pricing configured products
TRANSCRIPT
©2004 PROPRIETARY and CONFIDENTIAL, Rapt Inc.
Pricing Configured ProductsPricing Configured ProductsPPS Webinar Series May 19, 2004
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©2004 PROPRIETARY and CONFIDENTIAL, Rapt Inc.
Pricing Configured ProductsPricing Configured ProductsPPS Webinar Series May 19, 2004
Presentation will start in 5 minutes
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©2004 PROPRIETARY and CONFIDENTIAL, Rapt Inc.
Pricing Configured ProductsPricing Configured ProductsPPS Webinar Series May 19, 2004
Presentation will start momentarily
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©2004 PROPRIETARY and CONFIDENTIAL, Rapt Inc.
Pricing Configured ProductsPricing Configured ProductsPPS Webinar Series May 19, 2004
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5Rapt ConfidentialHowTheAnalyticsWork.v3
nn What is a configuration?What is a configuration?
nn What makes configuration pricing easy What makes configuration pricing easy andand difficult?difficult?
nn How can companies optimize configuration prices?How can companies optimize configuration prices?
nn Case studies: How are companies pricing configured Case studies: How are companies pricing configured products profitably?products profitably?
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6Rapt ConfidentialHowTheAnalyticsWork.v3
What is a configuration?What is a configuration?What is a configuration?
A configuration is a product A configuration is a product for which the customer has for which the customer has multiple, priced options.multiple, priced options.
Examples:Examples:
nn AutomobilesAutomobiles
nn InsuranceInsurance
nn ComputersComputers
nn WindowsWindows
nn Clothing washer (with Clothing washer (with extended warranty, color extended warranty, color
premium, etc.)premium, etc.)
ToyotaCamry
A/CPower
windows Security
Radio Entry
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7Rapt ConfidentialHowTheAnalyticsWork.v3
ProductProduct
What makes the pricing of configurations easy?What makes the pricing of configurations What makes the pricing of configurations easyeasy??
Pricing configurations at the Pricing configurations at the component level is component level is easyeasy in in that it dramatically reduces that it dramatically reduces the number of pricing the number of pricing decisions.decisions.
Product
Option 1
H M
Option 2 Option 3 Option 4
L None
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8Rapt ConfidentialHowTheAnalyticsWork.v3
ProductProduct
What makes the pricing of configurations easy?What makes the pricing of configurations What makes the pricing of configurations easyeasy??
Pricing configurations at the Pricing configurations at the component level is component level is easyeasy in in that it dramatically reduces that it dramatically reduces the number of pricing the number of pricing decisions.decisions.
Example: Imagine a product Example: Imagine a product offering with:offering with:
nn 20 products20 products
nn 4 options4 options
nn 3 values for each option 3 values for each option plus the “none” optionplus the “none” option
nn Price 240 options or 5,120 Price 240 options or 5,120 SKUsSKUs
Product
Option 1
H M
Option 2 Option 3 Option 4
L None
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9Rapt ConfidentialHowTheAnalyticsWork.v3
What makes the pricing of configurations What makes the pricing of configurations difficultdifficult ??
Memory Chassis
128 256 512
Storage
20 30 60
1
2
3
4
5
Component cross-elasticity
Drag effects
Market share effects (self-elasticity)
Configuration cross-elasticity
Laptopfamily
12-inch800-MHz
14-inch933-MHz
14-inch1-GHz
Basemodel
Competingsolution
A
Competingsolution
B
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10Rapt ConfidentialHowTheAnalyticsWork.v3
What makes the pricing of configurations What makes the pricing of configurations difficultdifficult ??
12-inch800-MHz
14-inch933-MHz
14-inch1-GHz
Memory Chassis
128 256 512
Storage
20 30 60
I decrease the price of 256MB memory by 20%
Basemodel
Competingsolution
A
Competingsolution
B
1
2
3
4
5
Component cross-elasticity
Drag effects
Market share effects (self-elasticity)
Configuration cross-elasticity
Laptopfamily
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11Rapt ConfidentialHowTheAnalyticsWork.v3
What makes the pricing of configurations What makes the pricing of configurations difficultdifficult ??
