how to boost profit through power pricing · how to boost profit through power pricing portorož,...

How to Boost Profit

through Power Pricing

Portorož, May 30, 2012

Prof. Dr. Dres. h.c. Hermann Simon

Bonn Office

Haydnstraße 36, 53115 Bonn, Germany

Phone +49/228/9843-115, Fax +49/228/9843-380

E-mail: [email protected]

Internet: www.simon-kucher.com

www.hermannsimon.com

17th Slovene Marketing Conference

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The first commandment for pricing:

Manage for Profit, not for Market Share!

This requires an attitude change

in many companies.

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Profit vs. Market Share - Quote:

“Let’s be honest. We all claim to be going for

profit, but heads start rolling as soon as the

market share drops by 0.1%. When profit goes

down by 20%, nothing happens.”

Executive Vice President

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Profit vs. Market Share: Example Sony

Result of discussion:

Prices need to be increased.

Comment from top executive:

“But then we lose market share”

End of discussion.

The Poison of PIMS

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Source: PIMS

PIMS-Study (1970-1983): Profit Impact of Market Strategy

0

10

20

30

40

50

0 10 20 30 40 50

Market share in %

Pretax return on

investment in %

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General Motors

“Fixed costs are extremely high in our in-

dustry. We realized that in a crisis we fare

better with low prices than by reducing

volume. After all, in contrast to some competi-

tors, we still make money with this strategy.”

Richard Wagoner, CEO General Motors

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Porsche

“We have a policy of keeping prices stable to

protect our brand and to prevent a drop in prices

for used cars. When demand goes down we

reduce production but don’t lower our prices.”

Wendelin Wiedeking, CEO Porsche

Price Wars Simon-Kucher Global Pricing Study 2011: Survey of 3905 managers worldwide.

46% consider their company to be in a price war, and 83% of those blame

competitors for starting it.

Source: Simon-Kucher & Partners Global Pricing Study 2011

Industries with a dis-

proportionately large share

of price wars: construction,

energy/utilities, chemicals,

industrial goods, automotive

Japan is the country with the

most ongoing price wars

(84%)

No 54%

Yes 46%

8%

9%

83% Other companies

We did – intentionally

We did – unintentionally

Is your company

currently engaged

in a price war?

- 8 -

Who started the

price war?

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Good vs. Bad Market Share

Market Share

Good Bad

earned by performance,

quality, innovation,

value, adequate prices

conquered by aggressive

low prices without

corresponding low costs

good margins, high profits margins ruined, low profits,

losses

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Lesson 1

“Manage for Profit, not for Market Share” is

perceived as a provocation by many managers. It

calls for a fundamental attitude change. In

pricing, profit should and must be the first goal.

Profit is the cost of survival.

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Value Extraction: Get More out of It

? ? Value Delivery (Welchen Wert liefern

wir den Kunden?)

Value Delivery (What value do we deliver to the customer?)

Value Extraction (Wie holen wir uns den Gegenwert?)

Value Extraction

(How do we get the counter-value?)

+ + - / o / +

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What is Price in Latin?

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Pretium

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Pretium

What is Value in Latin?

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Pretium


Pretium

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Pretium


Pretium

Pretium = Price = Value

That’s it!

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Gillette Blades The price per blade between the original Gillette Sensor and the Gillette Fusion has

gone up by 298%

0,63 0,69

0,97

1,29

1,75 1,87

0,00

0,20

0,40

0,60

0,80

1,00

1,20

1,40

1,60

1,80

2,00

GilletteSensor

GilletteSensor Excel

Gillette Mach3

Gillette Mach3 Turbo

Gillette M3Power

GilletteFusion

Price per blade (£)

+9% +41%

+32%

+36%

+7%

Source: Data collected by SKP London in October 2006. Price per blade is based on the largest pack available.

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Starbucks: Value Creation through Innovation

© Prof. Dr. Holger Ernst, WHU – Otto Beisheim School of Management

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End of 2005 Porsche introduced the all

new coupé Cayman S

The Cayman S is technologically based on

the roadster Boxster S

Price position Cayman S?

