value based pricing in the capital equipment aftermarket

Valuebasedpricinginthecapitalequipmentaftermarket

10th Copperberg aftermarketconference,Wiesbaden

20October2016

Dr ShaunWest

Copperberg AftermarketEurope2016|October2016|ShaunWest

IntroductionValuebasedpricingmeansunderstandingboththecalculationandthecustomeremotions

Apracticalmodeltohelpyoubuildupvalue-basedpricingfortheaftermarketisdevelopedandpresented

Whyispricingimportant?

Customervaluecreationanditsimpactonpricing

Theprosandconsofdifferentpricingstrategies

Anexampleofvaluebasedpricing

Copperberg AftermarketEurope2016|October2016|ShaunWest

HistoryPricingandvaluearenotnewproblems!

Copperberg AftermarketEurope2016|October2016|ShaunWest

TodayHowmuchforaglassofwater?

Whatwouldyoupay?Thesituationhasamajorimpactonprice

Copperberg AftermarketEurope2016|October2016|ShaunWest

BackgroundWhyispricingimportant?

Whatisimportantwhenpricingservices?- Offeringhighervalueaddedproductsandservices- Offeringservicesandsolutions- Rethinkingpricingstrategies- Settingtherightprice- Capturingcustomervalue

Pricingisakeypartofthebusinessmodelandimpactsmanydifferentareas

“…manufacturersshouldpricetheirmostadvancedserviceofferingsaccordingtovalue-,

ratherthantocost- orcompetitionbasedstrategies”(Rapaccini 2015)

Copperberg AftermarketEurope2016|October2016|ShaunWest

BackgroundValueasafundamentalofservicepricing

Whatdoestheliteraturetellus?- Thatbuyer’schoiceisdependentonpriceisanoversimplificationoftheproblem

- Pricinghasanimpactoncustomersatisfaction- Pricingforservicesisdependentonsituations- Pricingmustreflectfunctionalandemotionalaspects

- Pricingandservicescopesarerelated

Theuseofvaluemustbeacentralaspectinthepricingobjectives

“..whatisthedifferenceinworthofthetwoofferingstomyfirm,andhowdoesitcompare

tothedifferenceintheirprices?”(Andersonetal,2009)

Copperberg AftermarketEurope2016|October2016|ShaunWest

BackgroundPricingisthemostpowerfultoolinthemarketingtoolbox

Whatdoestheliteraturetellus?- Pricinghasahugeimpactonthefinancialresults- Pricingisamulti-departmentactivity- Servicesareoftengivenawayfree- Servicesfirmsneedtoadjusttheirrevenuemodels- Manufacturersfindithardtochangepricingmodels

Itisimportingtodeveloppricingobjectives,strategiesandtoolstohelpsupportnewpricingmodels

Copperberg AftermarketEurope2016|October2016|ShaunWest

BackgroundPricinginfirmsmustworkonthreedifferentlevels

Alignmentisneededateachlevel

Pricingobjectivesmustalignwiththestrategyofthefirm

Thetoolsthathelpcreatethe’price’thatisgiventothecustomer

Differentstrategiescanbeappliedtoachievethepricing

objectives

Objectives

Strategies

Toolsandmethods

Copperberg AftermarketEurope2016|October2016|ShaunWest

BackgroundPricingobjectivesarethebasisforprofitabledecisions

Whatdoestheliteraturetellus?- Pricingobjectivesarequantitativeandqualitative

- Sales,profits,marketshare…- Relationships,competitors…

- Theobjectivesmustbeunderstoodwithinthefirm

Theobjectivesofpricingleadtodifferentoperationalpricingstrategieswithintheorganization

”…objectivesofpricingaretodeterminewhichpricingstrategywillbethebasisforprofitabledecisionsasaresultofcompany’soverall

strategy”(Hinterhuber,2003)

Copperberg AftermarketEurope2016|October2016|ShaunWest

BackgroundWhatareservicefirmsdoingtoday

Findingsconfirmedthatpricingofservicesiscomplex:- Differentpricingmodelshelpwithmarginoptimization- Itwashardtomoveawayfromacost-plusmodel- Firmshadadesiretomovetovalue-basedpricingbutwereunsureoftheimplications

- Thebuyermightbemoreadvancedinpricingmodelinnovationthantheseller

- Pricingalsoprovidesafocusonmeasuringcustomervalue

Withinafirmthereshouldbeanalignmentbetweenthepricingobjectives,pricing

strategiesandtools.“Suchtoolsareneededtocreateavaluebasedpricingmodel.”