Memory Chassis
128 256 512
Storage
20 30 60
I decrease the price of 256MB memory by 20%
More customers buy 256MB,
cannibalizing 128MB and 512MB memory
1
2
3
4
5
Component cross-elasticity
Drag effects
Market share effects (self-elasticity)
Configuration cross-elasticity
12-inch800-MHz
14-inch933-MHz
14-inch1-GHz
Basemodel
Competingsolution
A
Competingsolution
BLaptopfamily
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12Rapt ConfidentialHowTheAnalyticsWork.v3
What makes the pricing of configurations What makes the pricing of configurations difficultdifficult ??
Memory Chassis
128 256 512
Storage
20 30 60
I decrease the price of 256MB memory by 20%
More customers buy 256MB,
cannibalizing 128MB and 512MB memory
Increased demand for cheaper 256MB memory
means that 12-inch:800-MHz has become cheaper
1
2
3
4
5
Component cross-elasticity
Drag effects
Market share effects (self-elasticity)
Configuration cross-elasticity
12-inch800-MHz
14-inch933-MHz
14-inch1-GHz
Basemodel
Competingsolution
A
Competingsolution
BLaptopfamily
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13Rapt ConfidentialHowTheAnalyticsWork.v3
What makes the pricing of configurations What makes the pricing of configurations difficultdifficult ??
Memory Chassis
128 256 512
Storage
20 30 60
I decrease the price of 256MB memory by 20%
More customers buy 256MB,
cannibalizing 128MB and 512MB memory
Increased demand for cheaper 256MB memory
means that 12-inch:800-MHz has become cheaper
Cheaper 12-inch:800-MHz may grab additional sales
over the competition, increasing market share
1
2
3
4
5
Component cross-elasticity
Drag effects
Market share effects (self-elasticity)
Configuration cross-elasticity
12-inch800-MHz
14-inch933-MHz
14-inch1-GHz
Basemodel
Competingsolution
A
Competingsolution
BLaptopfamily
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14Rapt ConfidentialHowTheAnalyticsWork.v3
What makes the pricing of configurations What makes the pricing of configurations difficultdifficult ??
Memory Chassis
128 256 512
Storage
20 30 60
I decrease the price of 256MB memory by 20%
More customers buy 256MB,
cannibalizing 128MB and 512MB memory
Increased demand for cheaper 256MB memory
means that 12-inch:800-MHz has become cheaper
Cheaper 12-inch:800-MHz may grab additional sales
over the competition, increasing market share
Cheaper 12-inch:800-MHz may cannibalize sales from 14-
inch:933-MHz and 14-inch:1-GHz , impacting revenue and margin mix
1
2
3
4
5
Component cross-elasticity
Drag effects
Market share effects (self-elasticity)
Configuration cross-elasticity
12-inch800-MHz
14-inch933-MHz
14-inch1-GHz
Basemodel
Competingsolution
A
Competingsolution
BLaptopfamily
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15Rapt ConfidentialHowTheAnalyticsWork.v3
Adapts…Adapts…by constantly incorporating new order data.by constantly incorporating new order data.
55
How can companies optimize configuration prices? How can companies optimize configuration prices? How can companies optimize configuration prices?
Acts… Acts… by publishing by publishing prices that maximize prices that maximize performance against performance against objectives.objectives.
4422
Calibrates…Calibrates…price elasticities after price elasticities after unmasking the effects of unmasking the effects of nonnon--price factors.price factors.
11
Connects… Connects… to to your order data.your order data.
OrderOrderManagementManagement
SystemSystem
33
Plans…Plans…to meet your objectivesto meet your objectives with with
optimization, scenario optimization, scenario planning and sensitivity planning and sensitivity analysis. analysis.
Analytic engines are the backbone for optimized pricingAnalytic engines are the backbone for optimized pricing
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16Rapt ConfidentialHowTheAnalyticsWork.v3
External market dynamics n Controls for shifts in market segment size
Analytical models are necessary to “peel the onion.”
Price response is deeply hidden under multiple layers of demand dynamics.Price response is deeply hidden under multiple Price response is deeply hidden under multiple layers of demand dynamics.layers of demand dynamics.
