pricing for technology - toronto product management ... meeting files/2011-04/20… · pricing for...
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Pricing for Technology
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www.pricingexperts.net
“Price is your product’s most important statement”
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SECTION 1 The Pricing Opportunity
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Improve by 1% Operating Profit Improvement
Price
Variable Cost
Volume
Fixed Cost
8.7
3.6
2.6
12.3
Source: Compustat composite of 3,000 companies
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Phillips
Sony
Panasonic
Hitachi
Xerox
Konica Minolta
Sharp
Samsung
Nokia
73%
238%
120%
88%
72%
53%
44%
13%
11%
Source: SKP analysis based on latest publicly available full year financial results * Price increase across the board, volume consistent
37% Industry Average
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SECTION 2 Four Methods of Pricing
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1. Cost - Based Pricing
2. Competition - Based Pricing
4. Value - Based Pricing
3. “Gut” - Based Pricing
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Cost-based pricing is perhaps the oldest form of pricing. It involves adding a fixed mark-up to a product's cost to ensure a target margin.
Common in environments where it is difficult to know the competition’s price
Relatively easy to implement and use on a day-to-day basis
Effective at ensuring the product is sold at the target margin
May not be effective at ensuring the product achieves other important objectives ESPECIALLY WHEN TRANSFER OR OTHER ALLOCATED FIXED COSTS ARE ADDED TO THE COST FORMULA “Sound Familiar”
This approach is a problem when launching new products
Price = ( 1 + target margin ) x ( product cost )
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Competition-based pricing sets a product’s price by adding a set premium – or discount – to the price of a competing product (or basket of products).
Common in environments where the competition’s price is very visible and/or rapidly changing
• Often called “reference” pricing
Relatively easy to implement and use on a day-to-day basis
Effective at ensuring the product is sold at the target premium or discount
May not be effective at ensuring the product achieves other important objectives.
Price = { 1 + ( target premium or discount ) } x ( competition’s price)
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• Typically based on past experiences of a senior team or leader
• Draws from past customer and competitor responses
• Easy to apply
• Still common approach to pricing
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Situation:
In mid-2000s, 3 leading gaming console producers introduced new products, ignoring the most important element in any transaction:
Value ascribed by the buyer to a product
Result:
Prices cut prices to stimulate sales
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Results:
Increased artificial focus on price Less attention on product’ technical advantages
• Product fails to generate expected sales volume
• Price cuts to meet volume targets, followed by competition, leading to price wars
• Loss of time for product penetration; becoming more important as lifecycles are becoming shorter
• Negative press coverage and loss of credibility
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Price of a product tied to attributes customers use when determining the benefits of a product/ service.
Example of benefits: use of a product or service may provide dollar savings
Common for new product pricing – especially in the case of very innovative products
Not an approach that can be implemented rapidly; requires careful consideration of alternatives and their pros and cons
Not always effective at ensuring the product achieves its objectives
Incremental Price = some fraction of ( savings vs. best alternative )
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SECTION 3 Value-Based Pricing
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Value ascribed to an offering will not likely be the same for all segments or customers within a segment.
Value to Customers
International Software applied to:
External Customers Internal Users
National Software applied to:
External Customers Internal Users
Regional Software applied to:
External Customers Internal Users Enhanced customer relationships
Lower transaction costs
Reduce operating costs
Broaden exposure to market
Efficient transfer of information
Maximize breadth of products/ services available
- B2C : Conjoint Analysis
- B2B : Value Chains
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• A key element is the presentation of complete offers containing all the important attributes of a product
• Data analysis includes: importance of each factor (attribute) and utility calculation for each offer, based on the respondents’ evaluation and choices
• The offers presented in the survey represent some possible combinations –the conjoint allows inference from a smalL number of direct measurements
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Which vehicle would you be most likely to purchase from among these choices?
Dodge Stratus
V6 engine AM/FM radio
$17,500
Nissan Altima
V4 engine AM/FM radio w/cassette $19,500
I wouldn’t purchase any of these if they were my only choices
Chevy Malibu
V6 engine AM/FM radio w/CD $18,500
2 3 4 1
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Surveys based on Conjoint Analysis give answers to several important questions.
– Will the new product meet customers’ approval?
– What factors do influence purchase decisions?
– How different are different market segments?
– What changes in the offer will have highest impact?
– What price is acceptable? What price maximizes sales value?