Porsche Cayman

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Convertibles more Expensive/Hard Tops less Expensive

+ 14%

+ 13%

+ 12%

+ 7%

Porsche 911

BMW 630

MB CLK 500

Audi TT

Lesson/conventional wisdom:

Make the Cayman 10% less expensive!

Porsche Cayman: Conventional Wisdom

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Porsche Cayman

Our price

recommendation

Learnings:

Understand the

value!

Quantify the value in

price terms!

Observe product line

and competitive

situation!

76 741 €

52 265 €

58 500 €

911

Boxster S

47 000 € Conventional

wisdom

Price positioning:

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Carbon Fiber Brake

Porsche price: ca. 8,000 €

Ferrari price: ca. 15,000 €

Value Pricing: 3M Industrial Safety Case: End-of-Life-Indicator

• Enormous value of that

feature: 20 to 25%

• Cannot be exploited through

performance or efficiency

aspects

• Main motivations: Safety

engineer is on "safe side"!

Responsibility is handed

over to the user!

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- 24 - Source: Dan Ariely, Predictably Irrational, New York: Harper Collins 2009, p. 1-6

SUBSCRIPTIONS

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Pick the type of subscription you want to buy

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One-year subscription to the print edition of

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articles from The Economist since 1997.

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Value Perception: Price Anchor or the Magic of Zero?

- 25 -

SUBSCRIPTIONS

Welcome to

The Economist Subscription Center

Pick the type of subscription you want to buy

or renew.

Economist.com subscription – US-$ 59.00

One-year subscription to Economist.com

Print subscription – US-$ 125.00


The Economist.

Print & web subscription – US-$ 125.00


The Economist and online access to all

articles from The Economist since 1997.

Source: Dan Ariely, Predictably Irrational, New York: Harper Collins 2009, p. 1-6


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- 26 - Source: Dan Ariely, Predictably Irrational, New York: Harper Collins 2009, p. 1-6

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16

0

84

68

32

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Lesson 2

Value delivery and value extraction are the

essential determinants of profit and price. There-

fore, understanding and quantifying the value

perception is critical for profit maximisation.

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Can you be

profitable

with low prices?

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Aggressive Pricing: Ryanair

2011/12:

Revenue 4,39 billion € (+21%)

Profit 560 million € (+50%)

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Cost Leadership

*Aldi Nord

Source: FAZ, 18.02.04

0.9 2.6 Inventory turnover

3.0% 6.7% EBIT in % of sales

13.1% 4.9% Personnel expenses in % of sales

890 1,160 Gross profit per sm in €

Regular

supermarket Aldi*

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Aggressive Pricing: IKEA’s Big “Bang” “Sharpen your product”

Target priced € 1

One shape, one color

Size and shape optimised for

efficient production

Only lighter colors

Consistent strategy, no “marketing

overkill”

Result: IKEA is the most profitable retailer in the world!

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Emerging Ultra-low Price Segment

Vijay Mahajan: “The biggest market opportunity of the 21st

century.”

Tata Nano: car for $2,500

$35 tablet computer

Gillette Guard, India/October 2010:

11 cent blade, Mach3 44 cents

Sneakers for $1

Siemens Imaging System

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Tata Nano

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Lesson 3

It is possible to be profitable with low costs and

prices. But only a few companies rise to this

challenge. If you want to make money with low

prices you must trim your entire strategy chain

(production, marketing, culture) to frugality.

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Price Differentiation

across customers

across values

across space and time

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Rectangle vs. Triangle

"The Profit Potential is always a Triangle"

Sales

Price

Unit

Cost

Profit

Potential

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Rectangle vs. Triangle Sales

Price

Unit

Cost

Our Profit

Our Sales

Our

Price

"Money Left

on the Table"

"Passed-up

Profit"

With uniform price the profit is a rectangle,

the profit potential is a triangle

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Price Differentiation of Coca-Cola

0.32 0.34 0.40

0.45

0.60

0.75 1.80

1.00

1.10

€

0.33 l-can

3.50

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Price of service contract

depends on yield of wind park

86% of customers

sign a 12-year service contract

Enercon

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Two-Dimensional Pricing - BahnCard (Railcard)

