Developing a Winning Pricing Strategy in Times of

www.simon-kucher.com

PE-Backed CEO Summit

Developing a Winning Pricing Strategy in Times of Volatility

6 December 2021

Brad Soper, Partner

Bhavin Manjee, Partner

Atlanta office1180 West Peachtree St NW, Suite 1960Atlanta, GA 30309, USATel. +1 404 545 8263 [email protected]

New York office17 State Street, 37th floorNew York, NY 10004, USATel. +1 212 537 [email protected]

"If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you’ve got a terrible business."

The single most important decision in evaluating a business is Pricing Power.

“

”Warren Buffet (2010)

Simon-Kucher Partners CEN PE-Backed CEO Summit_Developing a Winning Pricing Strategy in Times of Volatility 12.6.21.pptx 2

iStock/Imgorthand

Source: Simon-Kucher & Partners

Value creation 101

Volume

x

Price

-

Cost


Pricing is hard as it touches on a number of functions and areas within your business

ImplementationStrategy Setting

TARGET MARKETS:Identify where you want to compete & pick your fights intelligently.

SEGMENTATION:Identify the variations in customer needs and willingness to pay

STRUCTURE:Create future-proof price/revenue models

PACKAGING & VALUE PRICING:Address different segments through differentiation of product and price

DISCOUNTING: Give confidence through structure

VALUE SELLING:Sell value and execute value prices

Leadership

ORGANIZATION:Balance local authority and central guidance

MINDSET:Create a culture of growth and profit

Infrastructure

TOOLS/DATA:Use tools, processes and common sense

GUIDANCE/INCENTIVES:Make pricing matter



Where do you focus your time?

Framework for value delivery and capture

Deliver value(Operations, customer service…)

Communicatevalue(Marketing,sales…)

Create value(Availability, portfolio mix…)

Brand, product,service

Extract value(Pricing)

Price

OFFER DIFFERENTIATION

SEGMENTATION

ENFORCING TRADE-OFFS

VALUE DELIVERY VALUE CAPTURE


Agenda

1. Pricing Power: How to execute a price increase – and pitfalls to avoid

2. Smart segmentation to optimize your pricing

3. Leverage recurring revenue and dynamic pricing models

4. Aligning sales & marketing with pricing

5. Wrap up and Q&A



Simple example

Price: $ 100

Variable Cost: $ 60

Fixed Cost: $ 30 million

Units Sold: 1 million

Revenue: $ 100 million

Profit: $ 10 million



Which improvement will lead to the biggest profit adjustment?

… variable cost* …

Driver Profits($ million)

An improvement by 10% of … ... leads to a profit increase of...

100%

60%

40%

30%

NewOld

10 M60

10 M 14 M1.1 M1 M

10 M

16 M54

20 M110100

10 M 13 M 27 M30 M

NewOld

… price …

… sales volume…

… fixed costs…


COLOURBOX/ Dmitry Rukhlenko

COLOURBOX/lev dolgachov

COLOURBOX/Anatoly-Tiplyashin

COLOURBOX/-

Source: Simon-Kucher & Partners market monitoring

Unfortunately inflation is already here

iStock/JoeGough

COLOURBOX/-

+84%

Colourbox/OZMEDIA

+43%

+265%

+83%

+13%

+210%

+72%

+3%

+182%



So.. how many more units / revenue do we need to maintain profitability if our variable costs increase by $6 with no price adjustment?

Price: $ 100

Variable Cost: $ 66 (+10%)

Fixed Cost: $ 30 million

Units Sold: ??

Revenue: ??

Required Profit: $ 10 million

Your guess:

____



You would need 17% more revenue / volume to deliver the same profit.. Assuming the profit dollar expectation hasn’t gone up!

