Pricing Meets Customer Insights

The Wonderful World of Data
                -   by Michael Hurwich.

It’s time for businesses to use the voluminous reams of data available to distill rich insights into customer value expectations.  The World Economic Forum – Global Competitiveness Report 2012-13 reported the Country of Canada ranked 22 sophistication.  Fortunately, with the advent of cloud-based data warehousing, there are reams of data available to draw some conclusions around customer insights, where limited information was available in the past but only to a select few.

Every business creates data. But what separates the leaders from the followers in how they interpret and execute upon the data. Smarter Analytics and SmartCloud solutions give businesses the ability to harness insights and put into practice price-value strategies and tactics in real-time in order to gain significant advantages over competitors both regionally and globally.

Two companies using Big Data customer insights are Verizon Superpages and the Yellow Page Group in Canada.  Both companies are looking to gain predictive insights into their visitors’ behaviors.    As a result, they are able to measure marketing and pricing campaigns with more accuracy, match the overall user experience and expand their online and mobile presence.

Big data is helping companies to reinvent themselves in a transformative way.  Traditionally, smarter analytics resided with individuals (usually in Finance or Marketing) sorting product data in Microsoft excel. To obtain the data, SQL Server Queries had to be requested and run, causing much stress attempting to obtain back-end mainframe time.  Even worse, the need to make such requests from companies IT Department that was and is being pulled in different directions from within and across the companies various functional silos to accommodate their own specific needs.

If Canada is any example of advanced business acumen, then the world has a tremendous opportunity ahead to develop sophisticated tools to understand customer needs, desires and derived benefits.  Any person within a company (assuming they have a dedicated license) is at the frontier of utilizing large streams of cloud-based regional or global data to customize products and services to relevant consumers.  To deliver value.  The old adage that “information is power” will continue to be embraced by those companies striving to take leadership roles in their respective verticals.  I predict there will soon be a position created within companies.  The tile will be a Consumer or Customer Insights Officer.

Harnessing the power of analytics and cloud-based computing will deliver a new kind of pricing power.  One that is predictive and demand-based in real time.  Technology is evolving the world of customer insights.  We are moving from pricing products and services in a vacuum or referencing competitors towards customer solutioning. The present is about personalizing the customer experience and matching appropriate pricing strategies and tactics to capture the benefits of the solution.

Pricing Expertise Grows Enterprise Value for Early-Stage Companies - Part 1

VC firms should invest in portfolio companies' pricing excellence

Steven Forth Partner Software and Cloud Strategy at SPMG

• Pricing excellence is a critical success factor for early-stage companies, but one where companies often stumble
• Pricing is based on value, and an understanding of value cascades through all product development, segmentation, marketing and sales decisions
• You cannot wait until you are in the market to come up with a compelling approach to pricing
• There are high-impact ways to help your investees with best practices today

The Impact of Pricing Excellence

Industrial firms have understood the power of the pricing lever for years. A 1% increase in average price drives more additional profit than a 1% increase in revenues or a 1% reduction in costs (see for example Pricing and Profitability Management by Julie Sheehan, Mike Simonetto, Larry Montan and Chris Goodin of Deloitte). Leading firms have invested heavily in developing pricing strategy and improving pricing practices and have consistently generated a high ROI on these investments.

But there has been much less focus on the importance of pricing to early-stage companies. Some people will say that pricing is a secondary issue, one that can be addressed later after market traction has been demonstrated. Or that early-stage companies should concentrate on product-market fit and that if they get that right the rest falls into place. There are even investors who believe 'the market sets the price.' All of these people are wrong. Without pricing excellence early-stage companies cannot meaningfully

• Segment their markets to focus where they can win
• Make effective product investment decisions that will create value
• Establish the compelling value stories that they need to have a market impact

And pricing is a critical vector for innovation in its own right. Companies that deliver a new pricing model are much more likely to win high returns for investors than those with a 'me too' approach. Google and Pay per Click advertising is a compelling example. And with the advent of cloud computing and the infiltration of software into many new and existing product categories we are entering a golden age of pricing innovation. Investors need to drive their portfolio companies to take advantage of this.

