Value based pricing (using design thinking approaches)
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Transcript of 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
Copperberg AftermarketEurope2016|October2016|ShaunWest
TodayHowmuchforaglassofwater?
Whatwouldyoupay?Thesituationhasamajorimpactonprice
Copperberg AftermarketEurope2016|October2016|ShaunWest
BackgroundWhyispricingimportant?
Whatisimportantwhenpricingservices?- Offeringhighervalueaddedproductsandservices- Offeringservicesandsolutions- Rethinkingpricingstrategies- Settingtherightprice- Capturingcustomervalue
Pricingisakeypartofthebusinessmodelandimpactsmanydifferentareas
“…manufacturersshouldpricetheirmostadvancedserviceofferingsaccordingtovalue-,
ratherthantocost- orcompetitionbasedstrategies”(Rapaccini 2015)
Copperberg AftermarketEurope2016|October2016|ShaunWest
BackgroundValueasafundamentalofservicepricing
Whatdoestheliteraturetellus?- Thatbuyer’schoiceisdependentonpriceisanoversimplificationoftheproblem
- Pricinghasanimpactoncustomersatisfaction- Pricingforservicesisdependentonsituations- Pricingmustreflectfunctionalandemotionalaspects
- Pricingandservicescopesarerelated
Theuseofvaluemustbeacentralaspectinthepricingobjectives
“..whatisthedifferenceinworthofthetwoofferingstomyfirm,andhowdoesitcompare
tothedifferenceintheirprices?”(Andersonetal,2009)
Copperberg AftermarketEurope2016|October2016|ShaunWest
BackgroundPricingisthemostpowerfultoolinthemarketingtoolbox
Whatdoestheliteraturetellus?- Pricinghasahugeimpactonthefinancialresults- Pricingisamulti-departmentactivity- Servicesareoftengivenawayfree- Servicesfirmsneedtoadjusttheirrevenuemodels- Manufacturersfindithardtochangepricingmodels
Itisimportingtodeveloppricingobjectives,strategiesandtoolstohelpsupportnewpricingmodels
Copperberg AftermarketEurope2016|October2016|ShaunWest
BackgroundPricinginfirmsmustworkonthreedifferentlevels
Alignmentisneededateachlevel
Pricingobjectivesmustalignwiththestrategyofthefirm
Thetoolsthathelpcreatethe’price’thatisgiventothecustomer
Differentstrategiescanbeappliedtoachievethepricing
objectives
Objectives
Strategies
Toolsandmethods
Copperberg AftermarketEurope2016|October2016|ShaunWest
BackgroundPricingobjectivesarethebasisforprofitabledecisions
Whatdoestheliteraturetellus?- Pricingobjectivesarequantitativeandqualitative
- Sales,profits,marketshare…- Relationships,competitors…
- Theobjectivesmustbeunderstoodwithinthefirm
Theobjectivesofpricingleadtodifferentoperationalpricingstrategieswithintheorganization
”…objectivesofpricingaretodeterminewhichpricingstrategywillbethebasisforprofitabledecisionsasaresultofcompany’soverall
strategy”(Hinterhuber,2003)
Copperberg AftermarketEurope2016|October2016|ShaunWest
BackgroundWhatareservicefirmsdoingtoday
Findingsconfirmedthatpricingofservicesiscomplex:- Differentpricingmodelshelpwithmarginoptimization- Itwashardtomoveawayfromacost-plusmodel- Firmshadadesiretomovetovalue-basedpricingbutwereunsureoftheimplications
- Thebuyermightbemoreadvancedinpricingmodelinnovationthantheseller
- Pricingalsoprovidesafocusonmeasuringcustomervalue
Withinafirmthereshouldbeanalignmentbetweenthepricingobjectives,pricing
strategiesandtools.“Suchtoolsareneededtocreateavaluebasedpricingmodel.”
Andersonetal.(2009).