Andersonetal.(2009).

Firmsarenotusinginformationthatcouldhelpthemtoidentifythecustomervalue

Copperberg AftermarketEurope2016|October2016|ShaunWest

BackgroundFirmsneedtobeabletounderstandcustomervaluetogettotheprice

Whatdoestheliteraturetellus?- Threecategoriesforservicepricingmethods:costbased,competitionbased,anddemandbased

- Pricingmethods:negotiatedpricing,purebundling,tradediscounts,efficiencypricing,cashdiscounts,andbundling

- Differentpricingtoolsrequiredtosupportthepricingmethods

Correctpricinglevelshelpfirmstoboosttheresalesandmargins

”…empiricalresearchonpricingmethodsisextremelylimited”(Avlonitis andIndounas 2005)

Copperberg AftermarketEurope2016|October2016|ShaunWest

PricingstrategiesCostpluspricingdoesnotalwaysprovidevaluetothecustomer

Pricingprocess Costplus- Easytouse- Supplierdoesnotunderstandcustomervalue- Canprovidethecustomerwithpoorvalue- Canleadto’over-scoping’ofservices- Pricingisonlyacalculation

Pricingprocessbeginswithcostsnotcustomervalue- that’swhyitiseasy

Scope Cost Margin Price Value

Copperberg AftermarketEurope2016|October2016|ShaunWest

PricingstrategiesCostpluspricingdoesnotalwaysprovidevaluetothecustomer

Pricingprocess Costplus- Easytouse- Supplierdoesnotunderstandcustomervalue- Canprovidethecustomerwithpoorvalue- Canleadto’over-scoping’ofservices- Pricingisonlyacalculation

Thevalueisjudgedbythecustomer,pricebythesupplier

Scope Cost Margin Price Value

Customer Customer

Pricepaid

Valuereceived

Supplier

Costbuild-up

Margin

Scope

Copperberg AftermarketEurope2016|October2016|ShaunWest

PricingstrategiesCompetition/marketbasedpricingdoesnotalwaysprovidevaluetothecustomer

Pricingprocess Competition/marketbase- Pricingiscontrolledbythemarket- Marketbenchmarksmustbeunderstood- Supplierdoesnotunderstandcustomervalue- Valuecapturecanbelow

Priceissetbythemarket- that’swhyitiseasy

Scope Cost Market Price Value

Copperberg AftermarketEurope2016|October2016|ShaunWest

PricingstrategiesCompetition/marketbasedpricingdoesnotalwaysprovidevaluetothecustomer

Pricingprocess Competition/marketbase- Pricingiscontrolledbythemarket- Marketbenchmarksmustbeunderstood- Supplierdoesnotunderstandcustomervalue- Valuecapturecanbelow

Thevalueisjudgedbythecustomer,pricesetbythemarket

Scope Cost Market Price Value

Customer Customer

Pricepaid

Valuereceived

Supplier

Costbuild-up

Margin

Market

MarketbenchmarkScope

Copperberg AftermarketEurope2016|October2016|ShaunWest

PricingstrategiesValuebasedpricingisbasedonthecustomer’svaluecreationprocess

Pricingprocess Valuebased- Customervalueisthedriverfortheprice- Pricesupportsscopedefinition- Supplierunderstandcustomervaluecreation- Suppliermeasuresmarginattheendoftheprovide- Canleavecustomersfeelingtheyareoverpaying

Pricingprocessbeginswithcustomervalue- that’swhyitishard

Value Price Scope Cost Margin

Copperberg AftermarketEurope2016|October2016|ShaunWest

PricingstrategiesValuebasedpricingisbasedonthecustomer’svaluecreationprocess

Pricingprocess Valuebased- Customervalueisthedriverfortheprice- Pricesupportsscopedefinition- Valuebasedpricingmustbeincludedriskpricing- Supplierunderstandcustomervaluecreation- Suppliermeasuresmarginattheendoftheprovide- Canleavecustomersfeelingtheyareoverpaying

Valueisdeterminedby’valueinuse’butrisksignoringintangibleissues

Value Price Scope Cost Margin

Customer Supplier

Costbuild-up

Margin

Pricepaid

Valueinuse

Scope

Copperberg AftermarketEurope2016|October2016|ShaunWest

PricingtoolsandmethodsforvaluebasedpricingValue-basedpricingtoidentifythe’willingnesstopay’andthe’fair-price’