100

10

60

30

$0M

$20M

$40M

$60M

$80M

$100M

$120M

Revenue Variable costs Fixed costs Profit

Baseline Scenario

Profitability waterfall

117.6

10

77.6

30

$0M

$20M

$40M

$60M

$80M

$100M

$120M

Revenue Variable costs Fixed costs Profit

10% cost inflation w/ no price change


7%

5%

14%

23%

42%

2%

Can't track that

60 to <80%

40 to <60%

20 to <40%

0 to <20%

0%

Source: Trend Radar / Global Pricing Survey 2020

Clearly price increases are the right response, but they are hard to implement in reality

How much of your budgeted price increases did you achieve last year?

67% of companiesdid not even achieve half of their planned price increase last year


YesNo

38%

I do not

know

3%

Source: Simon-Kucher Trend Radar / Global Pricing Survey March 2021 (n = 2,210); Q1: Overall, did your company improve its profit margins in 2020? (n=2,210), Q10: Do you plan to implement a price increase this year (2021)? (n=1,304)

Unfortunately looking forward, ~1/3 of all planned price increases are meeting or beating inflation

Overall, did your company improve its profit margins in 2020?

Do you plan to implement a price increase this year (2021)?

Danger ahead: The need to react decisively to inflation is largely still underdeveloped!

18%

10%

38%

25%

9%

None Belowinflation

In line withinflation

Aboveinflation

Significantlyabove inflation

66%

59%



Food for thought: Simon-Kucher’s proven Price Increase Campaign framework shows the steps that separate winning companies from others

Monitoring

Make sure there’s full

transparency on the status at

all times.

High-level targets/strategy

Sales incentives

Steer / countersteer behavior

Product-specific targets

Customer-specific targets

React immediately and

adequately if you observe

deviations from target.

Reward successful price

increases!

Typically higher increase

potential for value-added

products or slow movers!

Differentiate customer

(segment)s and channels

according to "ease of

increase".

Consider relevant revenues

only!

Communication

Communicate your price

increase incl. reasoning

externally and internally.

Supporting material + KPIs

Provide battle cards,

argumentation guidelines,

and a negotiation roadmap.

Guidelines and escalation rules

Define clear approval rules

in case of derogations from

target!

1

2

3

4

5

6

7

8

9

…get prepared… …and roll-out the initiativeConfigure the levels…


Source: Simon-Kucher

Lift

Peer set increase

• Target customers with products priced below the median

• A minimum spend per product can be applied

Shift

List price increases

• Standard annual escalators

• Additional price increases confirmed via willingness to pay studies

Differentiate

Behavioral adjustments

• “Lean-forward” or “lean-backward” price adjustment based on price sensitivity

A$

B C

If you are not in the practice of raising prices to match inflation – or if you lack price consistency – we recommend a three-step process



Continue to earn majority of revenue through existing

packaging/pricing, offering advanced only upon request

Offer existing packaging/pricing to current customers and new use-case bundles to new customers in

parallel

Gradually shift customer base away from current

packaging/pricing in stepwise fashion

Duration: 2 - 3+ years

Aggressively migrate entire customer base to new

packaging/pricing using blend of carrots and sticks

Duration: Less than 2 years

Migrationtime horizon

“Hybrid Approach” “Accelerated Migration”“Phased Migration”“Reactive”

“In Cycle” is Preferred by Most Companies

“Out of Cycle” vs “In Cycle”: Your company should determine the type of migration approach based on inflation expectations and strategic goals


Agenda





5. Wrap up and Q&A



Segmentation primer: Demographics can be misleading

AGE 72

BORN UK

MARRIED

HOME Castle

INCOME LEVEL Wealthy

Two customers: Seemingly alike... ...but very different

72

UK

Castle

Wealthy



Segmenting a market means breaking it down into a few different parts on which

you can act differently

Communicate, advertise, influence,

reach out to, etc.