Total Price with/without BC Realised Discount

Total

total km per

year

With

BahnCard

Without

BahnCard

43%

12%

-3%-13% -19% -23% -27% -29% -31%

137%

500 1000 1500 2000 2500 3000 3500 4000 4500 5000

Full Fare

= 100

actual discount

end of 1990s: 28%

1st: 460 €

2nd: 230 €

total km per year

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Bundling for Car Features Optimal Bundle Discount and Profit - A Case from the Automotive Industry:

Profit Plus

25%

0 5 10 15 20 25 30 35 40

Optimal Bundle Discount of 21%

0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

Pro

fit

(In

dex

)

Individual Special Features

Comfort Bundle

Safety Bundle Sports Bundle

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Lesson 5

Price differentiation, multidimensional, non-

linear pricing, and bundling schemes are

extremely effective pricing tools. Highly

accurate information is required for these

schemes.

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Implementation and Process

Information, models, decision guidelines

Organisation, responsibilities, incentives,

timing

Competencies, qualifications

IT support

Sequence: analysis, decision, implementation,

monitoring

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Margin up 160 basis points

= 1.6 percentage points

Project payback < 1 month

Result:

Focus on 50,000 most relevant

decisions, automatic identification

New Process:

1 million price decisions per season Situation:

Case: Tour Operator

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Margin up 150 basis points

= 1.5 percentage points

Project payback < 1month

Result:

Central pricing and discount system

Continuous monitoring

New Process:

Decentralised pricing in 200 countries

Large price inconsistencies

Situation:

Case: DHL

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Very quick win: Average discount down from 16% to 14%

Margin up 200 basis points = 2 percentage points

Result:

Anti-discount incentive for sales force

Better information on price elasticity

New Process:

40,000 articles Prices are negotiated

Situation:

Case: World Leader in Assembly Products

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Price Defense Commission The "price defense commission" rewards sales force performance in terms of their pricing achievements.

Special 80% 100%

3.0%

9.0%

Commission

Price

Industry supplier

Global company

Sales force with broad price

authority

Primarily sales commission,

only partly linked to margins

Strong price decline during

the last years; most of

transactions were closed at

maximum discount

Strong margin drop

Source: SKP project database

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Result: Profit increase of €60 million = 400 basis points = 4 percentage points

Clear pricing guidelines and responsibilities Better information for account managers

New Process:

No clear pricing guidelines

No information on price elasticities

Case: Private Banking

Situation:

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Case: General Electric

Pricing Manager

Experiences

Reports directly to Division CEO

Rigorous implementation

Considerably stronger pricing discipline

Improved preparation: Price argumentation, defence

Source: GE Management, personal discussion with Jeff Immelt

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Lesson 6

The improvement of value and pricing processes

typically leads to margin increases of 2

percentage points. The cases show that quick

wins and high profit increases were achieved.

You can develop the best strategy in the world,

implementation is 90% of its success.

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Summary

Price is the most effective profit driver. Manage for Profit, not for Market Share.

Value pricing: higher value – higher price – higher profit

It is possible to make money with low prices, but…

Keep an eye on the emerging ultra-low price segment

Whenever possible differentiate prices

Look at your pricing processes! Implementation counts!

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Simon - Kucher & Partners

Worldwide Strategy & Marketing Consultants

Focus: Revenue-driven (=Smart) Profit Growth

Core Competency: Pricing

- 52 -

- 53 -

Best Consultancies in "Marketing and Sales"

In 2007 and 2011, top managers ranked Simon-Kucher as best consultancy in

marketing and sales before Boston und McKinsey.

