Description
A business can use a variety of pricing strategies when selling a product or service. The Price can be set to maximize profitability for each unit sold or from the market overall. It can be used to defend an existing market from new entrants, to increase market share within a market or to enter a new market. Businesses may benefit from lowering or raising prices, depending on the needs and behaviors of customers and clients in the particular market.
Pricing Strategy
Services Industry
Akash Rathod
[email protected]
Topics
• Why pricing is important
• Pricing Maturity Roadmap
• How to define the Pricing structure
• Pricing Process
• Conditions for Pricing Strategy
Why Pricing is important
100
24.5
66.4
9.1
Increase price
by 1%
Price
(Indexed to 100)
Fixed
Cost
Variable
Cost
Operating
Profit
Profit Increase of
11%
101
10.1
Impact of price
increase on Operating
Profit
Improvement in price by 1%
increases profitability by 11%
11.0
7.3
3.7
2.7
Volume
Variable
Cost
Fixed
Cost
Price
Price is the biggest
profit improvement
lever
Improving the lever by 1% delivers
profit improvement of …
Price decreases are
only offset by huge
volume uplifts
Reducing prices by 5%
requires a break-even
volume increase of 17.5%
17.5
-5
Price
Decrease
Volume Increase to
Breakeven
Source: The Price Advantage, Marn, Roegner, Zawada
Based on Global 1200 Average Economics
4 13 September 2011
Pricing Maturity Map
How do we define the Pricing Structure?
Usage
Metrics
Packaging
Pricing
Model
Structural Elements
Detail Elements
Levels Discount
Aligning Metrics
• Metric = On what basis you charge the customer
? Critical, fundamental
• Scale with value delivered
? People Per user
? Deployment Per instance
? Web access Per transaction
• Depends on how product is used
? Personal vs. group use
? Transaction vs. continuous use
? Sporadic use vs. frequent use
• Selection considerations
? Convenient for budgeting, quoting
? Easily monitored and measured
– Must be instrumented properly
– Basis for billing, invoicing
Example of Metrics – Services Industry
CRM per sales rep RightNow,
Salesforce.com
Developer Tools per instance SAP, Oracle
Stock Trading per trade Archipelago
Credit Card Processing % of transaction Verisign
Survey per survey Zoomerang
Check Scanning per check Kodak
Network Management per device Hewlett Packard, Cisco
Insurance per policy Allenbrook
SW asset management % of revenue Flexera
Bandwidth/data transfer per GB Comcast, TWC
Direct Mail Mail list size Constant Contact
Packaging
• Basic issues
? What use cases are being addressed?
? How are functions related?
? What functions are popular?
? Which functions will customers pay more for?
• Narrowing the choices
? Broad vs. narrow appeal
? Basic vs. premium offering
? Add-ons and options
Packaging – Determining Package
and Add-ons
Low
Medium High
Medium
Low
High
Component Value to User
Usage of
Component
Add-Ons
Features
Hacks
Table Stakes
Usage
• Related to payment stream
• Annual and shorter-term
? Rate of change in application, use
? An option? (vs. perpetual)
? SaaS includes RTU and M&S?
• Multi-year
? How long?
? Payment in advance
? Price protection typical
• Perpetual
? Up-front = PV of what?
? Value of annual M&S?
– Is % RTU fee (list or net) right metric?
Price Levels - Value-Driven
• Metric tracks value
• Look at ROI, payback period, etc.