Triangulationofvalue-basepricingbasedonthedataandanalysis:market,internalandcustomer

Customer Supplier

Productsand

services

Gainmakers

Valueinuse

Willingnesstopayregion

Market

Marketbenchmark

Gains⬆

Pains⬇

Totalvaluedelivered

Customer

Painrelievers

Margin

’Fair’price

Scope

Copperberg AftermarketEurope2016|October2016|ShaunWest

Scope

Customer Supplier

Productsand

services

Gainmakers

Valueinuse

Willingnesstopayregion

Market

Marketbenchmark

Gains⬆

Pains⬇

Totalvaluedelivered

Customer

Painrelievers

Margin

’Fair’price

PricingtoolsandmethodsforvaluebasedpricingBuildingapricingmodelbasedoncustomervalueneedsyoutothinklikethecustomer

Thinkandfeed?

Sayanddo?

Hear? See

Pains Gains

Empathymapping

Gains⬆

Pains⬇

Customervalueproposition

Customerjobs

Gains

Pains

Gainscreators

Painsrelievers

Productsand

services

CustomervaluecreationValueinuse Jobstobedone

Strategicaimsandinputs

Pricingisnotaone-timeeventandhastobeviwed frommanydifferentangles

BenchmarkingMarketdata,win/lossanalysis,CRM….

Copperberg AftermarketEurope2016|October2016|ShaunWest

PricingtoolsandmethodsforvaluebasedpricingBundlingandunbundlingtocapturevalueandimprovecustomerexperience

Outcomevaluepricing- Paymentperunitproduced- Risksharebasedon3(-5)performanceindicators

O&Gcontractswithinterestinoil- Benchmark:costperbarrelshouldbeinasimilarballpackasthesameservicesfromthepricelist

Therearealwaysmorewaystobuildavaluebasedprice

Equipment-basedvaluepricing- Monthlyfees:fixedcosts,obsolescence/upgrades- Feeperuse(typicallyperhour)- Risksharebasedon3(-5)performanceindicators

Gasturbinesservicecontractsinpowergeneration- Benchmark:monthlyfeesplusbasicfeesshouldbeinasimilarballpackasthesameservicesfromthepricelist

Copperberg AftermarketEurope2016|October2016|ShaunWest

PricingtoolsandmethodsforvaluebasedpricingWhentousevaluebasedpricingandwhennottofromexperience

Costplusormarketbased- Forconsumablepartswithstandarddelivery- Forlogistics- FortravelandlivingcostsIfyoudon’taddvaluewhyshouldyoutakemoremargin?

Valuebased- Wherethecustomergainsrevenueperunitcost- Wherethecustomersavescostsperunitproduction- WhereriskexchangetakeplaceIfyouaddvalueyoushouldtakemoremargin.

Howonescrewcanchangecustomerrelationship

Copperberg AftermarketEurope2016|October2016|ShaunWest

Value-basedpricingworkdoeswork!ValuenotcostinO&Gcanhelptodrivethecostout

Background- Customerrevenueisbasedonperbarrelofoil- Facilityhada’cost’mentality- TheavailabilityandHSEwerepoorCustomervalue- Customervalueisderivedfromoilsold- Outsourcetocompetentparty- AlignmentofgoalsSuppliervalue- Incomebasedonperbarrel- Removesprocurementdistractions- Alignmentofgoals

Movingfromcostplustoatariff-likeagreementcanprovideopportunitiestocutperbarrelcosts

goo.gl/Ab3ZEH

Copperberg AftermarketEurope2016|October2016|ShaunWest

ClosingSummary

Pricingneedstobetailoredtoindividualcustomersandhowyouaddvaluetotheirbusinesswhilebeingsensitivetothemarketnorms

Pricingcanmakeorbreakarelationshipwithacustomer

Pricingshouldbeinlinewithcustomervaluecreation

Thebestpricingstrategiesputthecustomerinthecentre

Anexampleofvaluebasedpricinghasbeenpresented

Copperberg AftermarketEurope2016|October2016|ShaunWest

http://www.advancedservicesgroup.co.uk/ssc2017

Copperberg AftermarketEurope2016|October2016|ShaunWest

Thanksforyourtime!Questionsovercoffee… SlidespostedonSlideShare.com