Ritesh Sheth Pricing Top Right Quadrant 102810

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Pricing Strategy

Transcript of Ritesh Sheth Pricing Top Right Quadrant 102810

  • 1.The Top Right Quadrant: The Strategic and Tactical Answer to Profitable Pricing October 28, 2010 Ritesh Sheth, Director Pricing Strategy

2. PPS Conference Confidential 2 Executive Summary This presentation provides an opportunity to create and add value to an organizations existing pricing strategy. There are two major categories for work around Pricing: Marketing Strategy Finance Operations Within the Strategy umbrella lies a variety of value-adding pricing related activities including: Operations for Pricing includes: Over time, these pricing activities will help an organization grow revenue and increase profitability. Metrics Forecasting Trending Competitives List Pricing Market / Mix Modeling Product Launch Cost Package Deal Pricing Deal Review Desk Account and Segment P&Ls Large Deals Sales Training Controllership 3. PPS Conference Confidential 3 Marketing Strategy competencies include a host of value-add activities and deliverables to provide discipline around Pricing Set Pricing Strategy Weekly Metrics Product Scorecards Attainment vs. Forecast Forecasting by Product Revenue Units Margin Trending List Margin (LM%) Product Margin (PM%) Discounting (Disc %) Ad-hoc Analyses Competitive Analysis WAPP (Weighted Average Price Position) MCPP (Minimum Configuration Price Point) SAPP (Starting At Price Point) Master Price List List price and Cost by SKU / Product Code Pricing Roadmap Attach Rates Consolidation By product family Modeling Product Launches New Service Requirements Doc Timelines Pricing Strategy Presentations and Training Cost Package Integration & Analysis 4. PPS Conference Confidential 4 Pricing Related Finance Operations competencies provide an ongoing view of the business revenue / profitability and necessary communications / controls to ensure growth and profitability Set Deal Pricing Strategy Discount Authority Matrix Deal Review Desk Deal Structuring Approvals (Vendavo) Deal P&L Tool Upsell Tool Account P&Ls P&L for the Business By Segment Aligned with Sales Org Large Deals Analysis Disc % Trending Profitability Analysis Sales Training Pricing Methodologies Upsell Strategies Controllership Finance Alignment on Quotas / Compensation Controls Risk Management 5. PPS Conference Confidential 5 Here is a proposed timeframe for implementing both the strategic and operational pricing competencies within Hoovers 3 Months 6 Months 1st Year 2nd Year 3rd Year StrategyOperations Cost Package Master Price List Competitive Analysis Weekly Metrics Attach Rate Analysis Modeling Forecasting Product Launches Trending Ad-hoc Analysis Discount Authority Matrix Deal Pricing Sales Training P&Ls Large Deals Analysis Controllership 6. PPS Conference Confidential 6 Pricing Strategy Margin % WAPP Margin $ WAPP = Weighted Average Price Position Richness of Config IncreasingWAPP IncreasingMargin$ 7. PPS Conference Confidential 7 Dell Confidential For Internal Use Only Pricing Formulas Price = LP * ( 1 - DR%) LM% = 1 C / LP PM% = 1 C / P C = P * (1 PM%) P = C / (1-PM%) Formula for solving for upsells: NP = BP + (LPr LPb) * (1 DR%) Legend: LP = List Price DR% = Discount Rate % LM% = List Margin % C = Cost P = Price PM% = Product Margin % NP = New Price BP = Base Price LPr = List Price Rich Config LPb = List Price Base Config 8. PPS Conference Confidential 8 The goal here is to help drive the sales team to upsell and achieve sales within the top right quadrant, where discounting is higher, but so is absolute margin $, and where we are most competitive WAPP Level of Offering List / Product Margin $ Min Avg Rich 1.0 1.5 2.0 100% 60% 30% WAPP - Weighted Average Price Position: Disc % Margin $ Competitor Offering w/in product line weighted by Hoover's Attach Hoover's Weighted List 9. PPS Conference Confidential 9 WAPP Level of Offering List / Product Margin $ Min Avg Rich 1.0 1.5 2.0 100% 60% 30% Disc % Margin $ Heres a pricing strategy example applied showing an upsell from the base price to the updated Price and a further upsell to achieve even greater profitability assumes guidance in profitably lower discounting WAPP - Weighted Average Price Position UP = BP + (LPu LPo) * (1 DR%) Upsell Opportunity Updated Price (UP) Base Price (BP) 10. PPS Conference Confidential 10 Heres the math to apply for the example presented in the previous slide below shows the math behind the upsells X = $1,000 Current Discounted L2 License + ($1,732 L2 + AH Add- on List - $1432 L2 List) * (1 10%) X = $1,270 L2 + AH Add-on Discounted Bundle FR Add-on: $650 Apply $650 FR Add-on upsell Opportunity at 10% off: X = $1,270 Discounted Bundle + ($2,382 L2 AH + FR List - $1,732 L2 AH List) * (1- 10%) X = $1,855 11. PPS Conference Confidential 11 Business Case Template Customer: Business Case / Project: Acquisition / Retention: Quantity: Total Deal