? Target value to be 5 –10x price
• Price scales with NET value
• Set price for base product using
? Customer value
? Competition
? Costs (for viability)
Value
Delivered
Price
Paid
…………
Metric Amount
Price Discounts
• Long lasting financial impact
? Avoid price cuts
? Free “months” vs. lower price
• Be clear on objectives
? Product trial
? Quick adoption
? Retention
• Use scheduled discounts
• Avoid negotiated discounts if possible
Discount Types
• Introductory
? Accelerate new product uptake
• Time-limited
? Purchase sooner
• Contract length
? Longer commitment
• Bundle
? Increase transaction value
• Volume-based
? Increase unit or dollar volume
• Upgrade
? Trade-up, upsell
• Segment focused
? Industry, customer type
Price Setting
(Pricing Team)
Standard
Cost Setting
& Resetting
(Finance,
Engineering)
The Pricing Process
Deal Price
Capture and
Analysis
(Pricing Team)
Deliver to Sold
Price
Apply and Configure
Pricing
Establish Standard Pricing
Translate Market
Pricing
Market
Intelligence
(Competitive
Intelligence)
Pricing
Strategy &
Structure
(Pricing Team)
Develop
Deal Price
(Sales
Support)
Finalize
Deal Price
(Region
Leader)
Deal
Sign-Off
(Account
Executive)
•Pricing Trends
•Competitive
Market
Benchmarking
•Provide
pricing
insight
•Price
performance
•Pricing Units
•Pricing
Structure &
Strategy
•Pricing Rules
•Segment Pricing
•Discount Structure
•Solution
development
•Service
Descriptions
•Deal
profitability
•Sales pursuit
review
•Contract
signed and
input into
system
•Hand-off to
Delivery
Product
Strategy
(Product
Management)
Regional
Validation
(PM, Regional
Sales)
Standard Pricing Development
Transaction Pricing
Pricing
Tools
Plan Design Build Launch
Understa
nd
Customer
Validate
Opportun
ity
Develop
Proposal
Negotiate
& Close
Key Pitfalls to Pricing Process
Pitfalls Mitigation Strategy
Pricing Process is not Proactive • Executive Sponsorship of pricing
process
• Pricing Governance
Does not give an integrated view of all
relevant information
• Having a pricing process that involves
key function groups and embeds cross-
functional co-ordination
Right incentive are not there for
salespeople
• Right sales incentive structured on
sales revenue and profitability
Customer does not understand the
differential value of the product offering
• Sales and marketing collateral aligned
to justify pricing
Typical Pricing Strategies
Emerging Growth Mature Decline
Skim
Penetration
Neutral
Strategy
Mkt. Phase
Strategy for Slightly Disadvantaged Companies
Strategy for Niche Providers
Bad Positioning Bad Positioning Bad Positioning
Pricing Strategy Skim Neutral Penetration
Description • Pricing high compared to
competition or pricing higher than
perceived value of product or
service
• Price close to competition or
pricing close to medium than
perceived value of product or
service
• Price low relative to competition
or pricing lower than perceived
value of product or service
Value Differentiation
• Differentiated • Parity / Slight Disadvantage • Disadvantage
Lifecycle Phase
• Emerging – Mainstream
• All Phases – Niche Providers
• Mature & Declining Markets
• All Phases – Slightly
Disadvantaged (“Me Too”)
• Growth
When to Use • Ideal to use with high value and
image type services
• Company has a competitive
advantage
• Trying to protect against price
competition in Growth and Mature
Phases
• Have good competitive pricing
data and ability to keep the data
current
• Want to focus on a broad market
• Companies at a slight competitive
disadvantage that want to adopt a
“follow the leader” strategy
• Need to maintain market position
for companies at a competitive
disadvantage
Margin Impact • Captures value from differentiated
services and / or early adopters in
emerging markets
• Pricing is not used as a
competitive weapon preserving
margin
• Protects margin from reduced
price by using volume growth to
change cost structure and
reduce costs
Appendix
Typical pricing models suitable for price maturity levels
Pricing
Model
Definition Optimal Conditions for Use Example
Fixed
Price
• Project value is determined up
front and then divided into
installments
• Scope and process is well known
• Service provider assumes all financial risk,
so use only where risk is low
• Software Development
projects
• Up-sell development when
scope is well defined
Time &
Materials
• Project Value is charged for
based on consumption of time
and expenses as needed to
complete the project
• Best for short-term engagements where
scope and content is not well-known and
the activity is not core to the client.
•IT projects charging monthly
or hourly for specified FTEs
Transactio
n/SLA
Based
• Generate price per transaction,
multiplied by the number of
transactions; usually during a
given time period (daily,
weekly, monthly).
• Best to use for leveraged offerings where
client wants to outsource in order to change
their spending from fixed to variable.
• Results are predictable, measurable, clearly
linked to the project, and understood by
client. Good when the client will not share
risk.
•Claims processing for Health
Care Companies
•Reservation systems for airline
companies
Blended
(Fixed
plus
variable)
• Combination of two or more of
the above models
• Best to use when there are multiple
objectives within the same project, to add
flexibility and accommodate different needs
• Consumption-based fixed
price includes up to a
predetermined number of
servicing events (e.g.
helpdesk calls), after which
additional events are charged
for on a per event basis
Risk /
Reward
Business
Benefit
• Vendor is paid in proportion to
the business value generated
by the project or service, such
as a percentage of increased
profit or decreased cost.
• Best to use when a leveraged offering that
can offer significant value to the client
• Must have a strong client relationship;
Baseline & tracking the metric for business
value is easy
• Pricing of security software
services
• Supply Chain software
implementations
O
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t
p
u
t
B
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s
e
d
V
a
l
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e
B
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e
d
M
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B
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doc_962951172.pdf
A business can use a variety of pricing strategies when selling a product or service. The Price can be set to maximize profitability for each unit sold or from the market overall. It can be used to defend an existing market from new entrants, to increase market share within a market or to enter a new market. Businesses may benefit from lowering or raising prices, depending on the needs and behaviors of customers and clients in the particular market.
