value based pricing (using design thinking approaches)

Valuebasedpricingofproductsandservices

DesignX/Stanford

22March2017

Dr ShaunWestCopperberg AftermarketEurope2016|October2016|ShaunWest

Willingnesstopayregion

Scope

Customer Supplier

Productsand

services

Gainmakers

Valueinuse

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-timeeventandhastobeviewedfrommanydifferentangles

BenchmarkingMarketdata,win/lossanalysis,CRM….

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- Suppliermeasuresmarginattheendoftheprocess- 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


Market

Marketbenchmark

Gains⬆

Pains⬇

Totalvaluedelivered

Customer

Painrelievers

Margin

’Fair’price

Scope



Scope

Customer Supplier

Productsand

services

Gainmakers

Valueinuse

Market

Marketbenchmark

Gains⬆

Pains⬇

Totalvaluedelivered

Customer

Painrelievers

Margin

’Fair’price

PricingtoolsandmethodsforvaluebasedpricingBuildingapricingmodelbasedoncustomervalueneedsyoutothinklikethecustomer

Thinkandfeed?

Sayanddo?

Hear? See

Pains Gains

Empathymapping

Gains⬆

Pains⬇


Customerjobs

Gains

Pains

Gainscreators

Painsrelievers

Productsand

services



Pricingisnotaone-timeeventandhastobeviewedfrommanydifferentangles



The40minutechallengeAstheproductmanageryouhavebeenaskedforyourviewonthepriceforaproduct

SilverAGmanufactureshightechnologyengineeredpumps.Thepumpsareusedinoilpipelines.Thepumpshasbeenspecificallydesignedtoreplaceolderpumps.Atypicalpipelinehas20pumps.Studiesshowthattheexistingpumpshaveinthepipeline

haveanoperationalefficiencyof92%andreliabilityof95%.Thepumpshavebeeninoperationforthepast20yearsandarewellunderstoodandlikedbytheoperationsandmaintenanceteam.Thepumpsoriginallycost600kUSD.Thecurrentmaintenancecostshavebeenestimatedtobearound1.2MUSDforatypicalpipelinewithanelectricitybillof1.6MUSDperyear.Saleshaveidentifiedthekeyactorsas pipelinemanager,

operationsmanager,maintenancemanagerandprocurement.

Usingthefollowingprocesstoidentifythewillingnesstopayandthenprovideafairpriceforthepump

Information- R&Deffort5MUSD- Manufacturingcosts(firstunit)estimated1.2MUSD- Manufacturingcosts(20unit)typical20%lower- Budgettosell30unitsperyear- Operationalefficiency95%(target)- Reliability98%(target)- Maintenanceschedule

- Routine:20kUSDperyear- Minor:50kUSD,24koperationalhours- Majorcosts:100kUSD,48koperationalhours

- Theexistingmaintenanceteamunderstandstheexistingpumpsandtheirmaintenanceissues

- ProcurementisveryCAPEXfocused- Operationswantaneasylifewithunexpectedfailures


ThechallengeCustomervaluecreation

Whatisthecostofuseoftheexistingpumpandthenewreplacementpumps?




ThechallengeBenchmarking

Whatarethelikelybenchmarksthatthecustomerwilluse?Whatisthebenchmarkthatislikelytobemostimportantforthepipelineowner?



ThechallengeTheempathymapandthewillingnesstopay

Buildanempathymapforeachofthekeyactors.Canyouquantifytheirpainsandgains?Whatdoyouthinkisthe’willingnesstopay’(range)?

Thinkandfeed?

Sayanddo?

Hear? See

Pains Gains

Empathymapping


ThechallengeCustomervaluepropositionandthefairprice

Buildthesuppliersideofthecustomervaleproposition(costsfor:productsandservices;gaincreators;andpainrelievers).Finallyprovidethe’fairprice’(whatdoesyourrevenuemodellooklike?).Isthereanymargin?

Gains⬆

Pains⬇


Customerjobs

Gains

Pains

Gainscreators

Painsrelievers

Productsand

services


ClosingSummary

Pricingneedstobetailoredtoindividualcustomersandhowyouaddvaluetotheirbusinesswhilebeingsensitivetothemarketnorms

Pricingcanmakeorbreakarelationshipwithacustomer

Pricingshouldbeinlinewithcustomervaluecreation

Thebestpricingstrategiesputthecustomerinthecentre

Anexampleofvaluebasedpricinghasbeenpresented


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


Thanksforyourtime!Questionsovercoffee… SlidespostedonSlideShare.com

value based pricing (using design thinking approaches)

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