value based pricing in the capital equipment aftermarket

Valuebasedpricinginthecapitalequipmentaftermarket

10th Copperberg aftermarketconference,Wiesbaden

20October2016

Dr ShaunWest

Copperberg AftermarketEurope2016|October2016|ShaunWest

IntroductionValuebasedpricingmeansunderstandingboththecalculationandthecustomeremotions

Apracticalmodeltohelpyoubuildupvalue-basedpricingfortheaftermarketisdevelopedandpresented

Whyispricingimportant?

Customervaluecreationanditsimpactonpricing

Theprosandconsofdifferentpricingstrategies

Anexampleofvaluebasedpricing


HistoryPricingandvaluearenotnewproblems!


TodayHowmuchforaglassofwater?

Whatwouldyoupay?Thesituationhasamajorimpactonprice


BackgroundWhyispricingimportant?

Whatisimportantwhenpricingservices?- Offeringhighervalueaddedproductsandservices- Offeringservicesandsolutions- Rethinkingpricingstrategies- Settingtherightprice- Capturingcustomervalue

Pricingisakeypartofthebusinessmodelandimpactsmanydifferentareas

“…manufacturersshouldpricetheirmostadvancedserviceofferingsaccordingtovalue-,

ratherthantocost- orcompetitionbasedstrategies”(Rapaccini 2015)


BackgroundValueasafundamentalofservicepricing

Whatdoestheliteraturetellus?- Thatbuyer’schoiceisdependentonpriceisanoversimplificationoftheproblem

- Pricinghasanimpactoncustomersatisfaction- Pricingforservicesisdependentonsituations- Pricingmustreflectfunctionalandemotionalaspects

- Pricingandservicescopesarerelated

Theuseofvaluemustbeacentralaspectinthepricingobjectives

“..whatisthedifferenceinworthofthetwoofferingstomyfirm,andhowdoesitcompare

tothedifferenceintheirprices?”(Andersonetal,2009)


BackgroundPricingisthemostpowerfultoolinthemarketingtoolbox

Whatdoestheliteraturetellus?- Pricinghasahugeimpactonthefinancialresults- Pricingisamulti-departmentactivity- Servicesareoftengivenawayfree- Servicesfirmsneedtoadjusttheirrevenuemodels- Manufacturersfindithardtochangepricingmodels

Itisimportingtodeveloppricingobjectives,strategiesandtoolstohelpsupportnewpricingmodels


BackgroundPricinginfirmsmustworkonthreedifferentlevels

Alignmentisneededateachlevel

Pricingobjectivesmustalignwiththestrategyofthefirm

Thetoolsthathelpcreatethe’price’thatisgiventothecustomer

Differentstrategiescanbeappliedtoachievethepricing

objectives

Objectives

Strategies

Toolsandmethods


BackgroundPricingobjectivesarethebasisforprofitabledecisions

Whatdoestheliteraturetellus?- Pricingobjectivesarequantitativeandqualitative

- Sales,profits,marketshare…- Relationships,competitors…

- Theobjectivesmustbeunderstoodwithinthefirm

Theobjectivesofpricingleadtodifferentoperationalpricingstrategieswithintheorganization

”…objectivesofpricingaretodeterminewhichpricingstrategywillbethebasisforprofitabledecisionsasaresultofcompany’soverall

strategy”(Hinterhuber,2003)


BackgroundWhatareservicefirmsdoingtoday

Findingsconfirmedthatpricingofservicesiscomplex:- Differentpricingmodelshelpwithmarginoptimization- Itwashardtomoveawayfromacost-plusmodel- Firmshadadesiretomovetovalue-basedpricingbutwereunsureoftheimplications

- Thebuyermightbemoreadvancedinpricingmodelinnovationthantheseller

- Pricingalsoprovidesafocusonmeasuringcustomervalue

Withinafirmthereshouldbeanalignmentbetweenthepricingobjectives,pricing

strategiesandtools.“Suchtoolsareneededtocreateavaluebasedpricingmodel.”

Andersonetal.(2009).

Firmsarenotusinginformationthatcouldhelpthemtoidentifythecustomervalue


BackgroundFirmsneedtobeabletounderstandcustomervaluetogettotheprice

Whatdoestheliteraturetellus?- Threecategoriesforservicepricingmethods:costbased,competitionbased,anddemandbased

- Pricingmethods:negotiatedpricing,purebundling,tradediscounts,efficiencypricing,cashdiscounts,andbundling

- Differentpricingtoolsrequiredtosupportthepricingmethods

Correctpricinglevelshelpfirmstoboosttheresalesandmargins

”…empiricalresearchonpricingmethodsisextremelylimited”(Avlonitis andIndounas 2005)


PricingstrategiesCostpluspricingdoesnotalwaysprovidevaluetothecustomer

Pricingprocess Costplus- Easytouse- Supplierdoesnotunderstandcustomervalue- Canprovidethecustomerwithpoorvalue- Canleadto’over-scoping’ofservices- Pricingisonlyacalculation

Pricingprocessbeginswithcostsnotcustomervalue- that’swhyitiseasy

Scope Cost Margin Price Value


PricingstrategiesCostpluspricingdoesnotalwaysprovidevaluetothecustomer

Pricingprocess Costplus- Easytouse- Supplierdoesnotunderstandcustomervalue- Canprovidethecustomerwithpoorvalue- Canleadto’over-scoping’ofservices- Pricingisonlyacalculation

Thevalueisjudgedbythecustomer,pricebythesupplier

Scope Cost Margin Price Value

Customer Customer

Pricepaid

Valuereceived

Supplier

Costbuild-up

Margin

Scope


PricingstrategiesCompetition/marketbasedpricingdoesnotalwaysprovidevaluetothecustomer

