Defining the customer experience to inform value based pricing

© 2014 Blue Canyon Partners, Inc. All rights reserved.

September 2014

Defining the Customer

Experience to Inform Value-

Based Pricing


What is the customer experience?

How defining the customer experience informs

value-based pricing

A framework for using customer experience to drive

pricing decisions

The framework in action: 2 case studies

Agenda

2


What is the Customer Experience?

3

Effect Experience

Product Experience

Supplier Experience

Three dimensions that define the total

customer experience


The Supplier Experience

4

Effect Experience

Product Experience

Supplier Experience

Customer’s experience

interacting with the supplier

Marketing/Sales Campaigns

Sales Calls

Solution Design &

Engineering

Quote/Order Process

Inventory Management

Customer Support

Advisory Services


The Product Experience

5

Effect Experience

Product Experience

Supplier Experience

Customer’s experience

interacting with the product

Installation

Set Up/Configuration

Customization/Modification

Use

Maintenance

Updating/Upgrading

Removal/Decommissioning


The Effect Experience

6

Effect Experience

Product Experience

Supplier Experience

Customer’s experience of

the effect the offering has

on their business

Process

Inputs

Outputs

Resources

Decision Making

Differentiation


How Defining the Customer Experience

Informs Value-Based Pricing

7

Defining the customer

experience and understanding

how the offering impacts the

customer experience informs…

The value you are

delivering to the customer

The customer’s willingness

to pay

The price you can charge

Effect Experience

Product Experience

Supplier Experience


Effect Experience

Product Experience

Supplier Experience

How Defining the Customer Experience

Informs Value-Based Pricing

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But there is a piece missing…$

$

$

$

$

$

You must not only define the

customer experience but also

the economics of the customer

experience to successfully

value and price the offering


A Framework for Using Customer Experience

to Drive Value-Based Pricing

9

Our Current

Offering

Economic Impact/

Value Delivered

Value Captured

(Price)Our Future

Offering

Competitor

OfferingOur Offering

“Existing”

Customer

Experience

“New”

Customer

Experience

Change or difference in…

Supplier Experience

Product Experience

Effect Experience

As determined by…

Costs reduced

Productivity

improved

Time saved

Risk avoided

Revenue generated

Share gained

Driven by…

Supplier vs.

customer power

Supplier vs.

customer

contribution

Strength of proof

Competitive

dynamics

Our Standard

Offering

Our Premium

Offering


The Framework in Practice: Case Study #1

10

Case Study #1:

Product Experience

Company: Manufacturer

of Appliances

Challenge: Develop and

price new solution to

penetrate retrofit market


Case Study #1: Product Experience

11

Current Offering

Existing Retrofit Customer

Product Experience – Installation

Future Offering

Appliance Installation Work

Plumbing Work

Electrical Work

Customer Time

Coordination/Complexity

Cost Uncertainty

Increase Appliance Installation

Work

Reduce Plumbing Work

Eliminate Electrical Work

Reduce Customer Time

Reduce Coordination/Complexity

Eliminate Cost Uncertainty

Define the customer experience for the current and

future offering

New Retrofit Customer Product

Experience – Installation


Case Study #1: Product Experience

12

Define the economics of the customer experience for the

current and future offering to determine the value-based price

premium

Price Premium @ Different

Value Capture Ratios

Supplier/Customer

60/40: +$234

50/50: +$195

40/60: +$156

Base Retrofit Customer Product


(Most Difficult)

New Retrofit Customer Product


(Most Difficult)

Current Offering Future Offering

Note: Not actual figures, data has been

altered for confidentiality purposes

Total: $840 Total: $840

Current

Product Price:

$500

Future

Product Price:

$695


Case Study #1: Product Experience - Takeaways

13

Impact on Pricing Decisions and Overall Strategy

▫ Pricing Decisions

• Recognized new solution should be sold at a premium, not at discount as

originally assumed

• Established price premium for new solution, above what initially thought

appropriate

▫ Overall Strategy

• Defined solution requirements to drive increased adoption in retrofit market

• Determined target cost to drive R&D decisions

• Identified potential need for new channel/business model

Key Learnings

▫ There isn’t just one customer experience – understand what experience you are

targeting and price accordingly

▫ Need to understand tradeoffs in value-based pricing – what extra effort/costs are

you imposing on the customer as well?


