pricing trends and tools: how companies set prices to optimize business outcomes

© 2014 Blue Canyon Partners, Inc. All rights reserved.

June 2014

Strategic Pricing Survey

Results and Insights


Table of Contents

2

Introduction 3

Is Pricing a Challenge? 4

What is Impacting Pricing and What

are Companies Doing About it?12

What are Top Performers Doing? 17

Summary and Recommendations 25

Survey Methodology 28


About a year ago, serious conversations began to

emerge across the markets Blue Canyon serves

regarding pricing strategy. Although the topic itself

was not unusual or unfamiliar, the number of

companies wanting to discuss the issue was

increasing. Pricing strategy has become an important

topic for the business unit leader and the C-level

executive and across functions, such as business

development and marketing.

When the opportunity came to partner with MAPI on

this topic, we were eager to learn what drives and

impacts pricing strategy, how companies are

addressing these factors, and how confident they are

in their overall pricing approach.

With more than 80% of respondents stating that

they reassessed their pricing strategy 1 year ago

or less confirms that pricing is top of mind.

However, what does that say about the remaining

20% who have not recently reassessed their pricing

strategy?

Introduction

3

Less than 1 year ago, 62%1 year ago,

19%

2 years ago, 7%

3 years ago, 2%

More than 3 years ago, 11%

When was the last time

your company reassessed

its pricing strategy?

N=103


Is Pricing a Challenge?

4


Although more than 80% of

survey respondents indicated

that they reassessed their

pricing strategy 1 year ago or

less, nearly 60% specified

that their business did not

have a well-articulated,

formal pricing strategy.


Well-articulated, Formal Business Strategy

5

N=102


Reasons for Not Having a Well-articulated,

Formal Pricing Strategy

6

“A lot of randomness to our

strategy—needs tightening

up in a lot of areas”

“Not

consistent

globally”

“Mostly based in culture/institutional

knowledge rather than well-articulated

strategy”

“Some of our operating units

have a well-articulated pricing

process, some do not. We are

attempting to have all units take

a value-based approach

whenever possible”

“Prices have been managed

independently by business

entities. Global customer

behavior forcing changes

towards coordinated, global

price approach”


While those who indicated that their business has a well-articulated pricing strategy are more likely to be confident that they price effectively, only 24% are Very Confident

Of those who indicate they do not have a well-articulated pricing strategy a full 60% are Not Confident in how effectively they are pricing

7


Pricing Effectively to Maximize Profitability and Ability to Win

N=42

N=60


Those at the top, President/C-Suite, are the most confident that they

are pricing effectively, with over 70% at least Somewhat Confident

However the same level of confidence is not reflected at the Vice

President level, where only 50% are at least Somewhat Confident

and few are Very Confident

8


Pricing Effectively to Maximize Profitability and Ability to Win

N=25

N=46

N=32


Reasons for Not Being Confident

in Pricing Practices

9

“Lack of understanding

of value pricing”

“Cost-plus

not

optimal”

“Not convinced that the value

proposition for the products we offer

is fully assessed for each opportunity”

“Decentralized nature of our

pricing processes leaves a lot

of opportunity for different

behavior in different business

units and geographies”

“Since our general

pricing strategy is

cost-plus, we

don’t know what

we are leaving on

the table”

“Broad catalog and

several channels, the

system is too complex

and unwieldy to

effectively gauge”


Those who indicated that their business has a well articulated pricing strategy are more

likely to be confident that where pricing decisions are being made is appropriate

to drive success, with over 40% being Very Confident

Of those who indicate they do not have a well articulated pricing strategy only 15%

are Very Confident that where pricing decisions are being made is appropriate to

drive success

10


Determining Where Pricing Decisions Should be Made

N=42

N=60


Reasons for Not Being Confident in Where

Pricing Decisions are Made

11

“There are times that

decisions are made in silos or

vacuums”

“We are in the

process of driving

pricing decisions

down to the local

level”“We need to improve Marketing’s

role in pricing decisions”

“Lack of a repeatable, proven

methodology”

“Not enough

market

knowledge

factored into

pricing”

“We are still building central

guidelines that will allow for

more local decisions within

these parameters. Today there

is not enough structure”


What is Impacting Pricing and What

are Companies Doing About it?