What is Pricing Excellence?

Pricing excellence is about more than just picking a number. For B2B companies it begins with an understanding of differentiated economic value.

What does this mean? Economic value is always for a specific customer (or a well defined market segment) relative to an alternative. And there is always an alternative, whether it is a direct competitor, a substitute, ‘doing what we have always done’, or even ‘doing nothing’.  Economic value is the ways in which a solution (i) increases a customer’s revenue (ii) decreases operating costs, (iii) decreases operating capital or (iv) decreases capital investment.

In consumer markets value is often more psychological and social than economic (though there are exceptions in these tough economic times). Here the best practice is to treat price as part of the overall brand concept and to tie pricing into the brand benefit ladder.

Too many companies begin with product development, then look at their costs, come up with a price and finally see if there are any customers willing to buy at that price. They may never understand how the customer gets value relative to the alternatives. A better process is to start by understanding customers and how to create differentiated value for them. This determines product features and price. The customer doesn’t really care about the vendor’s costs. Of course if your investee cannot find customers and then deliver and capture value at a price that is well above cost there will not be a business; but you want to know this before you make an investment and not after.

Companies also need to have pricing discipline. They need to understand and stand behind their pricing and be able to communicate it to the market. Some early-stage companies, desperate for revenues, default to discounting and call this an investment in the market. One should only make an investment in anticipation of a return, so always ask what return is expected on the discount and how this return will be captured. In most cases, price objections reflect a failure to communicate differentiated value (or the absence of differentiated value) and not actual pushback on price. Discounting is the easy way out.

Pricing excellence

• Is based on an understanding of value
  (economic in B2B products; psychological and social for B2C)
• Uses pricing metrics that align with how the customer gets value
• Is tuned for each market segment
• Requires discipline and courage or it will be eroded by ad-hoc discounting
• Is part of a coherent go-to-market strategy

When does pricing excellence matter?

Defining market segments

Segmentation, even micro segmentation, is emerging as a best practice for early-stage companies. We don’t want to boil the ocean and we need to use capital efficiently. Too many segmentations are based on large-picture demographic variables. The best practice is to use value drivers and the customer buying process as the foundation of a market segmentation. The work done to understand value is a critical input into segmentation. Demographics can then be used as proxies and to estimate the size of an opportunity.

Making product investment decisions

Time is life for start-ups and many choices need to be made on what goes into a solution and what can be left out. Understanding value is a critical lens for making these decisions. One wants to invest in those features that increase differentiation value.

Designing the go-to-market strategy

A good go-to-market strategy is targeted at a small number of market segments and is aligned with the customer buying process. It is critical to get pricing right as a poor pricing structure can kill the best product in the best segment. Ask your investee if the pricing metric (the unit in which the solution is priced) aligns with how the customer is able to buy and how the customer gets value. Make sure the pricing metric does not stand in the way of adoption. For example, the always popular ‘per user’ price can smother a viral adoption model. And the pricing strategy (penetrate, skim, market following) needs to be coherent and aligned with the go-to-market approach.

Building content for inbound marketing

Inbound marketing is another best practice that is drawing a lot of attention. Good inbound marketing depends on providing the right content at the right time so that the customer’s natural buying process is well supported and value is provided each step of the way. Communicating differentiated value, establishing the most relevant alternative in the buyer’s mind, and managing price expectations are all a critical parts of inbound marketing.

Negotiating sales

If a sales person is not able to communicate the economic differentiation value to a buyer the only fall back is to negotiate on price. And few things destroy an early stage company’s value like early and persistent discounting.

In our next post we will focus in on how early-stage companies can come up with a pricing metric and use it to drive innovation.

STRATEGIC PRICING WORKSHOP - Optimizing Revenue and Creating Value - Mexico City May 23-24

A practical, hands-on program on how to make money through strategic pricing, providing advice and real-life international successful case studies, helping you gauge whether you are under-pricing or over-pricing your products and services.

