining the customer experience provides value beyond pricing
▫ Informs multiple elements of strategy
How You Can Use Customer Experience to
Inform Value-Based Pricing
22
© 2014 Blue Canyon Partners, Inc. All rights reserved.
Axel J. Leichum, Principal
Axel J. Leichum
Current Responsibilities
Axel Leichum leads numerous business-to-business focused strategy projects that help Blue Canyon’s
clients improve their understanding of customer needs, identify and prioritize growth opportunities,
effectively segment and target markets, and enhance their major customer relationships.
PRINCIPAL
T (847) 967-0253
Experience
With more than 12 years as a management consultant, Axel brings extensive experience in conducting
primary and secondary research and performing economic analysis, combined with the ability to translate
information into insight and actionable strategies for clients. Axel’s client engagements have spanned a
wide variety of industries and geographies. His work includes:
Developing a pricing strategy for a global supplier of healthcare equipment
Defining a go-to-market strategy for an IT infrastructure management software and hardware provider
Developing a global growth strategy for a supplier of equipment to the telecommunications industry
Defining the market opportunity for a new technology to be introduced into the utility industry
Prior to joining Blue Canyon, Axel served as a consultant with Booz Allen & Hamilton’s management
consulting practice (now known as Strategy&) working primarily with clients in the financial services and
consumer products industries.
Education and Affiliations
Axel has a Bachelor of Arts in Economics from Northwestern University with departmental honors.
Thought Leadership
Axel has written and contributed to a number of articles and white papers on topics such as adjacencies
and pricing strategies. His two white papers on adjacencies --Discovering Your Next Growth Opportunity:
Adjacent Markets and Adjacent Markets: Choose Your Battles Wisely--explore how to identify and
prioritize adjacent market opportunities.
23