Your sales forceYour marketing

departmentYour company

There is no point in segmenting and then acting the

same with the entire market


Basic Sophisticated

Demographic Geographic End-market Occasion / use caseNeeds and Behavioral

Customer size/importanceLocation (or any other single, physical describing variable)

Vertical market Functionality typesNeeds and value drivers of

customer

• Annual revenue• # Projects• Overall profitability• Product Mix• …

• North, South, etc.• Urban vs Rural• …

• Industrial • Healthcare• Government• CPG• …

• Professional use• DIY use• Executive use• Manager use• …

• Cost-to-serve• Loyalty: transactional

vs partnership• Urgency• …

Examples

ILLUSTRATIVE

A variety of segmentation approaches exist with the vast majority of firms deploying a basic approach leaving room for improvement



-20%

0%

20%

40%

60%

80%

100%

0 500 1000

Thousands-20%

0%

20%

40%

60%

80%

100%

0 20 40 60 80 100 120

Thousands-20%

0%

20%

40%

60%

80%

100%

0 5 10 15 20 25 30 35

Thousands-20%

0%

20%

40%

60%

80%

100%

0 2 4 6

Thousands

A Customers B Customers C Customers D Customers

Median Margin46.3%

Median Margin39.8%

Median Margin35.5%

Median Margin35.4%

60% of revenue 20% of revenue 15% of revenue 5% of revenue

% Gross Profit Margin *each dot is a CustomerAvg. margin

Source: Simon-Kucher & Partners.

Demographic: Simple B2B customer size segmentation reveals small customers receiving better pricing than larger customers, controlling for mix


Geographic: A common finding is a National approach to local pricing

$30.91

$30.90

$30.88$30.93

$30.88

$30.89

$30.88

$30.98

$30.88

$30.88$30.67

$30.88

$29.12

$29.12

$30.88$30.95

$29.12$30.62

$30.88

$30.88$30.88

Key Takeaways:

▪ Pricing between 29.12 and 30.98 in all states (+/- 3% of avg price)

▪ Opportunity: Explore regional (market-based) price differentiation based on value, demand, competition, and other factors

Represents states of which no sales for this product were indicated in the data.

Illustration represents average distributor net price by state of client product

Net Prices

Source: Simon-Kucher & Partners project experience; data anonymized for client confidentiality


Agenda





5. Wrap up and Q&A


Source: Simon-Kucher & Partners, Zuora

Leading firms have recognized that digital enables a shift from a transactional/product mindset toward a recurring/customer approach

customer

product

channels

vs.

service

channels

experience

subscriber


Reduced barrier to purchase Differentiation to Customer Needs Scalable and Expandable

▪ Ability to offer alternative cost profile

− e.g. predictable recurring fee

− eliminates large upfront capex to customers

▪ Decreasing risk for the customer

▪ Increases customer stickiness

▪ Allows for more creative packaging solution

▪ Ability to meet multiple needsprofiles

▪ Facilitates concession planning, upselling and cross-selling

▪ Revenue realization is more closely linked to customer value

▪ You own the customer journey…not the customer moment

▪ Prepares for value realization coming out of recession!

2020 demonstrated the incredible resiliency of recurring revenue models for those who have embraced their intrinsic value



Metric reflects how the customer utilizes the equipment

Metric relates to how well the service provider performs

Metric is linked to how much business value the equipment creates for the customer

Usage-based

Performance-based

Output-based

e.g. pay per click (page) in photocopiers

e.g. service-level agreements on

reactive maintenance response time

e.g. volume of purified water

from water treatment equipment

Price metric:Reference base unit of measure on which the total fee/price charged to a customer is calculated

Recurring revenue models often accelerate growth by enabling alternative price metrics that better align price paid with value received




Private Equity has spearheaded this change across more sectors than most realize; Simon-Kucher anticipates this trend to accelerate post pandemic

Elevators

Surgical robots

Industrial watertreatment

Heating systems

Cargo handling cranes

PV1 plants andself consumption

Sector Original model New revenue model

▪ Sell elevator to building owner

▪ Charge separately for service / maintenance

Sign contract with owners for 10-20 year “elevator rights”

