Pricing In Economic Downturn Francois Delvaux
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The document discusses pricing strategies during economic downturns. It outlines common pricing pitfalls like using discounts to drive volume or lowering prices without aligning to value. It recommends reinforcing value provided, preventing commoditization, controlling discounts, and preparing the organization for price adjustments. Proactive strategies include segmenting customers and creating flexible offers, addressing unwarranted price variances, managing the "price waterfall", investing in less costly customers, and defining pricing objectives and sales break-evens.
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Pricing In Economic Downturn Francois Delvaux
- 1. Pricing in times of economic crisis February 25th, 2009 Vlerick Alumni Event
- 2. Objective Todays environment Common Pitfalls of Pricing Proactive Pricing in Down Turn
- 3. Pricing in The News InBev increases prices for third time this year * 07/01/2009, Het Laatste Nieuws NMBS increases tariffs * 01/02/2009, De Standaard Kinepolis: Compens辿 par une augmentation du prix moyen des tickets ... 21/02/2009, LEcho Increasing price Delhaize launches concept low cost store red market 21/01/2009, De Tijd Danone launches discount range of yoghurt 12/09/2008, Le Figaro Punch management will work four fifths 10/02/2009, De Standaard VW stops its production for a week 23/02/2009 * Note: Common reasons given are increased costs of raw materials and other resources, reduced sales and large inflation Lowering price or price image Cutting Costs $ $
- 4. Objective Todays environment Common Pitfalls of Pricing Proactive Pricing in Down Turn
- 5. Common Pitfall: Our price levels is the root cause of our problems Price Level and is, therefore, the only way to overcome it.
- 6. Is this your company? PITFALLS LIKELY OUTCOMES Creating higher (or unrealistic) goals for the direct or indirect sales teams Defending prices by offering free value-added services Offering better price to customers who ask for a lower price Higher pressure in market to gain or defend market share/volume Increased risk of price wars Reduces the perception of value of the companys services Lowers margins because of increased costs to serve Rewards a customers aggressive price behavior Encourages suppliers to compete against one another 1 2 3
- 7. Is this your company? Discounting a high-value offering to attract the price sensitive customers Systematic lowering of prices in market to boost sales volume Price levels based mainly on costs and adjusting price when cost changes Decline in margins Destruction of value in the market Jeopardize current brand position Encourage competitive activity Possibly reducing margin pool Risk future price setting efforts Creates missed opportunities to align price to value More price conscious customers 4 5 6 PITFALLS LIKELY OUTCOMES
- 8. Putting everything together, pricings success in reality depends on many elements Reality: Pricing is only the tip of the iceberg, Price Level And many elements are part of pricings success Value Communication Price and Offer Structure Value Creation Pricing Policy Organizational Alignment + Sound Value & Price Management
- 9. Objective Todays environment Common Pitfalls of Pricing Proactive Pricing in Down Turn
- 10. Your Chess board Price Paid Value Received high low low medium high medium Price relative to Value C Missed Opportunities B Unharvested Value A
- 11. Proactive pricing activities you can do in times of economic downturn Reinforce the value you provide in the market Prevent your value to become commoditized 1 Have good controls on discounts and incentives Ensure when you flex done proactively & organization disciplined 3 Prepare organization and make price adjustments Enable organization to implement price changes in market 5
- 12. Symptoms Organization does not understand the differential value it provides in market Feature -> Benefit -> value Sales does not have the ability (skills, tools, etc.) to explain differential value to customers Not effectively communicating value to change customers perceptions Pricing of new products not aligned with the differential value created Reference Value 0,85 / kg Next best competitive Alternative internal mixing costs Less Defective 0,08 Less WIP Scrap 0,07 Your positive differentiation Less Freight 0,03 Fewer Material Rejection 0,05 Goal: Sell on value not on price Reinforce the value you provide in the market Prevent your value to become commoditized 1
- 13. Goal: Frame the reference Reinforce the value you provide in the market Prevent your value to become commoditized 1