Pricing Strategy
Services Industry
Akash Rathod
[email protected]
Topics
• Why pricing is important
• Pricing Maturity Roadmap
• How to define the Pricing structure
• Pricing Process
• Conditions for Pricing Strategy
Why Pricing is important
100
24.5
66.4
9.1
Increase price
by 1%
Price
(Indexed to 100)
Fixed
Cost
Variable
Cost
Operating
Profit
Profit Increase of
11%
101
10.1
Impact of price
increase on Operating
Profit
Improvement in price by 1%
increases profitability by 11%
11.0
7.3
3.7
2.7
Volume
Variable
Cost
Fixed
Cost
Price
Price is the biggest
profit improvement
lever
Improving the lever by 1% delivers
profit improvement of …
Price decreases are
only offset by huge
volume uplifts
Reducing prices by 5%
requires a break-even
volume increase of 17.5%
17.5
-5
Price
Decrease
Volume Increase to
Breakeven
Source: The Price Advantage, Marn, Roegner, Zawada
Based on Global 1200 Average Economics
4 13 September 2011
Pricing Maturity Map
How do we define the Pricing Structure?
Usage
Metrics
Packaging
Pricing
Model
Structural Elements
Detail Elements
Levels Discount
Aligning Metrics
• Metric = On what basis you charge the customer
? Critical, fundamental
• Scale with value delivered
? People Per user
? Deployment Per instance
? Web access Per transaction
• Depends on how product is used
? Personal vs. group use
? Transaction vs. continuous use
? Sporadic use vs. frequent use
• Selection considerations
? Convenient for budgeting, quoting
? Easily monitored and measured
– Must be instrumented properly
– Basis for billing, invoicing
Example of Metrics – Services Industry
CRM per sales rep RightNow,
Salesforce.com
Developer Tools per instance SAP, Oracle
Stock Trading per trade Archipelago
Credit Card Processing % of transaction Verisign
Survey per survey Zoomerang
Check Scanning per check Kodak
Network Management per device Hewlett Packard, Cisco
Insurance per policy Allenbrook
SW asset management % of revenue Flexera
Bandwidth/data transfer per GB Comcast, TWC
Direct Mail Mail list size Constant Contact
Packaging
• Basic issues
? What use cases are being addressed?
? How are functions related?
? What functions are popular?
? Which functions will customers pay more for?
• Narrowing the choices
? Broad vs. narrow appeal
? Basic vs. premium offering
? Add-ons and options
Packaging – Determining Package
and Add-ons
Low
Medium High
Medium
Low
High
Component Value to User
Usage of
Component
Add-Ons
Features
Hacks
Table Stakes
Usage
• Related to payment stream
• Annual and shorter-term
? Rate of change in application, use
? An option? (vs. perpetual)
? SaaS includes RTU and M&S?
• Multi-year
? How long?
? Payment in advance
? Price protection typical
• Perpetual
? Up-front = PV of what?
? Value of annual M&S?
– Is % RTU fee (list or net) right metric?
Price Levels - Value-Driven
• Metric tracks value
• Look at ROI, payback period, etc.