Firmsarenotusinginformationthatcouldhelpthemtoidentifythecustomervalue
Copperberg AftermarketEurope2016|October2016|ShaunWest
BackgroundFirmsneedtobeabletounderstandcustomervaluetogettotheprice
Whatdoestheliteraturetellus?- Threecategoriesforservicepricingmethods:costbased,competitionbased,anddemandbased
- Pricingmethods:negotiatedpricing,purebundling,tradediscounts,efficiencypricing,cashdiscounts,andbundling
- Differentpricingtoolsrequiredtosupportthepricingmethods
Correctpricinglevelshelpfirmstoboosttheresalesandmargins
”…empiricalresearchonpricingmethodsisextremelylimited”(Avlonitis andIndounas 2005)
Copperberg AftermarketEurope2016|October2016|ShaunWest
PricingstrategiesCostpluspricingdoesnotalwaysprovidevaluetothecustomer
Pricingprocess Costplus- Easytouse- Supplierdoesnotunderstandcustomervalue- Canprovidethecustomerwithpoorvalue- Canleadto’over-scoping’ofservices- Pricingisonlyacalculation
Pricingprocessbeginswithcostsnotcustomervalue- that’swhyitiseasy
Scope Cost Margin Price Value
Copperberg AftermarketEurope2016|October2016|ShaunWest
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
Copperberg AftermarketEurope2016|October2016|ShaunWest
PricingstrategiesCompetition/marketbasedpricingdoesnotalwaysprovidevaluetothecustomer
Pricingprocess Competition/marketbase- Pricingiscontrolledbythemarket- Marketbenchmarksmustbeunderstood- Supplierdoesnotunderstandcustomervalue- Valuecapturecanbelow
Priceissetbythemarket- that’swhyitiseasy
Scope Cost Market Price Value
Copperberg AftermarketEurope2016|October2016|ShaunWest
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
Copperberg AftermarketEurope2016|October2016|ShaunWest
PricingstrategiesValuebasedpricingisbasedonthecustomer’svaluecreationprocess
Pricingprocess Valuebased- Customervalueisthedriverfortheprice- Pricesupportsscopedefinition- Supplierunderstandcustomervaluecreation- Suppliermeasuresmarginattheendoftheprocess- Canleavecustomersfeelingtheyareoverpaying
Pricingprocessbeginswithcustomervalue- that’swhyitishard
Value Price Scope Cost Margin
Copperberg AftermarketEurope2016|October2016|ShaunWest
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
Copperberg AftermarketEurope2016|October2016|ShaunWest
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
Copperberg 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
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
Copperberg AftermarketEurope2016|October2016|ShaunWest
ThechallengeCustomervaluecreation
Whatisthecostofuseoftheexistingpumpandthenewreplacementpumps?
CustomervaluecreationValueinuse Jobstobedone
Strategicaimsandinputs
Copperberg AftermarketEurope2016|October2016|ShaunWest
ThechallengeBenchmarking
Whatarethelikelybenchmarksthatthecustomerwilluse?Whatisthebenchmarkthatislikelytobemostimportantforthepipelineowner?
BenchmarkingMarketdata,win/lossanalysis,CRM….
Copperberg AftermarketEurope2016|October2016|ShaunWest
ThechallengeTheempathymapandthewillingnesstopay
Buildanempathymapforeachofthekeyactors.Canyouquantifytheirpainsandgains?Whatdoyouthinkisthe’willingnesstopay’(range)?
Thinkandfeed?
Sayanddo?
Hear? See
Pains Gains
Empathymapping
Copperberg AftermarketEurope2016|October2016|ShaunWest
ThechallengeCustomervaluepropositionandthefairprice
Buildthesuppliersideofthecustomervaleproposition(costsfor:productsandservices;gaincreators;andpainrelievers).Finallyprovidethe’fairprice’(whatdoesyourrevenuemodellooklike?).Isthereanymargin?
Gains⬆
Pains⬇
Customervalueproposition
Customerjobs
Gains
Pains
Gainscreators
Painsrelievers
Productsand
services
Copperberg AftermarketEurope2016|October2016|ShaunWest
ClosingSummary
Pricingneedstobetailoredtoindividualcustomersandhowyouaddvaluetotheirbusinesswhilebeingsensitivetothemarketnorms
Pricingcanmakeorbreakarelationshipwithacustomer
Pricingshouldbeinlinewithcustomervaluecreation
Thebestpricingstrategiesputthecustomerinthecentre
Anexampleofvaluebasedpricinghasbeenpresented
Copperberg AftermarketEurope2016|October2016|ShaunWest
http://www.advancedservicesgroup.co.uk/ssc2017