This program will show you how to create value driven pricing strategies, enable professionals to negotiate from knowledge and gain a competitive edge in the value process.

 

For full information:  http://spmgpricingmexico.com/index_en.html

Selling on Value: The Sales Rep Dilemma

By: Michael Hurwich, President SPMG                                                                                         May 17 2012

'THE drive-by shooting’ has been a commonly used phrase to describe the sales process. Fit as many customers as you can in a day, make the sale at all cost and move on to the next account. To perpetuate this, sales targets have traditionally been in the form of key performance metrics such as revenue and margin optimization. That was then... this is now. 

            

In the past, optimizing revenue and gross margin were easy metrics to track salesperson performance, but they lacked other very important characteristics to quantify success.  They failed to answer questions like: Did a sale contribute to overall profitability? Did the sale optimize price for the products and services provided? What soft-dollars, discounts and incentives were required to obtain the sale? What is the true cost to serve this customer? What is the total cost of ownership of the account? Most importantly; How does the customer derive benefit and/or value from the products and services purchases?

            

What these methods don't take into consideration is that salespeople are in a unique position to adjust sales accordingly, making them individual little companies with their own profit/loss statements. Changing performance metrics around value-based pricing methodologies would drive a shift in purchasing behavior. However, the mistake companies often make, is that they train their salespeople to talk about what they are selling rather than asking salespeople to ask customers what they are actually buying.

           

Many companies often get hung up on what they produce, ignoring what customers buy. Companies are set up to sell products, not value as perceived by their customers. They have product managers - not customer value managers. They design price sheets - not value sheets. Finance looks at Gross margin of specific product categories - not the overall gross margin of what customers are purchasing (or not purchasing). If the process to track value does not exist internally, it’s near impossible to expect a sales force to sell on value, externally. To counter this, companies must have a process in place to create, capture and communicate value into the marketplace.

            

Some companies create value by producing quality products while additionally providing great service. A smaller majority of companies capture value by internally and externally qualifying and quantifying the utility of each product/service characteristic and price accordingly. However, the vast majority of companies inadequately communicate their value proposition to customers and in the absence of a value message, the customer learns to focus on price, regardless of their value needs. As a result salespeople stop negotiating with value and systems are developed to formalize the weak selling process.

            

The real problem shared amongst many companies is their products and services become a commodity mindset resulting in excessive discounting encouraged by price-oriented customers. Price is not deflected in favor of a ‘value’ discussion.

            

The name of the game is VALUE. Salespeople must be provided with tools to understand the values family before they can even begin to discuss price. 

Salespeople must understand the following four components that make up the values family;

Understanding how the customer responds to each of the value-family components will provide the salesperson or team with the necessary ammunition to discuss price or more importantly, 

how a customer derives benefit from one’s goods and services.

Knowledge of the aforementioned requires an integrated group of departments each providing information to a centralized pricing department or pricer. Fig. 1 demonstrates an integrated process

To survive and thrive, companies and their respective sales reps must adopt the new customer-centric pricing strategies and tools that have been enabled by technological advances in software delivery. Understanding the customer and focusing on execution and service delivery as perceived by the customer will drive price now and in the future. It’s imperative that today’s companies both conduct an internal review of customer past purchasing behavior to identify peer customers and segment accordingly to identify opportunities for revenue optimization. Then it is imperative to further conduct external research utilizing many of the aforementioned pricing tools to understand how customers trade price for value and their respective price elasticity of demand of various products and services.

The information is only as good as the tools provided to Sales Reps.  Without adequate software tools and relevant information to match price/discounts/ incentives to customer decision selection criteria, and the knowledge of how customers derive benefit, corporate objectives are likely to fail or fall short of expectations.