Pricingprocess Competition/marketbase- Pricingiscontrolledbythemarket- Marketbenchmarksmustbeunderstood- Supplierdoesnotunderstandcustomervalue- Valuecapturecanbelow

Priceissetbythemarket- that’swhyitiseasy

Scope Cost Market Price Value


PricingstrategiesCompetition/marketbasedpricingdoesnotalwaysprovidevaluetothecustomer

Pricingprocess Competition/marketbase- Pricingiscontrolledbythemarket- Marketbenchmarksmustbeunderstood- Supplierdoesnotunderstandcustomervalue- Valuecapturecanbelow

Thevalueisjudgedbythecustomer,pricesetbythemarket

Scope Cost Market Price Value

Customer Customer

Pricepaid

Valuereceived

Supplier

Costbuild-up

Margin

Market

MarketbenchmarkScope


PricingstrategiesValuebasedpricingisbasedonthecustomer’svaluecreationprocess

Pricingprocess Valuebased- Customervalueisthedriverfortheprice- Pricesupportsscopedefinition- Supplierunderstandcustomervaluecreation- Suppliermeasuresmarginattheendoftheprovide- Canleavecustomersfeelingtheyareoverpaying

Pricingprocessbeginswithcustomervalue- that’swhyitishard

Value Price Scope Cost Margin


PricingstrategiesValuebasedpricingisbasedonthecustomer’svaluecreationprocess

Pricingprocess Valuebased- Customervalueisthedriverfortheprice- Pricesupportsscopedefinition- Valuebasedpricingmustbeincludedriskpricing- Supplierunderstandcustomervaluecreation- Suppliermeasuresmarginattheendoftheprovide- Canleavecustomersfeelingtheyareoverpaying

Valueisdeterminedby’valueinuse’butrisksignoringintangibleissues

Value Price Scope Cost Margin

Customer Supplier

Costbuild-up

Margin

Pricepaid

Valueinuse

Scope


PricingtoolsandmethodsforvaluebasedpricingValue-basedpricingtoidentifythe’willingnesstopay’andthe’fair-price’

Triangulationofvalue-basepricingbasedonthedataandanalysis:market,internalandcustomer

Customer Supplier

Productsand

services

Gainmakers

Valueinuse

Willingnesstopayregion

Market

Marketbenchmark

Gains⬆

Pains⬇

Totalvaluedelivered

Customer

Painrelievers

Margin

’Fair’price

Scope


Scope

Customer Supplier

Productsand

services

Gainmakers

Valueinuse

Willingnesstopayregion

Market

Marketbenchmark

Gains⬆

Pains⬇

Totalvaluedelivered

Customer

Painrelievers

Margin

’Fair’price

PricingtoolsandmethodsforvaluebasedpricingBuildingapricingmodelbasedoncustomervalueneedsyoutothinklikethecustomer

Thinkandfeed?

Sayanddo?

Hear? See

Pains Gains

Empathymapping

Gains⬆

Pains⬇

Customervalueproposition

Customerjobs

Gains

Pains

Gainscreators

Painsrelievers

Productsand

services

CustomervaluecreationValueinuse Jobstobedone

Strategicaimsandinputs

Pricingisnotaone-timeeventandhastobeviwed frommanydifferentangles

BenchmarkingMarketdata,win/lossanalysis,CRM….


PricingtoolsandmethodsforvaluebasedpricingBundlingandunbundlingtocapturevalueandimprovecustomerexperience

Outcomevaluepricing- Paymentperunitproduced- Risksharebasedon3(-5)performanceindicators

O&Gcontractswithinterestinoil- Benchmark:costperbarrelshouldbeinasimilarballpackasthesameservicesfromthepricelist

Therearealwaysmorewaystobuildavaluebasedprice

Equipment-basedvaluepricing- Monthlyfees:fixedcosts,obsolescence/upgrades- Feeperuse(typicallyperhour)- Risksharebasedon3(-5)performanceindicators

Gasturbinesservicecontractsinpowergeneration- Benchmark:monthlyfeesplusbasicfeesshouldbeinasimilarballpackasthesameservicesfromthepricelist


PricingtoolsandmethodsforvaluebasedpricingWhentousevaluebasedpricingandwhennottofromexperience

Costplusormarketbased- Forconsumablepartswithstandarddelivery- Forlogistics- FortravelandlivingcostsIfyoudon’taddvaluewhyshouldyoutakemoremargin?

Valuebased- Wherethecustomergainsrevenueperunitcost- Wherethecustomersavescostsperunitproduction- WhereriskexchangetakeplaceIfyouaddvalueyoushouldtakemoremargin.

Howonescrewcanchangecustomerrelationship


Value-basedpricingworkdoeswork!ValuenotcostinO&Gcanhelptodrivethecostout

Background- Customerrevenueisbasedonperbarrelofoil- Facilityhada’cost’mentality- TheavailabilityandHSEwerepoorCustomervalue- Customervalueisderivedfromoilsold- Outsourcetocompetentparty- AlignmentofgoalsSuppliervalue- Incomebasedonperbarrel- Removesprocurementdistractions- Alignmentofgoals

Movingfromcostplustoatariff-likeagreementcanprovideopportunitiestocutperbarrelcosts

goo.gl/Ab3ZEH


ClosingSummary

Pricingneedstobetailoredtoindividualcustomersandhowyouaddvaluetotheirbusinesswhilebeingsensitivetothemarketnorms

Pricingcanmakeorbreakarelationshipwithacustomer

Pricingshouldbeinlinewithcustomervaluecreation

Thebestpricingstrategiesputthecustomerinthecentre

Anexampleofvaluebasedpricinghasbeenpresented


http://www.advancedservicesgroup.co.uk/ssc2017


Thanksforyourtime!Questionsovercoffee… SlidespostedonSlideShare.com

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