Charge flat monthly rate

▪ Sell robots to hospitals

▪ Tight hospital budgets limited sales of robots

Charge hospitals per surgery for use of the robots

▪ Sells equipment to factories

Sets up the equipment on site and handles maintenance

Charges per volume of water used

▪ Manufacturer sells heating systems to homeowners / contractors

Charges only for the warmth provided

▪ Sell cranes

▪ Charge separately for maintenance

Sells containers moved where infrastructure and maintenance is provided

▪ Sell photovoltaic modules

▪ Turnkey EPC contracts

Charge for energy generated kWh including equipment maintenance


Agenda





5. Wrap up and Q&A



Pricing needs to consider the realities of the associated salesforce if it is to be successful

0%

5%

10%

15%

20%

25%

30%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

% of project bids

Avg. discount per bid

No approval required Sales director VP Global AccountingSVP and VP Product LineVP Sales

Discount approval by:

The primary driver of this client’s realized prices was the levels at which sales approval thresholds were set


Struggling Sales FTE’s in undersized markets

▪ This is the concept most people quickly understand

▪ Implications include

− Erratic pricing

− High cost-to-serve

− Sales FTE churn

Underperforming Sales FTE’s in oversized markets

▪ This is the concept that typically flies under the radar

▪ Implications include

− Inflexible pricing

− Low customer-satisfaction

− Long-tenured Sales FTEs

Data-driven approach reveals

0

0.5

1

1.5

2

2.5

3

3.5

1 6 11 16 21 26 31 36 41 46 51 56 61 66 71

Ma

rke

t O

pp

ort

un

ity

Sales FTE

Opportunity per sales FTE

Indexed Spending

Optimized Territories

Lacking Opportunities

Overloaded

Sales’ impact on pricing: We repeatedly observe erratic pricing in undersized markets and strict adherence in oversized markets



Remember that “Cube” logic?: Firms leverage actual sales transactions to establish credibility & target price points decoupled from costs

Revenue ($M)

Price targets derived from sales data

Cumulated revenues

Yearly volume for the category

Se

gm

en

t cate

go

ry

% of annual volume

Discount 0%

100%

High discounts

Low discounts

Ø discounts

Best practice

Worst practice

List price

Relative performance can be observed within homogeneous segments

$/unit prices

Best internal performance

credible yardstick for

the sales force steering

Project example




Deal scoring in practice: These are the underpinning of deal scoring tools that tap into seller’s competitive nature and triangulate market clearing prices

Customer scoring:reflecting customer value, i.e turnover, vertical market, payment terms, loyalty, …

Target price:clear vision of the price the team should aim reflecting internal best practices

Deal specificities:differentiated price recommendations by type of deal, i.e. new logo vs cross-sell, product type, associated service/support, contract duration, geography, industry, urgency, …

Project exampleSimon-Kucher offers a configurable deal-scoring tool


Agenda





5. Wrap up and Q&A



Parting thoughts – What is the role of the CEO in pricing?

▪ The ultimate responsibility of the CEO is to increase enterprise value (EV), and price is the strongest driver of EV; therefore pricing deserves highest CEO-attention

▪ Cases where price destroyed EV are numerous and this happens faster than building EV through smart pricing

▪ CEO-involvement is really important, it improves pricing power and successful price implementation which leads to higher margins, growth and EV

▪ The CEO should focus on creating awareness for the critical role of price, on setting the right goals, on providing clarity in positioning and effective pricing processes

▪ The CEO should create a culture which avoids destructive price aggressiveness, inspires price leadership and instils pricing discipline

▪ The CEO’s role is not to interfere in pricing details and negotiations; trust your team once the governance structure is in place


www.simon-kucher.com

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AmericasAtlanta, Boston, Chicago, Houston, Mexico City, New York, San Francisco, Santiago de Chile, São Paulo, Silicon Valley, Toronto

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EuropeAmsterdam, Barcelona, Bonn, Brussels, Cologne, Copenhagen, Frankfurt, Geneva, Hamburg, Istanbul, London, Luxembourg, Madrid, Milan, Munich, Paris, Stockholm, Vienna, Warsaw, Zurich

Thank you

Developing a Winning Pricing Strategy in Times of

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