See Full Article with 'sample tools to assist the sales process' <Click Here>

SPMG April - May 2012 Newsletter

PRICING TO CUSTOMER EXPECTATIONS

Article in the World Economic Journal - Nov. 2011

Written by Michael Hurwich and Julia Reshetnikva                                                                      

(EDITED 2012)

Price consulting is mostly all about understanding what drives purchasing behavior. In interviewing a thousand people we can find various commonalities. For example some people may have similar value expectations for a product or service. Perhaps, for some the driver is brand name, while for others it could be price. After collecting appropriate data, we can then construct a value proposition for people seeking brand loyalty.

Measuring the psychology of purchasing behavior is very important. With so many competitors worldwide, it is very important to understand how customers trade value for price. Furthermore, a 1% change in price typically represents an 11% increase in net revenue.

Price is a very powerful lever to improve profitability.

STRATEGIC PRICING MANAGEMENT:

Previously, adjusting price was a decision left to only one individual (known as a "Price Czar"). Usually this individual works in the Finance or Accounting department. This person's unilateral decision was basically the one adopted by the company to establish the price. However this specific process represented an inside-out approach. In those days, companies always looked at cost involved in producing a product or providing a service to a customer. This traditional form of pricing involved adding a fixed-markup to a product's cost to ensure a target margin. From  here, companies traditionally went to market with a margin markup strategy. If customers found the price unattractive, the company would be forced to discount their products and services or fear a rapid decline forecasted sales.

Today, most companies in well developed countries have adopted what is commonly known as value-based pricing strategies. This outside-in approach is more complicated but much more effective. The price is not set from inside the company, but rather is set in learning and understanding a customers use of products and services and their willingness to pay for the derived benefit of the product or service. Some companies have known to measure customer decision selection criteria and purchasing behavior by the hour or minute to determine the price-benefit equation. This tactic is known as dynamic pricing.

THE ROLE OF THE PRICING CONSLTANT:

Pricing consultants are typically used today to look at the historical data of unit sales of companies by reviewing the nature of what has been sold in the past. The process is typically known as regression or cluster analysis and is used to determine the nature of purchases and the consistency of pricing performance. Past volume and prices obtained can often be used to determine future prices in the absence of external market research. When historical data is insufficient companies often conduct a primary field research by talking to a select group of respondents with prior experience using a similar product to determine the demand based on the suggested price and value proposition of the new product or service.

Price affects everyone. There is not a company in the world that doesn't talk about price at some point during any given day. Interestingly, most of the focus of price consultancy firms is not around price, but rather in understanding a company's value proposition to customers. Price is merely the reward for creating, capturing and communicating value into the marketplace.

THE RESEARCH PROCESS (McDonalds Case Study)

McDonalds was an interesting client, in that they asked us to review their pricing and value proposition for the Big Mac and Happy Meal for the US market versus existing competitive products with equivalent value propositions. In the USA the Happy Meal was $5.99. McDonalds sought to understand if they have the right price relative to competitors.

We [SPMG] decided to use a customer segmentation model to understand the McDonalds customers pricing pain threshold relative to their value proposition. There are 4 types of customer segments. Price sensitive customers segment usually representing 33% of the marketplace. The convenience customer is typically represented by 15% of the market, while loyalty customers represent 25% of the market. Finally the value customer segment is always looking to measure value in relation to price.

The research for McDonalds unveiled different price thresholds for different customer segments using diverse delivery channels. McDonalds conducted the price research across the contiguous United States and Canada with 1600 customers. What was interesting is that most customers represented by 75% of the sample didn't even know the right price of the Big Mac and Happy meal. They actually thought that it was 20% higher. The message here: if customers fail to know the right price, it is implied that McDonalds was leaving money on the table. If customers didn't know the price that they suggested, there is a lot more value as perceived by the customer than the price that was being charged. McDonalds had to rethink their price-value strategy and what to do with their price.

There was a different price-point threshold across different channels. Because McDonalds avoided charging different price across their four channels we took an average of all the channels and arrived at a new price that would be optimal for drive-through clientele as well as for customers that dined-in.

CONCLUSION: The benefit to McDonalds was roughly $80 million dollars to their top-line revenue merely by adjusting price to more adequately reflect current market and competitive conditions.

