Download - Ritesh Sheth Pricing Top Right Quadrant 102810

The Top Right Quadrant: The Strategic and Tactical Answer to

Profitable PricingOctober 28, 2010

Ritesh Sheth, Director

Pricing Strategy

PPS Conference Confidential 2

Executive Summary

This presentation provides an opportunity to create and add value to an organization’s 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


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


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


Here is a proposed timeframe for implementing both the strategic and operational pricing competencies within Hoover’s

3 Months 6 Months

1st Year

2nd Year 3rd Year

Str

ate

gy

Opera

tions

Cost PackageMaster Price ListCompetitive AnalysisWeekly 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


Pricing Strategy

Margin %

WAPP

Margin $

WAPP = Weighted Average Price Position

Richness of Config

Incr

ea

sin

g W

AP

P

Incr

ea

sin

g M

arg

in $


Dell ConfidentialFor 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 PriceDR% = Discount Rate %LM% = List Margin %C = CostP = PricePM% = Product Margin %NP = New PriceBP = Base PriceLPr = List Price Rich ConfigLPb = List Price Base Config


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 / ProductMargin $

Min Avg Rich

1.0

1.5

2.0100%

60%

30%

WAPP - Weighted Average Price Position:

Disc %Margin $

Competitor Offering w/in product line weighted by Hoover's AttachHoover's Weighted List


WAPP

Level of Offering

List / ProductMargin $

Min Avg Rich

1.0

1.5

2.0 100%

60%

30%

Disc %Margin $

Here’s 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)


Here’s 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


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:


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


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


Top Ten Questions from Management

If negative margin: What’s 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


Auction Pricing Strategies

Purpose: Participate in competitive online biddingGoal: 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

incentivesRetention: 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 auctionLegal review of customer’s Terms and Conditions of AuctionCareful consideration of discount assurance requirements May require that you maintain discount of initial aggressive fixed price


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


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


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


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


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


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:

5. Level Playing Field

6. If low price leadership, competitors don’t want this

3rd Party Indexing Benefits


Last Attended Pricing Conference Agenda

10/24 – Day 1 Workshop: The Keys to Unlocking Your Organization’s Potential

10/25 – Dr. Reed Holden’s Pricing With Confidence – author of Strategy and Tactics of

Pricing (KISS)– Herman Simon of Simon Kutcher & Partners – co-author of Manage for Profit, not

for Market Share – great Porsche example– Rafi Mohammed – Culture of Profit– Andrew Rojeski – Pricing Practitioner ~ Pricing Capability Development: Driving

a Commitment to Success– Julie Eastman – How to Standardize Your Pricing Exceptions– Richard Lancioni, Temple University Professor

10/26 – Bringing Science to the Art of Pricing (Waterfall Method)– Chris Delfanzo – Commoditization: Taking a Leadership Role in Reversing the

Trend– Laura Preslan – Pricing Theory– Tom Jacobson - Pricing and Project Optimization (Accenture)


Last Attended Pricing Conference Best Practices – Pricing Org

World Class Pricing Process Maturity Levels

1. The Firefighter (Baseline Process is Ineffective)

2. The Policeman – Gaining Control of Pricing (Internal Process in Place)

3. The Partner – Developing Pricing Strategy (Value Processes in Place)

4. The Artist – Optimizing Pricing (Optimization Process in Place)

5. The Master – Achieving World Class (Excellence in Execution)


Pricing Conference Best Practices – Impact of Move

Revenue 100 99COGS 60 60SG&A 32 32NI 8 7

= (7 - 8) / 812.5%

A 1% change in price can have a 12.5% reduction in profitability

1% increase in price results in 12% increase in bottom line”

- McKinsey & Co


Pricing Conference Best Practices – EVE

Economic Value Estimation

Positive (+) Differentiated

Value

Negative (-) Differentiate

d Value

Total Economic Value

Price parity to competition

$1,500

$1,000


Contact Info

Ritesh M. ShethDirector, Pricing StrategyHoover’s, a Dun and Bradstreet Co.Email: [email protected]: 512.380.4879LinkedIn: www.linkedin.com/in/thisisritesh

mailto:[email protected]

http://www.linkedin.com/in/thisisritesh