Pricing Configured Products

©2004 PROPRIETARY and CONFIDENTIAL, Rapt Inc.

Pricing Configured ProductsPricing Configured ProductsPPS Webinar Series May 19, 2004

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5Rapt ConfidentialHowTheAnalyticsWork.v3

nn What is a configuration?What is a configuration?

nn What makes configuration pricing easy What makes configuration pricing easy andand difficult?difficult?

nn How can companies optimize configuration prices?How can companies optimize configuration prices?

nn Case studies: How are companies pricing configured Case studies: How are companies pricing configured products profitably?products profitably?




What is a configuration?What is a configuration?What is a configuration?

A configuration is a product A configuration is a product for which the customer has for which the customer has multiple, priced options.multiple, priced options.

Examples:Examples:

nn AutomobilesAutomobiles

nn InsuranceInsurance

nn ComputersComputers

nn WindowsWindows

nn Clothing washer (with Clothing washer (with extended warranty, color extended warranty, color

premium, etc.)premium, etc.)

ToyotaCamry

A/CPower

windows Security

Radio Entry




ProductProduct

What makes the pricing of configurations easy?What makes the pricing of configurations What makes the pricing of configurations easyeasy??

Pricing configurations at the Pricing configurations at the component level is component level is easyeasy in in that it dramatically reduces that it dramatically reduces the number of pricing the number of pricing decisions.decisions.

Product

Option 1

H M

Option 2 Option 3 Option 4

L None




ProductProduct

What makes the pricing of configurations easy?What makes the pricing of configurations What makes the pricing of configurations easyeasy??

Pricing configurations at the Pricing configurations at the component level is component level is easyeasy in in that it dramatically reduces that it dramatically reduces the number of pricing the number of pricing decisions.decisions.

Example: Imagine a product Example: Imagine a product offering with:offering with:

nn 20 products20 products

nn 4 options4 options

nn 3 values for each option 3 values for each option plus the “none” optionplus the “none” option

nn Price 240 options or 5,120 Price 240 options or 5,120 SKUsSKUs

Product

Option 1

H M

Option 2 Option 3 Option 4

L None




What makes the pricing of configurations What makes the pricing of configurations difficultdifficult ??

Memory Chassis

128 256 512

Storage

20 30 60

1

2

3

4

5

Component cross-elasticity

Drag effects

Market share effects (self-elasticity)

Configuration cross-elasticity

Laptopfamily

12-inch800-MHz

14-inch933-MHz

14-inch1-GHz

Basemodel

Competingsolution

A

Competingsolution

B





12-inch800-MHz

14-inch933-MHz

14-inch1-GHz

Memory Chassis

128 256 512

Storage

20 30 60

I decrease the price of 256MB memory by 20%

Basemodel

Competingsolution

A

Competingsolution

B

1

2

3

4

5


Drag effects



Laptopfamily





Memory Chassis

128 256 512

Storage

20 30 60


More customers buy 256MB,

cannibalizing 128MB and 512MB memory

1

2

3

4

5


Drag effects



12-inch800-MHz

14-inch933-MHz

14-inch1-GHz

Basemodel

Competingsolution

A

Competingsolution

BLaptopfamily





Memory Chassis

128 256 512

Storage

20 30 60




Increased demand for cheaper 256MB memory

means that 12-inch:800-MHz has become cheaper

1

2

3

4

5


Drag effects



12-inch800-MHz

14-inch933-MHz

14-inch1-GHz

Basemodel

Competingsolution

A

Competingsolution

BLaptopfamily





Memory Chassis

128 256 512

Storage

20 30 60






Cheaper 12-inch:800-MHz may grab additional sales

over the competition, increasing market share

1

2

3

4

5


Drag effects



12-inch800-MHz

14-inch933-MHz

14-inch1-GHz

Basemodel

Competingsolution

A

Competingsolution

BLaptopfamily





Memory Chassis

128 256 512

Storage

20 30 60






Cheaper 12-inch:800-MHz may grab additional sales

over the competition, increasing market share

Cheaper 12-inch:800-MHz may cannibalize sales from 14-

inch:933-MHz and 14-inch:1-GHz , impacting revenue and margin mix

1

2

3

4

5


Drag effects



12-inch800-MHz

14-inch933-MHz

14-inch1-GHz

Basemodel

Competingsolution

A

Competingsolution

BLaptopfamily




Adapts…Adapts…by constantly incorporating new order data.by constantly incorporating new order data.

55

How can companies optimize configuration prices? How can companies optimize configuration prices? How can companies optimize configuration prices?

Acts… Acts… by publishing by publishing prices that maximize prices that maximize performance against performance against objectives.objectives.

4422

Calibrates…Calibrates…price elasticities after price elasticities after unmasking the effects of unmasking the effects of nonnon--price factors.price factors.

11

Connects… Connects… to to your order data.your order data.

OrderOrderManagementManagement

SystemSystem

33

Plans…Plans…to meet your objectivesto meet your objectives with with

optimization, scenario optimization, scenario planning and sensitivity planning and sensitivity analysis. analysis.

Analytic engines are the backbone for optimized pricingAnalytic engines are the backbone for optimized pricing




External market dynamics n Controls for shifts in market segment size

Analytical models are necessary to “peel the onion.”

Price response is deeply hidden under multiple layers of demand dynamics.Price response is deeply hidden under multiple Price response is deeply hidden under multiple layers of demand dynamics.layers of demand dynamics.