PRICING EXCELLENCE

Science-based segmentation utilizes data analysis and statistical methods to group customers into "significantly similar" groups. The object is to create segment optimized pricing given particular buying behaviour of that segment.

Today companies use sophisticated pricing tools to derive price and measure the psychology of purchasing behavior in what is an important and key attribute of price-value consulting.

Another tool used in pricing is called Monadic testing which only tests price in the absence of other product or service characteristics. In Monadic testing you are attempting to test different price points. If you get a large enough sample you can determine acceptable price points that represent the majority of market share.

Another useful tool that is commonly used is called Price-Value mapping. This tool shows your company how a customer evaluates specific product and service attributed to price. The tricky part of constructing a Price/Value Map is estimating the product & service value to the average customer. We recommend the identification of a handful of product or service features that your customers care about most and then try to determine. You would plot the price and value on a price value map. The Price-Value map is one and most important, most often used pricing tools in the industry today.

Restaurant Pricing - Some "Food for Thought"

By Peter Maniscalco

My wife and I recently visited one of our favorite local restaurants (a "Bar & Grill" as it's called).  We've been loyal customers for several years.  It's a nice place, always busy with good food, service, atmosphere and, reasonable prices. Clientele is mixed (i.e. blue and white collar patrons)as the establishment is located in the suburbs but, not close in proximity to a major city either. Sounds like a great place so far, right?  Well, that was the case until about six months ago after we had some new priced "food for thought".

What happened?  Well, whether it was due to the change in economic conditions over the last few years or not, the Bar & Grill decided to make some changes.  The food is still good with same portion sizes and the atmosphere is still nice, however, the grill extended the length of the bar.  Okay, so they can now seat  several more customers at the bar.  I see the improvement. What we noticed even more was a complete change out of staff members.  And yes, as a result there has been a noticeable decline in the level of quality service in addition to (are you ready for this?), selective yet significant price increases in the menu!
Examples include a two dollar increase for a salad, a one to two dollar increase for a cocktail, and a one to two dollar increase for a dessert.  This all happened within a month or so of completing the bar "renovation".
Well, we all know commodity costs have increased in the last couple of years or so but did the Bar & Grill inadvertently "overlook", ignore, or just plain screw up their value proposition here?  The staff, according to what we understand from an inside "source", is much less costly compared to the prior staff.  All right, so now their variable costs have decreased.  But, the additional costs incurred were for the extended bar, a one-time fixed cost investment!  My "Food for Thought?"  The food/drink price increases are significant,  there is a decline in the level of quality customer service but quality of food and atmosphere are still solid. However, from what we've heard and observed, the level of business has dropped noticeably.

The key points missed here by the owner are that a value proposition contains more than just the price element; pricing is not solely just a function of costs; and to be successful one must take into consideration the target market/customer base.(i.e. segmentation)

Alternative solutions?  Sure.  Here are a few quick and obvious ones that the owner(s) could have taken.

1. Bar & grill could have held its prices, for at least a little longer anyway.  Please don't let me as a customer think your price increases are simply a way to help you cover your sunk cost investment (i.e. extending the length of the bar).  Since there was an "overhaul" of the staff which reduced its variable costs, by holding its prices the Bar & Grill could probably still maintain its margins even in light of commodity cost increases.  Or, an option would have been to implement smaller and selective price increases, if the owners felt compelled to do so.  
2. Bar & Grill could have implemented a less obvious price increase by "downsizing" the portion of its food and drinks, instead of the quite more noticeable price increases.  
3. Instead of a mass overhaul of its staff, the owners could have taken a selective approach in terms of reducing its variable costs.  For example, the owners could review their payroll staff and re-balance their hours and schedules based on employee labor expense differences.   

Will we frequent this establishment as often?  Most likely not. I'm not sure where the value is now, since we(and other patrons I'm sure) observed quite noticeable price increases, an obvious decline in quality customer service and a feeling that the restaurant lost sight of the customer.  Maybe the Bar & Grill will recognize that its value proposition is not(or should not be) just all about recovering its costs.