- 14. Adapt offer to grow among different targets Change aspects of cost or value to profitably serve target 2 High Low Received Value Segment and Size A B C D Setting price here leaves money on the table and communicates that value does not have to be paid for 1 2 .and misses volume growth opportunities by over pricing these customers out of the market 3
- 15. Adapt offer to grow among different targets Change aspects of cost or value to profitably serve target 2 Goal: Capitalize on segment differences Create flexible offer - with different levels of value and price Facilitate choices Sell high value/high cost services a la carte INDEPENDENT CHOICE ACTIVE CHOICE PROFESSIONAL CHOICE PRICING ORDERING FULFILLMENT HANDLING FEE FREIGHT PRE-SALES TECH SUPPORT POST SALES TECH SUPPORT FINANCING SALES SUPPORT Must order on - line Can use any method of ordering Can use any method of ordering Within two business days Within one business day Same day For orders less than 1000 For orders less than 500 For orders less than 100 All freight expenses charged Free freight for orders more than 2000* Free freight for orders more than 1500* Not Included Requires minimum purchase of 50k per quarter Requires minimum purchase of 30k per quarter Not Included Not Included Requires minimum purchase of 30k per quarter 10 - day net terms 30 - day net terms 30 day net terms Available for complex orders only Available for placement pricing, availability, and order verification Available for placement pricing, availability, and order verification Receive most aggressive pricing Receive aggressive pricing Receive less aggressive pricing
- 16. Adapt offer to grow among different targets Change aspects of cost or value to profitably serve target 2 Goal: Capitalize on segment differences Create flexible offer - with different levels of value and price Facilitate choices Sell high value/high cost services a la carte
- 17. % Off list prices Volume Example of unwarranted variance Symptoms Silos and incentives in organization driving misalignment on pricing goals High price variability leading to low Average Selling Prices (ASPs) The number of special pricing deals higher than required Price leakage larger than generally understood & from unexpected sources A small % of transactions account for a significant share of price leakage Discounting policies not reflecting all related costs Goal: Address unwarranted variance and have proactive policies to drive desired behaviors Have good controls on discounts and incentives Ensure when you flex done proactively & organization disciplined 3
- 18. Goal: Manage your price waterfall Identify where and how much money is being deducted from the list price Linking quantified price leaks to specific points in the price management process Pocket Price The List Price net of all known adjustments (discounts etc) The actual revenues realized Price (Euros) Have good controls on discounts and incentives Ensure when you flex done proactively & organization disciplined 3
- 19. Make choices on which customers to invest in Wisely allocate your scare resources and have real partners 4 Symptoms: Winning a large share of complex, high cost-to-serve customers True cost-to-serve & pricing not in line Losing low cost-to-serve customers Pricing decisions creating sub-optimal loading of capacity & use of resources Price policies do not address high cost to serve behaviors Not factoring in opportunity costs or impact of pricing decisions Price Product Cost Service Costs Price levels & policies that discourages costly behaviors Price structure that aligns price with value & cost-to-serve cost Goal: Pricing, policies and structure that protects or discourages costly behaviors Goal: Manage behaviors Price
- 20. High VC: Low CM High FC: High CM Opportunity cost: CM foregone Drive Price Drive Volume Capacity Optimization Cost Type Strategic Objective Goal: Defining objectives and knowing sales break evens per pricing action Understanding how your costs Change with changes in Sales Having relevant checks and balances within organization Evaluation of effectiveness of pricing actions Symptoms: Lack of pricing ownership and accountability in organization Not understanding sales break even when change price Not anticipating market responses Not preparing ways customers can proactively adapt their behaviors to avoid price changes Bad timing of raw material cost increase pass through Prepare organization and make price adjustments Enable organization to implement price changes in market 5
- 21. How to get in contact: Pricing and Value Management Fran巽ois Delvaux Mobile +32 (0)495 24 29 86 E-Mail [email_address]