Archive for the ‘Pricing’ Category

Implementing process to increase your (verified) competitive advantage

Friday, June 22nd, 2012

Once your company view of competitive advantage is aligned with the way your clients view you, there is a new opportunity to understand whether this competitive advantage is applied , supported, and reflected coherently throughout the company and outside the company.

Process will help you managing and improving you competitive advantage. How? By giving you holistic coherence throughout your company.

The first thing you need to do is to ask five questions:

  1. Are the products/services emphasized in the company strategy coherent with the verified competitive advantage?
  2. Are investment decisions made from the same view?
  3. Is working time allocated accordingly?
  4. Are the products in pipeline/in development in alignment with the strategy?
  5. Is our company communicating our competitive advantage in a way that the message is received correctly by the customers?

If, among the answers, there is at least one no, your company needs to act in order to address these issues.

Process helps in addressing and solving those issues in a systematic way.

When the various stakeholders making decisions in the company are in alignment about competitive advantage, performance improves- including profitability. The objective of looking for alignment is to avoid internal and external customers “dissonance in perception” and to improve your company profitability by focusing on the right products, services, and messages.

You want to focus on selling products where your competitive advantage is present and receive the benefits deriving from your superior offerings. In a product portfolio, however, it is often the case that only a few products or services deliver true competitive advantage: this will drive R&D investments, possibly including protection of intellectual property and underlying (eventual) patent investments. Do we want to invest money in R&D and patents for products that are not representing our competitive advantage? No.

Products that don’t represent our competitive advantage are often products that clients are not really interested in and/or products not truly differentiated from those of competitors. Why would we want to invest money on those type of products?

Products that do not provide advantages to our clients are also products that cannot be sold for a premium price and that have often very low margins.

Company’s resources are limited; as such, you need ot test whether a competitive advantage exists within your entire product portfolio(s). This is also neccessary when we consider new products to be developed and/or protected.

The final step in the process is to increase your competitive advantage and to ensure that customers are aware of what your competitive advantage is. Often it is just not visible as management would think.

This blog was authored by Laura Rainati, Thinking Dimensions

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Posted in Pricing, Strategy |

Incremental Profitability through Pricing

Friday, May 25th, 2012

A key question on the mind of every management team (and of course the shareholders) is:

How can we increase profitability?

A major emphasis is often placed on cost- however what about pricing (Revenue)?

Incremental profitability can be increased through a deliberate pricing process and program to target:

1) Customers who are very sensitive to price and do not require all the product/service attributes a company offers

2) Customers who require a specific product and services which generate significant added value to their end offering

3) Customers who require unique lead times

Almost all companies recognize at some level the different needs of their customers- what is often absent is an understanding of the value the customer generates with your products and services and how you can partner with them to increase their competitive positioning and thus earn a price premium.

Furthermore, in a number of companies pricing decisions- while being made hundreds and thousands of times a day- are not made visible and are not linked to the value generated for the customer. There are a few steps that can be made to change this deficiency:

1) Make pricing a priority- and an agenda item for management to discuss openly

2) Survey in detail your customers objectively to understand what is working- and what is not working for them

3) Verify your true competitive advantage as viewed through the eyes of the customer relative to the premium they are prepared to pay for your products and services

4) Conduct a trial pricing program as opposed to a “one size fits all” pricing solution

5) Work cross-functionally to understand where value is being generated not only for your customer but also internally within your business units

6) Roll out a new pricing program and adjust together with your strategy

A pricing program, in our experience, can increase EBITDA as much as 15% per year, when implemented in conjunction with a solid Strategy.


This post was authored by Scott Newton, Partner, Thinking Dimensions

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Posted in Pricing |

Improving Profitability through process

Friday, May 18th, 2012

Companies can have different definitions or views of profitability. Nevertheless, it is one of the most important metrics that a business should take care about.

Many companies measure their success on revenues and units sold, but these metrics are not always  helping the management in making decisions in the correct way. Some other companies include profit among the critical metrics, but still they can’t make sense of the huge amount of disordered data that the controlling department of the company provides them with. At the end management often decides based on its feelings and hoping for the best.

In order to make decisions that improve profitability, successful companies adopt a systematic process that gives management the tools to make data driven decisions that significantly impact margins.

You can impact profitability on 2 sides: from the cost side and from the sales side.

A detailed analysis of cost is for sure one of the processes that can be implemented in order to improve profitability. Nevertheless, what successful companies have focused on the most is the capability of making fruitful decisions on the combination of products and clients they have in their portfolio today and in a few years from now.

The assumption behind this approach is that different clients see different value in the same product due to many reasons (buying criteria, product life cycle stage, final application, etc.). This difference represents a big opportunity in  terms of price and, in turn, profit.

Process can leverage on this opportunity by helping management:

  1. Focusing on a small sets of reporting tools with company-specific key performance indicators (internal and external)
  2. Setting product/client/market priorities to focus on by understanding the profitability in the current situation (what are the combinations of products/clients that are more profitable, what are not and what are the causes) and making decisions on how to take action (cut costs, dismiss products, leave clients, price differently for specific combinations, etc.)
  3. Monitoring the impact of the different decisions on profitability

Process wants to give company management the possibility to decide in the best way by being aware of their different portfolio combinations performances. Having this visibility is something that can give a very different and impressive insight. Often companies discover that those clients, products or the combination of the two who they believed being their best ones, are actually more value destroyer than value creators.

