Pricing Trends and Tools: How Companies Set Prices to Optimize Business Outcomes
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Transcript of 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
© 2014 Blue Canyon Partners, Inc. All rights reserved.
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
© 2014 Blue Canyon Partners, Inc. All rights reserved.
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
© 2014 Blue Canyon Partners, Inc. All rights reserved.
Is Pricing a Challenge?
4
© 2014 Blue Canyon Partners, Inc. All rights reserved.
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.
Is Pricing a Challenge?
Well-articulated, Formal Business Strategy
5
N=102
© 2014 Blue Canyon Partners, Inc. All rights reserved.
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”
© 2014 Blue Canyon Partners, Inc. All rights reserved.
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
Is Pricing a Challenge?
Pricing Effectively to Maximize Profitability and Ability to Win
N=42
N=60
© 2014 Blue Canyon Partners, Inc. All rights reserved.
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
Is Pricing a Challenge?
Pricing Effectively to Maximize Profitability and Ability to Win
N=25
N=46
N=32
© 2014 Blue Canyon Partners, Inc. All rights reserved.
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”
© 2014 Blue Canyon Partners, Inc. All rights reserved.
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
Is Pricing a Challenge?
Determining Where Pricing Decisions Should be Made
N=42
N=60
© 2014 Blue Canyon Partners, Inc. All rights reserved.
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”
© 2014 Blue Canyon Partners, Inc. All rights reserved.
What is Impacting Pricing and What
are Companies Doing About it?
12
© 2014 Blue Canyon Partners, Inc. All rights reserved.
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
© 2014 Blue Canyon Partners, Inc. All rights reserved.
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
© 2014 Blue Canyon Partners, Inc. All rights reserved.
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
© 2014 Blue Canyon Partners, Inc. All rights reserved.
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”
© 2014 Blue Canyon Partners, Inc. All rights reserved.
What are Top Performers Doing?
17
© 2014 Blue Canyon Partners, Inc. All rights reserved.
What are Top Performers Doing?
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
© 2014 Blue Canyon Partners, Inc. All rights reserved.
What are Top Performers Doing?
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
© 2014 Blue Canyon Partners, Inc. All rights reserved.
What are Top Performers Doing?
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
© 2014 Blue Canyon Partners, Inc. All rights reserved.
What are Top Performers Doing?
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
© 2014 Blue Canyon Partners, Inc. All rights reserved.
What are Top Performers Doing?
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
© 2014 Blue Canyon Partners, Inc. All rights reserved.
What are Top Performers Doing?
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”
© 2014 Blue Canyon Partners, Inc. All rights reserved.
What are Top Performers Doing?
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”
© 2014 Blue Canyon Partners, Inc. All rights reserved.
Summary and Recommendations
25
© 2014 Blue Canyon Partners, Inc. All rights reserved.
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
© 2014 Blue Canyon Partners, Inc. All rights reserved.
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
© 2014 Blue Canyon Partners, Inc. All rights reserved.
Survey Methodology
28
© 2014 Blue Canyon Partners, Inc. All rights reserved.
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)
© 2014 Blue Canyon Partners, Inc. All rights reserved.
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
© 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.
31