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The value chain for customers of a software applications developer providing a strategic planning tool could be summarized as below. The incremental value provided by the tool contained two value components:
Incremental revenue
Cost savings
Establish Objectives
Translate into Strategy
Convert into Plans
Monitor Adjust
Strategic Planning Tool
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• Reduces work needed to combine data on performance with metrics
• Reduces time required to demonstrate and build buy-in to cause and effect analyses
• Minimizes response time thereby minimizing lost revenues
Key Activities Estimated $ Value Incremental Value Added Revenue Cost Large Small Large Small
• Collect data on
performance
• Review performance
relative to metrics defined in
Planning
• Trend analysis
• Analyze cause and effect
Establish Objectives
Translate into Strategy
Convert into Plans
Monitor Adjust
$12.5 K
Person-days: - - 10 5 All-in cost/day - - $375 $375 Incremental Benefit: - - $3.75 K $3.75K
Person-days: - - 10 7 All-in cost/day - - $375 $375 Incremental Benefit: - - $3.75 K $2.63K
Person-days: - - - - All-in cost/day - - - - Incremental benefit: $5K $2K - -
TOTAL: $5K $2K $7.5K $6.38K
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Calculate a segment-specific premium (and weight it): • reflective of the value of the product to the segment
• based on factors identified through internal knowledge and external customer interviews.
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Section 4 Putting it Together:
The Price/ Value Map
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High Medium Low
Low
Med
ium
H
igh
Price
Valu
e
1. Premium 2. Penetration 3. Superb Value
4. Overcharging 5. Fair Value 6. Good Value
7. Rip-Off 8. Cream-Skimming 9. Cheap Value
This matrix will help you organize your strategies & tactics to make a well-informed pricing decision
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VALUE/PRICE Relationship
0
5
7
10
0 5 7 10
Price Rating
Value Rating
Your Company }
Competitors
Illustration Only
Scale 0-9 = Ranking Importance of Decision Criteria
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SPMG: OVERVIEW
Projects in the last year
SPMG Offices.
Partner Offices.
Years of consultative pricing experience through innovation, research and hands-on management have positioned the consultants at Strategic Pricing Management Group (SPMG) at the cutting edge of value-based pricing & revenue strategies and management.
The firm’s main services are strategic pricing and marketing strategy, research, corporate planning and education. Each assignment is carefully managed using proven customized methodologies and techniques to meet specific client needs. We have presence in North America, Europe and Asia.
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Range of services
Res
earc
h • Client/Consumer Value Drivers research
• Price change impact research • Transactional analysis/ Modélling • Client Value & Satisfaction studies • Product potential & ‘Willingness to pay’ • Client/Consumer segmentations • …..
Ad
viso
ry
• Value Based Pricing • Pricing Strategies & Tactics • Competitive Pricing / Price Wars • Implementing Price Increases • Channel Pricing • New Product Launch • ….
Pro
cess
• Development / Reinforcement of Pricing Capabilities • Redéployment of Pricing Processes • Management & optimization of ‘client conditions ’ • Multi-Channel Pricing / Pricing Corridors • Change Management • Value Propositions / Design to Price • Pricing Software implementation • …..
Sup
port
• Sales Force Training / Motivation • Support/ Training of Pricing / Marketing teams • Decision Support Systems • Deployment & management of ‘Test Platforms’ • Product/Service Full Cost Analysis • Pricing Process deployment • Pricing & Competitive Intelligence & Benchmarking • …..
Pric
ing
St
rate
gy
Pric
ing
M
anag
emen
t
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North America
Canada – H.Q Michael Hurwich, CEO & President Zoltan Lorantffy, Director [email protected]
United States Alain Meloche , Managing Partner [email protected]
Europe
Europe Loic Le Corre, Managing Partner [email protected]
Western Europe - France Eric Jacolin, Partner [email protected]
Western Europe - Germany Heinz Otto Luehr , Partner [email protected]
Central and Eastern Europe - Hungary Eniko Pongracz, Partner [email protected]
Asia
China -Hong Kong Edward Chan P, Eng, Partner [email protected]
Indonesia - Tangerang Erwin Husin, Partner [email protected]
Latin-America
Brazil - Rio de Janeiro Alex Carneiro, Partner [email protected]
Mexico – Mexico City Miguel Legorreta, MBA , Partner [email protected]
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