practical pricing tips for driving profitable growth

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Practical Pricing Tips for Driving Profitable Growth by David Mok at SVPMA Monthly Event February 2011


  • 1. Practical Pricing Tips for Driving Profitable Growth David Mok
  • 2. Speaker BiographyDavid Mok manages the worldwide retail pricing team for Seagates $1Bbranded storage solutions business. At Seagate, he helped turned a barelyprofitable situation into a strong and sustainable gross profit business withina year. During this time, the retail channel business posted the highest profitin Seagates six-year branded solutions history.Prior to Seagate, David was at Xilinx where he led transformational pricingefforts, deployed pricing software, architected the companys global pricingmodel, and developed pricing strategies across a broad spectrum ofsemiconductor products for a $2B business. He also managed thecommunications segment marketing team and led value-based pricing effortsusing solutions. He was a product manager for an advanced platform system-on-chip semiconductor product family. David teaches a pricing course at theUniversity of California, Berkeley and has been speaking professionally on thesubject of pricing at various conferences throughout the country. Davidbegan his career as a naval officer aboard an attack submarine where heconducted missions vital to the national security of the United States.David Mok Slide 2
  • 3. Retail Business Accomplishments 5 % GM - 2 plus years ago 3 # of quarters to improvements 25 % GM - at the height of our financialsDavid Mok Slide 3
  • 4. The Power of One McKinsey Study: Across the Fortune 2000, on average, 1% improvement in price translated to 11% improvement in operating profit 1% Improvement in Increase in Operating Profit Inventory 2.7% Units 3.7% COGS 7.3% Price 11.0%David Mok Slide 4
  • 5. Agenda Review some simple pricing rules to help you manage your business more profitably Concept applies whether you are selling widgets, software, services or whether you are in B2B or B2C channels Most importantly, lets have fun talking price tonightDavid Mok Slide 5
  • 6. Why are Diamonds More Expensive than Coal and Water? No Functional Value Critical to Life Labor intensive to mine, like diamondsDavid Mok Slide 6
  • 7. Three Approaches to Price Setting and Two Theories of Value Competition Driven Pricing Your Price = Competitors Price Cost-Plus Pricing Labor Theory of Value Product Cost Price Value Customers Value-Based Pricing Subjective Theory of Value Customers Value Price Cost ProductDavid Mok Slide 7
  • 8. Rule #1 If the value is not clear, your price will always be too high (Value Justifies your Price)David Mok Slide 8
  • 9. What is Value?Value is defined as the perceived worth inmonetary units of the set of economic,functional, and psychological benefits receivedby the customer in exchange for the price paidfor a product offering taking into considerationavailable competitive offerings and price.- James Anderson, Dipak Jain, and Pradeep Chintagunta. Journal of Business-to-BusinessMarketingDavid Mok Slide 9
  • 10. Case Study: Wired Communications Customer developing flexible communications equipment Your competition = another Chip vendor (competitors account) Customer building a solution in attempt to displace incumbent Competing Chip vendor priced at $125 per unit What would you do? 32 Uplink Downlink Opportunity 31 2 223 1 1 164 Block Bk #2 Bk #3 Block Block Block Block #1 #3 #4 #51 #1 Bk #4 Switch2 Fabric3 864 Opportunity David Mok Slide 10
  • 11. Integration of Surrounding Building Blocks Reduces System BOM by $5 Million Integrate Surrounding Functional Blocks Less Number of Chips Reduced System BOM CompetitiveFunctional Blocks Price Our Solution Price SolutionIngress Processing 20G Standard Chip $250 Programmable Chip + IP $210Egress Processing 20G Standard Chip $250 Programmable Chip + IP $210Control Function Programmable Chip $125 Programmable Chip $180Control Function Programmable Chip $125 Not Required $0Num of Boards / System 16 16Life Cycle System Forecast 2,000 2,000Total Life Cycle BOM $24 M $19 M David Mok Slide 11
  • 12. Field Upgradeability Reduces Service Costs by $8 Million Programmable Chip Online Field Upgradeability Eliminates Replacement of Boards Eliminates Truck Rollouts and Service CallsParameters Assumptions Competitor Our SolutionCustomer Equipment Revenue $1B $1BService Revenue 20% of Revenue $200M $200MCost of Services 50% of Service Revenue $100M $100MField Upgrade Costs 33% of Total Services $33M $0(BOM + Services)R&D Efforts (Design & Verification) $150K $150KProbability of Field Upgrades 25%Cost of Field Upgrades $8,287,500 $37,500David Mok Slide 12
  • 13. We Priced it at $210 and Won a $50M Program with 3 Key Benefits that Resonated with the Customer Right-Sized Lower Lowest Cost 1 Design Power Per Channel Customizable Solution Reduced Total Solution BOM Prog. Fabric + Function Integration Modular IP + System Services 2 3 Field Reduced Service Costs (OpEx) UpgradeabilityDavid Mok Slide 13
  • 14. Other ExamplesDavid Mok Slide 14
  • 15. Economic Impact of EMC DocumentumDavid Mok Slide 15
  • 16. What Customers BuyDont sell me things. Sell me ideals, feelin


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