The Framework in Practice: Case Study #2

14

Case Study #2:

Effect ExperienceCompany: Supplier of

Solutions for the

Refrigerated Container

Market

Challenge: Determine price

and available market for

next generation container

monitoring technology


15

Understanding the Effect Experience required detailing the customer’s

overall operational experience with refrigerated containers – activities,

economic factors, and players/roles

In OperationOwnership

Example of

Economics Details

•Energy

•Maint & Repair

•Monitoring

•Acquisition

•Storage & Prep

•Inland Transport

•Loading/Unloading

•Handling at Terminal

•Vessel Transport

Case Study #2: Effect Experience

Capital Cost

Operating Cost

Claims Cost

Handling Cost

Economics

Vessel & Overhead

Cost

Example of

Activities Details

•Monitor

•Maint & Repair

•Claims Admin

•Claims Payout

Activities

Shipping Line

Terminal

Shipper/Receiver

3rd Party Trans

Reefer Depot

Leasing Firm

Players/Roles



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See Decide Act

Who

• Shipping line – Reefer Operations • Shipping line – Reefer Operations

• If container in depot: Depot Tech

• If container in terminal: Terminal Tech

• If container on vessel: Ship Tech

What

• Request for data log/temperature history

• Container number

• Location of container

• Who to contact to download data log

data

• Locate container

• Wait (if container is inland or at customer)

• Lift/move containers to access and power

(if necessary)

• Download data log information

• Send data to Reefer Operations

Where

• Shipping line offices • Shipping line offices • Dependent on container location

When

• Claim filed

• Customer request

• Internal operations request

• When request for temperature history

received

• When request to retrieve data log is

received

How

• Shipping line system

• Manual request


• Experience

• Shipping line guidelines

• Manual locating

• Manual download at container

• Upload to shipping line systems or email

Develop a set of use cases for the next generation monitoring technology

and document how the solution would effect the customer’s operations



17

Who

• Shipping Line – Reefer Operations • Shipping line – Reefer Operations • Shipping line – Reefer Operations

What

• Request for data log/temperature history • Container number

• Login to monitoring system

• Select container

• Download temperature history

Where

• Shipping line offices • Shipping line offices • Shipping line offices

When

• Claim filed

• Customer request

• Internal operations request


received


received

How


• Manual request• Shipping line system

• Download temperature history from

monitoring system database through

web-based interface

RED=Change in Process

The new customer experience using the next generation monitoring

technology changed who, what, where, when, and how the temperature

history is accessed

See Decide Act


Reefer Trips - $XX,000 Dry Backhaul Trips - $X00

Revenue

Costs

Annual Revenue/Cost Per Refrigerated Container

Capital Cost

$X,445

Operating Cost

$X,520

Claims

Cost

$X85

Handling Cost

$X,645


18

Detail operating economics to determine economic impact and value delivered

by the next generation monitoring technology use cases

Note: Figures disguised for

confidentiality purposes



19

Use Case Description Market

Interest

Viability Value Potential

(Benefit Per Container Per Year)