12


What is Impacting Pricing?

Market Trends

13

Customers’ Perception of Value and Underlying Market Factors are

seen as the key drivers impacting pricing

Other factors:

Increased local/regional/global competition

Commoditization

New players in the value chain

Channel mix

N=102


What is Impacting Pricing?

Customer Trends

14

Greater Visibility and Smart Customers make pricing strategy and

decisions even more important

“Customers are demanding more price/cost

transparency before making large investments.”

“The channels we use that are growing heavily have

more sophisticated sourcing organizations.”

“Customers are more global and are starting to compare

price levels in various regions of the world.”

“The increasing presence of our products on the Internet

makes our pricing more transparent every year.”

N=102 N=102


What are Companies Doing About it?

Actions to Address Pricing Trends

15

To address pricing trends

companies are focusing more on

Process and Tools

Over 50% of companies are

undertaking multiple activities to

address pricing trends

N=103 N=103


Specific Actions Being Taken

16

“Global Pricing Core Team in

process” “Assessing rebates,

freight, and other

non-price factors in

the value equation”“More discipline process and

approval levels depending on deal

size and margins”

“Improved metrics and data structure to

facilitate pricing analytics and

performance management”

“Moving quickly toward market

segmentation and sub-

segmentation so that we can

truly focus on areas of distinct

competitive advantage”

“Better aligning metrics for

pricing stakeholders. Make sure

that metrics for sales folks

involved in pricing go beyond

revenue maximization”


What are Top Performers Doing?

17



Defining Top Performers

18

To identify best practices, we compared responses of “Top

Performers” and “Bottom Performers”

Top Performers are defined as those respondents

who…

Have a well-articulated, formal pricing strategy

Are somewhat or very confident that they are

pricing effectively

Are somewhat or very confident that where pricing

decisions are made is appropriate

Bottom Performers are defined as those respondents

who…

Do not have a well-articulated, formal pricing

strategy

Are neutral or unconfident that they are pricing

effectively

Are neutral or unconfident that where pricing

decisions are made is appropriateN=103



Pricing Approach

19

Top Performers are much more likely to have a Value-based approach to pricing or a Combination

approach that includes Value-based pricing, while Bottom Performers are more likely to have a

Cost-plus based approach or a Combination that includes Cost-plus pricing

How would you currently characterize your organization's

primary pricing approach?

More likely to

indicate

Combination,

including Value-

based pricing

More likely to

indicate

Combination,

including Cost-plus

pricing

N=36 N=24



Value-based Pricing Sidebar

20

Interestingly, respondents who do not primarily use a Value-based pricing approach are almost

just as likely as those who do primarily use a Value-based approach (or a combination, including

Value-based pricing) to specify that 1)Their customers understand the value of their offering and

2) Are willing to pay for that value

Given this perspective on their customers, one would expect more respondents to have

implemented Value-based pricing approaches. This is a strong indicator of the difficulty of

implementing Value-based pricing and moving away from traditional Cost-plus or Market-based

pricing approaches

N=71

N=31

N=71

N=31



Pricing Decisions

21

Examining where and how pricing decisions are made did

not reveal any significant differences in how many

functions/groups are involved in pricing decisions or

where decisions are made, however, Top Performers are

more likely to have a Dedicated Pricing Function and

rely less on General Mangers for Pricing Decisions than

Bottom Performers.

Confidence in pricing is likely more driven by other

factors such as process, tools, and capabilities

N=24

N=36N=24

N=36

N=24

N=36



Pricing Actions

22

Top Performers respond to market and pricing environment factors by focusing

on Developing/Improving Pricing Tools and Processes rather than

Restructuring their Organization or changing Pricing Authority

N=24

N=36



Pricing Tools

23

Frequently mentioned

tools utilized by Top

Performers include…

Strategic Pricing

Frameworks

Pricing Matrixes

Pricing Analytics

Competitor Pricing

Databases/Analysis

Primary Research/

Voice of Customer

“Various Strategic

structures: Voice of

the Customers

(VOCs); pricing

matrix”

“Pricing analytics - pattern assessment, scatter plots

and statistical analysis. Strategic pricing frameworks

(defining value creation and dimensions of

differentiation - then testing pricing strategy, price

points, and actual prices achieved)”

“Competitive price analysis, internal

assessment of value proposition

strength and consequent premium

potential”



Pricing Metrics

24

Frequently mentioned

metrics utilized by Top

Performers include…

Price Impact on

Revenue/Profitability

Win/Loss Ratio vs.