Size: Timeframe: Location: Justification for pricing below list / book value: Leasing: Any additional discounting / product credits / rebates: Margin Recovery Strategy: 12. PPS Conference Confidential 12 P&L Objectives and Impact Revenue Adjustments and Concessions These are essentially give backs to customers for a variety of reasons. Product issues Customer experience issues Competition It is critically important to understand the direct negative impact this can have on the P&L 13. PPS Conference Confidential 13 Negotiating Techniques (BATNA) Best Alternative To a Negotiated Agreement (BATNA) Strive to provide alternatives vs. no How you communicate is just as important as What Transparency to financials via cost files, P&Ls, product knowledge Triangulate financials via: Segment / Regional discount rates Historical P&L Regional P&L Discount rates by product Win / Loss Reporting 14. PPS Conference Confidential 14 Top Ten Questions from Management If negative margin: Whats the strategy to make money in this account? Allow enough time for approvals, per an approval matrix, schedule them Relay what the customer has told us in price terms, not margin Know how this deal compares to an existing contract Other Suppliers / OEM components: What is our value add Know competitive landscape How many rounds do we expect, or is this a Best and Final Offer Leverage any strategic funds: marketing / other supplier rebates Have the correct product offering / bundle Make sure the pricing manager is well aware of any deal that ends up in front of the CEO / President 15. PPS Conference Confidential 15 Auction Pricing Strategies Purpose: Participate in competitive online bidding Goal: Identify strategies to successfully manage auctions Mechanics Competitors bid down price to the customer Pricing manager will develop a P&L and secure appropriate pricing approvals for a pricing floor prior to the auction Lowest price in auction does not guarantee auction award Determining Price/Strategy Acquisition: Typically drive for first place position. May go in after auction with additional incentives Retention: Strive to win the auction, but stay a close second place in an R&D account auction. as transition costs may be more than the price difference Auction Tracking Pricing should compile details from the auction Legal review of customers Terms and Conditions of Auction Careful consideration of discount assurance requirements May require that you maintain discount of initial aggressive fixed price 16. PPS Conference Confidential 16 Competitive Intelligence Key sources of marketing data Sales makers Customer visits (Pricing should make these quarterly visits) Strategy, Brand Management, Product, and Procurement Competitive Intelligence Team Industry 3rd Party Research 17. PPS Conference Confidential 17 Pricing for Product Life Cycles Product Development typically targets a specific timeframe / life cycle for key Lines of Businesses Why is this important? Understanding refresh cycles for upsells and RFPs (Request For Proposals) Qualifying RFPs Communicating stability 18. PPS Conference Confidential 18 Pricing Techniques Fixed Price Fixed price is a negotiated price for a specified product offering for a set period of time Should be negotiated on a minimal offering Customer should not have the option to downgrade from standard Fixed price contracts usually take into account switching costs and tend to be extremely aggressive for the first year 19. PPS Conference Confidential 19 Price Assurance Price Assurance is intended to give customers the confidence that a supplier will always give them the best price and that they will share in any cost declines that usually occur in some industries IDC Use 3rd party vendor to establish an industry list price for a specific configuration and apply negotiated discount % to that list price Quarterly price reductions negotiate set quarterly reductions for the life of the contract Cost Plus agree to a cost plus percentage Cost Benchmark agree on a 3rd party to establish a cost benchmark and apply a negotiated mark up to that 20. PPS Conference Confidential 20 Comparing discount percentage off of list across potential partners is not an apples to apples comparison. The solution is to create a level playing field. How? Leverage an independent third party index to benchmark (discount) off. Utilize 3rd Party (Average of top vendors) How does this work? 1. Supplier submits the specified offering to 3rd Party 2. 3rd Party feature adjusts the vendors specified offering to establish an apples-to-apples book / list price 3. 3rd Party creates an average list price of the vendors to benchmark from 3rd Party Index Benchmarking 21. PPS Conference Confidential 21 Benefit to our Customers: 1. Easy to Evaluate 2. Assured good pricing for long term deals 3. Can focus on evaluating other areas of bids besides pricing 4. Eliminates Fear, Uncertainty and Doubt Internal Benefits: 1. Level Playing Field 2. I