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Rank Consultancy Ø Score*

1 Simon-Kucher & Partners

2 Boston Consulting Group

3 McKinsey & Company

4 Bain & Company

5 Roland Berger

Competence-Ranking "Marketing and Sales"

08/2007 und 08/2011

395

379

359

347

342

*Average for 2007 and 2011, maximum score 500;

Source: manager magazin August 2007&2011/IMB, Survey among German top managers

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World Leader in Price Consulting

“Simon-Kucher is world leader in giving advice

to companies on how to price their products.” Business Week

“Simon-Kucher is the worlds’ leading pricing consultancy.” The Economist

“In pricing you offer something nobody else does.” Professor Peter Drucker

“No one knows more about pricing than Simon-Kucher.” Professor Philip Kotler

“No firm has spearheaded the professionalization of pricing

more than Simon-Kucher & Partners.” William Poundstone (Priceless, Hill and Wang, 2010)

- 54 -

Employees and Revenue

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Revenue 2011: €121 million

3 4 5 7 13 18 19 22 27 35 46 56 71

90 112

130 147

165 187

220 248

283

354

436 446

500

585

632

-60

40

140

240

340

440

540

6401985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

5/2

01

2

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Global Presence

Germany,

Bonn

Switzerland,

Zurich

England,

London

Italy,

Milan

Spain,

Madrid

USA,

San Francisco

Germany

Munich

Japan,

Tokyo

Poland,

Warsaw

Germany,

Frankfurt

USA,

New York

Germany,

Cologne

USA,

Boston

Luxem-

bourg

Austria

Vienna

Belgium,

Brussels

USA,

Miami

Denmark,

Copenhagen

Netherlands,

Amsterdam

France,

Paris

China,

Beijing

Singa-

pore

Australia,

Sydney

- 56 -

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Slovene Books

- 58 -

Management Thinkers The most influential management thinkers in German-speaking

countries 2010-2011

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Source: Frankfurter Allgemeine Zeitung, Feb 6, 2012, p. 31 www.managementdenker.de, Internet Survey, n=804

1. Peter F. Drucker † 40.1%

2. Hermann Simon 22.5%

3. Fredmund Malik 14.6%

4. Michael E. Porter 7.5%

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Hermann Simon

Professor Simon has published over 30 books in 25 languages, including the worldwide bestsellers Hidden Champions

(Boston 1996, cover story of BusinessWeek in 2004) and Power Pricing (New York 1997), as well as Manage for Profit,

Not for Market Share (Boston 2006). His book Hidden Champions of the 21st Century, Success Strategies of Unknown

World Market Leaders (New York 2009) investigates the strategies of little known market leaders. Beat the Crisis (New

York 2010) provides companies with practical advice against the crisis and for a quick recovery.

Simon was and is a member of the editorial boards of numerous business journals, including the International Journal

of Research in Marketing, Management Science, Recherche et Applications en Marketing, Décisions Marketing,

European Management Journal as well as several German journals. Since 1988 regularly writes columns for the

business monthly Manager Magazin. As a board member of numerous foundations and corporations, Professor Simon

has gained substantial experience in corporate governance. From 1984 to 1986 he was the president of the European

Marketing Academy (EMAC). Simon is co-sponsor of the first Special Purpose Acquisition Company (SPAC) listed on

the German Stock Exchange in Frankfurt, which acquired Exceet Group S.E. in July 2011.

A native of Germany, he studied economics and business administration at the universities of Bonn and Cologne. He

received his diploma (1973) and his doctorate (1976) from the University of Bonn. Simon holds honorary doctorates

from IEDC Business School of Bled, Slovenia, and from the University of Siegen, Germany. He is a honorary professor

at the University of International Business and Economics in Beijing.

Hermann Simon is chairman of Simon-Kucher & Partners Strategy & Marketing Consultants with

offices in Amsterdam, Beijing, Bonn, Boston, Brussels, Cologne, Copenhagen, Frankfurt,

London, Luxembourg, Madrid, Miami, Milan, Munich, New York, Paris, San Francisco, Singapore,

Sydney, Tokyo, Vienna, Warsaw and Zurich. Simon is an expert in strategy, marketing and

pricing. He has an extensive global range of clients. In the German language area he was voted

the most influential management thinker after the late Peter Drucker.

Before committing himself entirely to management consulting, Simon was a professor of

business administration and marketing at the Universities of Mainz (1989-1995) and Bielefeld

(1979-1989). He was also a visiting professor at Harvard Business School, Stanford, London

Business School, INSEAD, Keio University in Tokyo and the Massachusetts Institute of

Technology. From 1995 to 2009 he was CEO of Simon-Kucher & Partners.

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