COMPONENT PURPOSE
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17Rapt ConfidentialHowTheAnalyticsWork.v3
External market dynamics n Controls for shifts in market segment size
Seasonal dynamics n Models high-level trends and seasonality in sales relative to market
Analytical models are necessary to “peel the onion.”
Price response is deeply hidden under multiple layers of demand dynamics.Price response is deeply hidden under multiple Price response is deeply hidden under multiple layers of demand dynamics.layers of demand dynamics.
COMPONENT PURPOSE
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18Rapt ConfidentialHowTheAnalyticsWork.v3
External market dynamics n Controls for shifts in market segment size
Serasonal dynamics n Models high-level trends and seasonality in sales relative to market
Analytical models are necessary to “peel the onion.”
Price response is deeply hidden under multiple layers of demand dynamics.Price response is deeply hidden under multiple Price response is deeply hidden under multiple layers of demand dynamics.layers of demand dynamics.
COMPONENT PURPOSE
Lifecycle dynamics n Models dynamics driven by product introductions and obsolescence
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19Rapt ConfidentialHowTheAnalyticsWork.v3
External market dynamics n Controls for shifts in market segment size
Seasonal dynamics n Models high-level trends and seasonality in sales relative to market
Analytical models are necessary to “peel the onion.”
Price response is deeply hidden under multiple layers of demand dynamics.Price response is deeply hidden under multiple Price response is deeply hidden under multiple layers of demand dynamics.layers of demand dynamics.
COMPONENT PURPOSE
Lifecycle dynamics n Models dynamics driven by product introductions and obsolescence
Price response n Models self- and cross-elastic effects of pricing
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20Rapt ConfidentialHowTheAnalyticsWork.v3
60GB
40GB
20GB
Storage capacity
12’’ 15’’ 18’’
Display size
12” notebook 867-MHz 512/20G/combo
12” notebook 867-MHz 512/40G/combo
15” notebook 1-GHz 512/60G/superdrive 18” notebook 1-GHz
512/60G/superdrive
15” notebook 867-MHz 512/40G/combo
15” notebook 800-MHz 512/20G/combo
Once the other layers are peeled away, the analytic engine can determine price elasticities.Once the other layers are peeled away, the Once the other layers are peeled away, the analytic engine can determine price elasticities.analytic engine can determine price elasticities.
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21Rapt ConfidentialHowTheAnalyticsWork.v3
60GB
40GB
20GB
Storage capacity
12’’ 15’’ 18’’
Display size
Elasticity
Once the other layers are peeled away, the analytic engine can determine price elasticities.Once the other layers are peeled away, the Once the other layers are peeled away, the analytic engine can determine price elasticities.analytic engine can determine price elasticities.
12” notebook 867-MHz 512/20G/combo
12” notebook 867-MHz 512/40G/combo
15” notebook 1-GHz 512/60G/superdrive 18” notebook 1-GHz
512/60G/superdrive
15” notebook 867-MHz 512/40G/combo
15” notebook 800-MHz 512/20G/combo
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22Rapt ConfidentialHowTheAnalyticsWork.v3
60GB
40GB
20GB
Storage capacity
12’’ 15’’ 18’’
Display size
Cross-elasticity
Once the other layers are peeled away, the analytic engine can determine price elasticities.Once the other layers are peeled away, the Once the other layers are peeled away, the analytic engine can determine price elasticities.analytic engine can determine price elasticities.
12” notebook 867-MHz 512/20G/combo
12” notebook 867-MHz 512/40G/combo
15” notebook 1-GHz 512/60G/superdrive 18” notebook 1-GHz
512/60G/superdrive
15” notebook 867-MHz 512/40G/combo
15” notebook 800-MHz 512/20G/combo
Elasticity
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23Rapt ConfidentialHowTheAnalyticsWork.v3
Case studies: How are companies pricing configured products profitably?Case studies: How are companies Case studies: How are companies pricing configured products profitably?pricing configured products profitably?