COMPONENT PURPOSE





Seasonal dynamics n Models high-level trends and seasonality in sales relative to market



COMPONENT PURPOSE





Serasonal dynamics n Models high-level trends and seasonality in sales relative to market



COMPONENT PURPOSE

Lifecycle dynamics n Models dynamics driven by product introductions and obsolescence





Seasonal dynamics n Models high-level trends and seasonality in sales relative to market



COMPONENT PURPOSE

Lifecycle dynamics n Models dynamics driven by product introductions and obsolescence

Price response n Models self- and cross-elastic effects of pricing




60GB

40GB

20GB

Storage capacity

12’’ 15’’ 18’’

Display size

12” notebook 867-MHz 512/20G/combo


15” notebook 1-GHz 512/60G/superdrive 18” notebook 1-GHz

512/60G/superdrive



Once the other layers are peeled away, the analytic engine can determine price elasticities.Once the other layers are peeled away, the Once the other layers are peeled away, the analytic engine can determine price elasticities.analytic engine can determine price elasticities.




60GB

40GB

20GB

Storage capacity

12’’ 15’’ 18’’

Display size

Elasticity





512/60G/superdrive






60GB

40GB

20GB

Storage capacity

12’’ 15’’ 18’’

Display size

Cross-elasticity





512/60G/superdrive



Elasticity




Case studies: How are companies pricing configured products profitably?Case studies: How are companies Case studies: How are companies pricing configured products profitably?pricing configured products profitably?

nn YAHOO’s product:YAHOO’s product:

–– OnOn--line impressions sold to advertisersline impressions sold to advertisers

nn Configuration challenges:Configuration challenges:

–– Prices are based upon attributes of ad (e.g. Auto, Research, NorPrices are based upon attributes of ad (e.g. Auto, Research, North)th)

–– Prices are based upon attributes of viewer (e.g. Male, 25 Prices are based upon attributes of viewer (e.g. Male, 25 –– 30, Bay Area)30, Bay Area)

–– Goal: Maximize revenue subject to constraint on impression supplGoal: Maximize revenue subject to constraint on impression supplyy

nn Prior approach:Prior approach:

–– Formidable endFormidable end--item approachitem approach

–– No viewer differentiationNo viewer differentiation

–– Quarterly rate cardQuarterly rate card

nn Current approach:Current approach:

–– New head of pricingNew head of pricing

–– Chose price optimization vendor (Rapt)Chose price optimization vendor (Rapt)




A hint at how analytics workA hint at how analytics workA hint at how analytics work

North ad

North ad





North ad

North ad

$4 CPM

$10 CPM





North ad

North ad

$4 CPM

$10 CPM

12,000 advertisers

buy

8,000 advertisers

buy





North ad

North ad

$4 CPM

$10 CPM

12,000 advertisers

buy

8,000 advertisers

buy

An aware analytic engine can derive advertiser-willingness-to-pay for

FINANCE versus QUOTES & INFO.





North adEast ad

$4 CPM$3 CPM

6,000 advertisers

buy

8,000 advertisers

buy

An aware analytic engine can derive advertiser-willingness to pay for north versus east advertisements




Case study: HP Unix, North AmericaCase study: HP Unix, North AmericaCase study: HP Unix, North America

nn The situation at HPThe situation at HP

–– Used costUsed cost--plus and competitive +/plus and competitive +/-- pricing in Excelpricing in Excel

–– Sought to understand customer’s willingness to paySought to understand customer’s willingness to pay

–– “Dreamed of” standard methodology across business units“Dreamed of” standard methodology across business units

nn Quantified value proposition at HPQuantified value proposition at HP

–– $60 million annual revenue increase for Unix North America alone$60 million annual revenue increase for Unix North America alone(1.4% of revenue)(1.4% of revenue)

–– Achieved in the midst of price war, two major product transitionAchieved in the midst of price war, two major product transitions, s, and post 9/11and post 9/11

nn Ongoing impact: HP decided to further invest in pricing Ongoing impact: HP decided to further invest in pricing technology and processes worldwidetechnology and processes worldwide

–– Across Value Businesses: Enterprise Systems, Workstations, Across Value Businesses: Enterprise Systems, Workstations, Storage and SoftwareStorage and Software




Decision optimizationMarket awarenessPrice rationalization

Time

Organizationalbenefit

Informed,Informed,TargetedTargetedPricingPricing

Disciplined, Disciplined, RationalRationalPricingPricing

Proactive, Proactive, Optimized Optimized

PricingPricing

++

++

++

++

The path to pricing

excellence

The path to The path to pricing pricing

excellenceexcellence

Caution: It’s not all about technologyCaution: It’s not all about technologyCaution: It’s not all about technology




SummarySummarySummary

nn Configuration pricing is a must for companies who sell options Configuration pricing is a must for companies who sell options that create many, many possible end items.that create many, many possible end items.

nn The approach drives down the number of decisions but drives The approach drives down the number of decisions but drives

up the interup the inter--related complexity.related complexity.

nn Analytic engines are required.Analytic engines are required.

nn Companies such as HP and Yahoo are adopting the technology Companies such as HP and Yahoo are adopting the technology and reaping big benefits.and reaping big benefits.

Thank you for your attention

[email protected]



Pricing Configured Products

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