Process can improve a company’s profitability by making management aware of those gaps between what they would think and what it is in reality, therefore making them able to choose in a thoughtful way ( it will be clear what are the good combinations of product and clients and what are the bad ones).

Management through process can improve responsiveness to unprofitable situations and increase the creation of profitable ones, all aimed at a better product/client mix.

 

This post was authored by Laura Rainati, Thinking Dimensions Italy

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Posted in Pricing, Strategy |

Pricing strategy for B2B – getting the data you need to make effective decisions

Wednesday, May 9th, 2012

Managers or CEOs seeking to improve the way the company makes pricing decisions need to implement changes starting from the way  the organization collects, sorts and uses data as an input in selecting the best performing alternatives.

As an example, one of our clients is a leading company that designs, manufactures and installs automated industrial equipment systems principally for the automotive industry.

As you probably know, the selling process for this type of product and service offering can be complex to manage for several reasons including:

  • Several stakeholders are involved in the selling process from the client side (i.e. the Production Manager, the  Business unit directors etc..)
  • The average price for a system is several million dollars, and one system may require a total investment of more than twenty million dollars
  • Every sales opportunity has specific characteristics in term of client need and urgency
  • Decision making criteria adopted by customers can change in time and depend on the specific situation
  • There is a bid or negotiation process per each sales opportunity

3 years ago, it was clear to the CEO that the decision making process for pricing was a capability that needed to be improved. The main reasons for this were not only the complexity of the selling process but also the impact that pricing decisions have on the company EBITDA.

In the case of this company, the impact on the EBITDA related to an improvement of 1% on the price is almost 5% improvement on total company EBITDA.

Figure 1- Pricing Impact Example for a B2B solutions provider

The CEO understood this impact, and worked to design and implement a better process to support pricing decisions. The initiative started with 2 simple questions:

1- what data do we need to make effective pricing decisions?

2- What data are we actually collecting to make pricing decisions?

If you are also asking these questions, we recommend to focus on 4 areas:

1. Competitive positioning:  What is the relative competitive positioning of the proposed solution compared to the main competitors?

2. Customer need: What is the real customer need? What is the relative level of urgency and importance? Why  is the customer buying?

3. Investment level for the client: What is the total cost of ownership of the system or solution provided compared to the total product costs?

4. Customer sensitivity: at what extent is the system we  provide critical for the overall performances of the manufacturing process?

Concurrently to answering the four questions, complete an assessment that to understand what percentage of the required data to make a decision is being collected by the sales force.   In our experiences, typically >20 % of the required data has been collected or used by the sales force for decision making.

This initial phase will have a duration of a few weeks and the implementation of the new way to make decisions involving >10 divisional or business unit managers in different functions (not only sales) normally has a duration of 8-10 months.  There is a significant amount of work and leadership involved- the payoff for an initiative of this type has demonstrated to grow EBITDA  by as much as 20 % (CAGR).

This blog was authored by Diego Miglioranzi, Partner, Thinking Dimensions

Feel free to contact the author directly for questions about this subject.

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Posted in Implementation, Pricing |

Value Based Pricing- First you must understand your customers

Friday, April 13th, 2012

A topical subject in management discussion today is Value Based Pricing- numerous articles, white papers, case studies, podcasts, and books have been published recently regarding pricing and the impact on company P&L and shareholder returns.

Value based pricing is centered around the concept of aligining the price of your product or service with the value received and percieved by your customers. A variety of software solutions are available to assist in pricing alignment, and the volume of offerings to set value based pricing is increasing in conjunction with software packages. The foundation of value based pricing however is that the firm truly understands the reasons customers purchase products and services and what they value most.

Understanding of why customers purchase infers a meaningful objective analysis into customer buying criteria is being conducted on a regular basis- an area frequently missed by sales and customer service teams.

In the past 10 years we have conducted analysis together with our clients in EMEA, APEC and the Americas referencing what customers value most particularly in B2B transactions and have found:

  1. Less than 50% of customers view price as the most important criteria in purchasing
  2. Customer service is the key to retaining customers- an area unfortunately frequently neglected in B2B organizations
  3. The Competitive Advantages- what companies think customers are paying for in terms of value- are often not aligned with customer beliefs about product and service performance which is unique and valuable

The 3 insights need to be made actionable for organizations prior to implementing value based pricing programs by:

  1. Aligning products and services to the criteria most important to high emphasis strategic customers
  2. Developing a customer service program that is not window dressing- a program the truly responds to the needs of the client
  3. Systematically revisiting strategy on a regular basis (at least every quarter) to ensure the validated competitive advantages are being invested in and are on track relative to timing, budget, and results

Once the understanding of customers is in place, value based pricing can move from a “nice to say in the annual report” topic to a method for retention of strategic accounts while generating the income necessary for investments in product and service development. The author of this post is Scott Newton, Thinking Dimensions.

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Posted in Pricing |

Challenges in Pricing B2B

Wednesday, April 11th, 2012

One of the most overlooked areas in the Strategic arsenal of organizations is the ability to control price.  The CEO and their team are faced with difficult decisions on a daily basis of how to impact profitability- yet most the effort is weighted towards cost control instead of pricing.

Pricing, while an area frequently dismissed as in control only of the competitor or direct material costs, is the topic which  provides organizations with the highest impact on P&L (Profit and Loss).

In the next few weeks and months, we will be discussing pricing decisions related to B2B products and services in particular- and invite your input on what has worked well, what is challenging, and what has not worked at all.

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Posted in Pricing |