Price Levels

Market Share Change

Price Realization/Price

Leakage

Customer Value

Indicators

“Win/loss, price

development year

over year, % of

business asking for

‘special’ prices”

“Price Realization and Price Quality Indicators.

Flexible and dynamic measurability at any level of

customer, product, and geography”

“Semi-annual customer survey that

addresses the overall value of our

business relationship”


Summary and Recommendations

25


Pricing continues to be a challenge

▫ Many companies lack a well-articulated pricing strategy

▫ Even among those that have a strategy, many are still not confident that they are pricing effectively

Market and customer trends will put greater emphasis on pricing going forward

▫ Changes in customer’s perception of value and underlying market factors combined with greater pricing

visibility and smart customers are making pricing decisions even more important

▫ Companies are responding by developing/improving pricing processes and tools

Top Performers can provide valuable guidance

▫ The location of pricing decisions and functions involved are not as important as having the right processes,

tools, and capabilities

▫ Implementing value-based pricing and the right pricing tools and processes are linked to increased

confidence in pricing effectiveness

▫ Strategic pricing frameworks, pricing analytics, competitive pricing data, and voice of customer are key tools

for success

▫ Focus on metrics that clearly indicate pricing’s impact on the overall business – Price Impact on

Revenue/Profitability, Win/Loss Ratio vs. Price Levels, and Price Realization/Leakage

Summary

26


Best practices to become a “Top Performer”

▫ Segmentation

• Fundamental to developing pricing strategy. Need to know when, where, and to who

pricing should be different and why

▫ Framework before programs

• First, establish your overall pricing approach. The programs to execute on the approach

will follow

▫ Tools and processes

• To consistently and effectively implement pricing approach, especially in large, global

organizations

▫ Put pricing in its proper place

• Pricing needs to receive the right level of attention. Dedicated function or position at

senior level with clear decision rights is best practice

▫ Measure, measure, measure

• Clear metrics and processes for monitoring performance, with systems and reporting

purpose designed to support strategic and tactical pricing decisions

Recommendations

27


Survey Methodology

28


Blue Canyon and MAPI surveyed more than

1,000 CEOs, General Managers, Division

Leaders, and Heads of Marketing and

Strategic Planning

103 valid responses were collected from

66 companies from a broad cross section

of industries

Over 2/3 of the survey respondents were

executive level who own a P&L and are

involved in making pricing decisions or

setting pricing guidelines within their

organizations

Nearly half of the companies have a

dedicated pricing group

Nearly 60 percent indicated that they use a

combination of pricing approaches, including

market-based, value-based, and cost-plus

Survey Methodology

29

0 10 20 30 40 50 60 70

Leading a business unit and/or region

Leading multiple businesses

Owning a P&L

Making pricing decisions

Setting the pricing guidelines within myorganization

None of the above

Please indicate if you are personally responsible for any of the following

(check all that apply)

48

6170

83 85

25

0102030405060708090

Which function/groups participates in pricing decisions in your business

(check all that apply)


What do we do?

Advise on growth

challenges/problems

Identify growth

opportunities

Develop new business

models

Evaluate fact-based

strategic options

Recommend alternative

approaches

Set detailed action plans

What makes us

different?

Foster win-win outcomes

along the customer chain

Centered on understanding

complex, external

environments [markets,

customers, channels,

competitors]

“Outside-in” market-driven

strategies

Leverage proven

methodologies to develop

cutting-edge answers

Journey with clients to

make decisions and to take

action

What is our

experience?

Industries

Agriculture

Vehicles

Construction

Distribution/Wholesaling

Chemicals

Industrial Equipment

Oil & Gas

Healthcare

IT & Telecommunication

Tools & Equipment

Utilities

And more….

Who are we?

Management

consulting firm

Serve Global 1000

business-to-business

companies

Team of seasoned

consultants

U.S. & global capabilities

with offices in Chicago and

Beijing

About Blue Canyon Partners

30


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

E [email protected]

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.

31