1

On-Demand

Temperature

History

End-to-end temperature record

stored in the global monitoring

system and available via on-

demand remote download

•Reduce claim admin costs by 50% = $XX

•Reduce claims paid by 25% = $X4

•Total value potential = $X9

2 Use Case 2Description 2 • Reduce claims rate (% of trips with claim) by 5% =

$X

• Total value potential = $X

3 Use Case 3Description 3 • Eliminate monitoring costs of $X0/day while in

terminal = $X00

• Total value potential = $X00

4 Use Case 4

Description 4 • Reduce maintenance labor costs by 10%: = $X6

• Reduce claims rate (% of trips with claim) by 5% =

$X


5 Use Case 5Description 5 • Reduce energy costs by 5% = $X3

• Reduce maintenance labor costs by $X0 = $X0


6 Use Case 6Description 6 • Increase annual trips per container by 5% = $X33


Total Total Value Potential = $X42

Aggregating the economic impact and value delivered by each use case

defines the total potential value of the next generation monitoring technology


confidentiality purposesHigherLower


Price Per Container

% of Annual Value Delivered Captured

20% 30% 40%

$X44 $X66 $X88


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Create scenarios with various value capture and market penetration

assumptions to establish price per container and estimate annual

available market

Annual Available Market

$ Millions % of Annual Value Delivered Captured

Market Penetration (% of

Reefer Population) 20% 30% 40%

20% $X8 $X3 $X7

30% $X3 $X09 $X46

40% $X7 $X46 $X95


confidentiality purposes


Case Study #2: Effect Experience - Takeaways

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Impact on Pricing Decisions and Overall Strategy

▫ Pricing Decisions

• Detailed economic impact and value delivered of monitoring technology, well

beyond what initially thought

• Established well supported price per container, to confidently price to customers

▫ Overall Strategy

• Identified higher economic impact use cases for prioritizing development and

marketing focus

• Defined annual market opportunity to determine investment levels

• Identified barriers to address for successful adoption

Key Learnings

▫ The most obvious benefits of a solution do not always deliver the most value –

detailing the economic impact is critical

▫ The value delivered can differ significantly by customer – pricing should differ

accordingly as well


Define the customer experience to determine if value-based pricing is

appropriate

▫ Do you have an offering that provides a unique or different customer experience?

▫ Examine supplier, product, and effect experience

Map out the “existing” and “new” customer experience

▫ Define your base – current offering, competitor’s offering, etc.

▫ Focus on the key aspects of the experience, don’t get lost in the details

Define the economics and your offering’s impact

▫ Remember to consider tradeoffs, rarely is there a “free lunch”

Be realistic in deciding how much of the value you can capture to set price

▫ Consider customer’s power and contribution, strength of proof, and competitive

dynamics

Defining the customer experience provides value beyond pricing

▫ Informs multiple elements of strategy

How You Can Use Customer Experience to

Inform Value-Based Pricing

22


Axel J. Leichum, Principal

Axel J. Leichum

Current Responsibilities

Axel Leichum leads numerous business-to-business focused strategy projects that help Blue Canyon’s

clients improve their understanding of customer needs, identify and prioritize growth opportunities,

effectively segment and target markets, and enhance their major customer relationships.

PRINCIPAL

T (847) 967-0253

E [email protected]

Experience

With more than 12 years as a management consultant, Axel brings extensive experience in conducting

primary and secondary research and performing economic analysis, combined with the ability to translate

information into insight and actionable strategies for clients. Axel’s client engagements have spanned a

wide variety of industries and geographies. His work includes:

Developing a pricing strategy for a global supplier of healthcare equipment

Defining a go-to-market strategy for an IT infrastructure management software and hardware provider

Developing a global growth strategy for a supplier of equipment to the telecommunications industry

Defining the market opportunity for a new technology to be introduced into the utility industry

Prior to joining Blue Canyon, Axel served as a consultant with Booz Allen & Hamilton’s management

consulting practice (now known as Strategy&) working primarily with clients in the financial services and

consumer products industries.

Education and Affiliations

Axel has a Bachelor of Arts in Economics from Northwestern University with departmental honors.

Thought Leadership

Axel has written and contributed to a number of articles and white papers on topics such as adjacencies

and pricing strategies. His two white papers on adjacencies --Discovering Your Next Growth Opportunity:

Adjacent Markets and Adjacent Markets: Choose Your Battles Wisely--explore how to identify and

prioritize adjacent market opportunities.

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Defining the customer experience to inform value based pricing

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