? Target value to be 5 –10x price
• Price scales with NET value
• Set price for base product using
? Customer value
? Competition
? Costs (for viability)
Value
Delivered
Price
Paid
…………
Metric Amount
Price Discounts
• Long lasting financial impact
? Avoid price cuts
? Free “months” vs. lower price
• Be clear on objectives
? Product trial
? Quick adoption
? Retention
• Use scheduled discounts
• Avoid negotiated discounts if possible
Discount Types
• Introductory
? Accelerate new product uptake
• Time-limited
? Purchase sooner
• Contract length
? Longer commitment
• Bundle
? Increase transaction value
• Volume-based
? Increase unit or dollar volume
• Upgrade
? Trade-up, upsell
• Segment focused
? Industry, customer type
Price Setting
(Pricing Team)
Standard
Cost Setting
& Resetting
(Finance,
Engineering)
The Pricing Process
Deal Price
Capture and
Analysis
(Pricing Team)
Deliver to Sold
Price
Apply and Configure
Pricing
Establish Standard Pricing
Translate Market
Pricing
Market
Intelligence
(Competitive
Intelligence)
Pricing
Strategy &
Structure
(Pricing Team)
Develop
Deal Price
(Sales
Support)
Finalize
Deal Price
(Region
Leader)
Deal
Sign-Off
(Account
Executive)
•Pricing Trends
•Competitive
Market
Benchmarking
•Provide
pricing
insight
•Price
performance
•Pricing Units
•Pricing
Structure &
Strategy
•Pricing Rules
•Segment Pricing
•Discount Structure
•Solution
development
•Service
Descriptions
•Deal
profitability
•Sales pursuit
review
•Contract
signed and
input into
system
•Hand-off to
Delivery
Product
Strategy
(Product
Management)
Regional
Validation
(PM, Regional
Sales)
Standard Pricing Development
Transaction Pricing
Pricing
Tools
Plan Design Build Launch
Understa
nd
Customer
Validate
Opportun
ity
Develop
Proposal
Negotiate
& Close
Key Pitfalls to Pricing Process
Pitfalls Mitigation Strategy
Pricing Process is not Proactive • Executive Sponsorship of pricing
process
• Pricing Governance
Does not give an integrated view of all
relevant information
• Having a pricing process that involves
key function groups and embeds cross-
functional co-ordination
Right incentive are not there for
salespeople
• Right sales incentive structured on
sales revenue and profitability
Customer does not understand the
differential value of the product offering
• Sales and marketing collateral aligned
to justify pricing
Typical Pricing Strategies
Emerging Growth Mature Decline
Skim
Penetration
Neutral
Strategy
Mkt. Phase
Strategy for Slightly Disadvantaged Companies
Strategy for Niche Providers
Bad Positioning Bad Positioning Bad Positioning
Pricing Strategy Skim Neutral Penetration
Description • Pricing high compared to
competition or pricing higher than
perceived value of product or
service
• Price close to competition or
pricing close to medium than
perceived value of product or
service
• Price low relative to competition
or pricing lower than perceived
value of product or service
Value Differentiation
• Differentiated • Parity / Slight Disadvantage • Disadvantage
Lifecycle Phase
• Emerging – Mainstream
• All Phases – Niche Providers
• Mature & Declining Markets
• All Phases – Slightly
Disadvantaged (“Me Too”)
• Growth
When to Use • Ideal to use with high value and
image type services
• Company has a competitive
advantage
• Trying to protect against price
competition in Growth and Mature
Phases
• Have good competitive pricing
data and ability to keep the data
current
• Want to focus on a broad market
• Companies at a slight competitive
disadvantage that want to adopt a
“follow the leader” strategy
• Need to maintain market position
for companies at a competitive
disadvantage
Margin Impact • Captures value from differentiated
services and / or early adopters in
emerging markets
• Pricing is not used as a
competitive weapon preserving
margin
• Protects margin from reduced
price by using volume growth to
change cost structure and
reduce costs
Appendix
Typical pricing models suitable for price maturity levels
Pricing
Model
Definition Optimal Conditions for Use Example
Fixed
Price
• Project value is determined up
front and then divided into
installments
• Scope and process is well known
• Service provider assumes all financial risk,
so use only where risk is low
• Software Development
projects
• Up-sell development when
scope is well defined
Time &
Materials
• Project Value is charged for
based on consumption of time
and expenses as needed to
complete the project
• Best for short-term engagements where
scope and content is not well-known and
the activity is not core to the client.
•IT projects charging monthly
or hourly for specified FTEs
Transactio
n/SLA
Based
• Generate price per transaction,
multiplied by the number of
transactions; usually during a
given time period (daily,
weekly, monthly).
• Best to use for leveraged offerings where
client wants to outsource in order to change
their spending from fixed to variable.
• Results are predictable, measurable, clearly
linked to the project, and understood by
client. Good when the client will not share
risk.
•Claims processing for Health
Care Companies
•Reservation systems for airline
companies
Blended
(Fixed
plus
variable)
• Combination of two or more of
the above models
• Best to use when there are multiple
objectives within the same project, to add
flexibility and accommodate different needs
• Consumption-based fixed
price includes up to a
predetermined number of
servicing events (e.g.
helpdesk calls), after which
additional events are charged
for on a per event basis
Risk /
Reward
Business
Benefit
• Vendor is paid in proportion to
the business value generated
by the project or service, such
as a percentage of increased
profit or decreased cost.
• Best to use when a leveraged offering that
can offer significant value to the client
• Must have a strong client relationship;
Baseline & tracking the metric for business
value is easy
• Pricing of security software
services
• Supply Chain software
implementations
O
u
t
p
u
t
B
a
s
e
d
V
a
l
u
e
B
a
s
e
d
M
a
r
k
e
t
B
a
s
e
d
doc_962951172.pdf