nn YAHOO’s product:YAHOO’s product:
–– OnOn--line impressions sold to advertisersline impressions sold to advertisers
nn Configuration challenges:Configuration challenges:
–– Prices are based upon attributes of ad (e.g. Auto, Research, NorPrices are based upon attributes of ad (e.g. Auto, Research, North)th)
–– Prices are based upon attributes of viewer (e.g. Male, 25 Prices are based upon attributes of viewer (e.g. Male, 25 –– 30, Bay Area)30, Bay Area)
–– Goal: Maximize revenue subject to constraint on impression supplGoal: Maximize revenue subject to constraint on impression supplyy
nn Prior approach:Prior approach:
–– Formidable endFormidable end--item approachitem approach
–– No viewer differentiationNo viewer differentiation
–– Quarterly rate cardQuarterly rate card
nn Current approach:Current approach:
–– New head of pricingNew head of pricing
–– Chose price optimization vendor (Rapt)Chose price optimization vendor (Rapt)
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24Rapt ConfidentialHowTheAnalyticsWork.v3
A hint at how analytics workA hint at how analytics workA hint at how analytics work
North ad
North ad
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25Rapt ConfidentialHowTheAnalyticsWork.v3
A hint at how analytics workA hint at how analytics workA hint at how analytics work
North ad
North ad
$4 CPM
$10 CPM
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26Rapt ConfidentialHowTheAnalyticsWork.v3
A hint at how analytics workA hint at how analytics workA hint at how analytics work
North ad
North ad
$4 CPM
$10 CPM
12,000 advertisers
buy
8,000 advertisers
buy
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27Rapt ConfidentialHowTheAnalyticsWork.v3
A hint at how analytics workA hint at how analytics workA hint at how analytics work
North ad
North ad
$4 CPM
$10 CPM
12,000 advertisers
buy
8,000 advertisers
buy
An aware analytic engine can derive advertiser-willingness-to-pay for
FINANCE versus QUOTES & INFO.
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28Rapt ConfidentialHowTheAnalyticsWork.v3
A hint at how analytics workA hint at how analytics workA hint at how analytics work
North adEast ad
$4 CPM$3 CPM
6,000 advertisers
buy
8,000 advertisers
buy
An aware analytic engine can derive advertiser-willingness to pay for north versus east advertisements
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29Rapt ConfidentialHowTheAnalyticsWork.v3
Case study: HP Unix, North AmericaCase study: HP Unix, North AmericaCase study: HP Unix, North America
nn The situation at HPThe situation at HP
–– Used costUsed cost--plus and competitive +/plus and competitive +/-- pricing in Excelpricing in Excel
–– Sought to understand customer’s willingness to paySought to understand customer’s willingness to pay
–– “Dreamed of” standard methodology across business units“Dreamed of” standard methodology across business units
nn Quantified value proposition at HPQuantified value proposition at HP
–– $60 million annual revenue increase for Unix North America alone$60 million annual revenue increase for Unix North America alone(1.4% of revenue)(1.4% of revenue)
–– Achieved in the midst of price war, two major product transitionAchieved in the midst of price war, two major product transitions, s, and post 9/11and post 9/11
nn Ongoing impact: HP decided to further invest in pricing Ongoing impact: HP decided to further invest in pricing technology and processes worldwidetechnology and processes worldwide
–– Across Value Businesses: Enterprise Systems, Workstations, Across Value Businesses: Enterprise Systems, Workstations, Storage and SoftwareStorage and Software
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30Rapt ConfidentialHowTheAnalyticsWork.v3
Decision optimizationMarket awarenessPrice rationalization
Time
Organizationalbenefit
Informed,Informed,TargetedTargetedPricingPricing
Disciplined, Disciplined, RationalRationalPricingPricing
Proactive, Proactive, Optimized Optimized
PricingPricing
++
++
++
++
The path to pricing
excellence
The path to The path to pricing pricing
excellenceexcellence
Caution: It’s not all about technologyCaution: It’s not all about technologyCaution: It’s not all about technology
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31Rapt ConfidentialHowTheAnalyticsWork.v3
SummarySummarySummary
nn Configuration pricing is a must for companies who sell options Configuration pricing is a must for companies who sell options that create many, many possible end items.that create many, many possible end items.
nn The approach drives down the number of decisions but drives The approach drives down the number of decisions but drives
up the interup the inter--related complexity.related complexity.
nn Analytic engines are required.Analytic engines are required.
nn Companies such as HP and Yahoo are adopting the technology Companies such as HP and Yahoo are adopting the technology and reaping big benefits.and reaping big benefits.
Thank you for your attention
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