service pricing strategies for maintenance services
TRANSCRIPT
Service pricing strategies in maintenance services
23rd EurOMA Conference, Trondheim, Norway
20 June 2016
Dr Shaun West, Dr Philipp Schmitt, Dominik Kujawski
23rd EurOMA Conference | June 2016 |West, Kujawski & Schmitt
HistoryPricing and value are not new problems!
23rd EurOMA Conference | June 2016 |West, Kujawski & Schmitt
IntroductionThe problem and the purpose of this paper
To highlight difficulties and provide guidance and understand how pricing influence customer value
This pricing pressure in the market confirms the need to focus on customer value when pricing due to changing buying behaviors
To identify and describe complexity of maintenance pricing models
Purpose of this paper
Price pressure has been increasing due to changes in buying behaviors
Problem
23rd EurOMA Conference | June 2016 |West, Kujawski & Schmitt
IntroductionWhy is pricing important?
What is important when pricing services?-‐ Offering higher value added products and services-‐ Offering services and solutions -‐ Rethinking pricing strategies-‐ Setting the right price-‐ Capturing customer value
Pricing is a key part of the business model and impacts many different areas
“manufacturers should price their most advanced service offerings according to value-‐,
rather than to cost-‐ or competition based strategies” (Rapaccini 2015)
23rd EurOMA Conference | June 2016 |West, Kujawski & Schmitt
BackgroundPricing is the most powerful tool in the marketing toolbox
What does the literature tell us?-‐ Pricing has a huge impact on the financial results-‐ Pricing is a multi-‐department activity-‐ Services are often given away free-‐ Services firms need to adjust their revenue models-‐ Manufacturers find it hard to change pricing models
It is importing to develop pricing objectives, strategies and tools to help support new pricing models
23rd EurOMA Conference | June 2016 |West, Kujawski & Schmitt
BackgroundValue as a fundamental of service pricing
What does the literature tell us?-‐ That buyer’s choice is dependent on price is an oversimplification of the problem
-‐ Pricing has an impact on customer satisfaction-‐ Pricing for services is dependent on situations-‐ Pricing must reflect functional and emotional aspects-‐ Pricing and service scopes are related
The use of value must be a central aspect in the pricing objectives
“What is the difference in worth of the two offerings to my firm, and how does it compare
to the difference in their prices?” (Anderson et al, 2009)
23rd EurOMA Conference | June 2016 |West, Kujawski & Schmitt
BackgroundPricing objectives are the basis for profitable decisions
What does the literature tell us?-‐ Pricing objectives are quantitative and qualitative
-‐ Sales, profits, market share…-‐ Relationships, competitors…
-‐ The objectives must be understood within the firm
The objectives of pricing lead to different operational pricing strategies within the organization
”…objectives of pricing are to determine which pricing strategy will be the basis for profitable decisions as a result of company’s overall
strategy” (Hinterhuber, 2003)
23rd EurOMA Conference | June 2016 |West, Kujawski & Schmitt
BackgroundPricing strategies are influenced by internal and external factors
Cost plus -‐ Easy to use-‐ Supplier does not understand customer value-‐ Can provide the customer with poor valueCompetition/market base-‐ Pricing is controlled by the market-‐ Supplier does not understand customer value-‐ Value capture can be lowValue based-‐ Customer value is the driver for the price-‐ Supplier understand customer value creation-‐ Supplier measures margin at the end of the provide
Pricing tools are needed to support the pricing strategies
Scope Cost Margin Price Value
Cost plus
Competition/market base
Scope Cost Market Price Value
Value based
Value Price Scope Cost Margin
SupplierCustomerMarket
23rd EurOMA Conference | June 2016 |West, Kujawski & Schmitt
BackgroundPricing tools and methods
What does the literature tell us?-‐ Three categories for service pricing methods: cost based, competition based, and demand based
-‐ Pricing methods: negotiated pricing, pure bundling, trade discounts, efficiency pricing, cash discounts, and bundling
-‐ Different pricing tools required to support the pricing methods
Correct pricing levels help firms to boost there sales and margins
”…empirical research on pricing methods is extremely limited” (Avlonitis and Indounas
2005)
23rd EurOMA Conference | June 2016 |West, Kujawski & Schmitt
MethodologyA two step methodology was applied in this study
Interviews • 6 senior managers • End-‐to-‐end sales process• Personal contact• Different industries
Cross case analysis• Direct comparison• Different revenue models• Different service offers • Compared with B2C base
23rd EurOMA Conference | June 2016 |West, Kujawski & Schmitt
Results and analysis Overview of the companies
Companies described according to: description, market, category, size and selling channels
OEM/SME – Firm 1• Hardware/software• Industrial refrigeration• Equipment indirect/Service direct
Aftermarket/Large – Firm 2• Full service provider for propulsion systems• Marine• Service direct/Agents
OEM/Large – Firm 3 • Power generation equipment and services• Power Generation • Equipment indirect/Service direct
Aftermarket/SME – Firm 4• Service provider for rotating equipment• Maintenance services• Service direct/Agents
OEM/Large – Firm 5 • Equipment and services for textile systems• Textiles• Equipment direct/Service direct/Agents
OEM/Large – Firm 6 • Turbomachinery equipment and services• O&G, industrial Power• Equipment direct/Service direct
23rd EurOMA Conference | June 2016 |West, Kujawski & Schmitt
Results and analysis Pricing objectives -‐ top 4 confirm missing customer orientation
Key findings-‐ Supplier focused-‐ Financially based: margin optimization, stability, sales, overhead recovery
-‐ Strong affinity to the cost plus basis of pricing-‐ None mention that optimal pricing is a key part of maintaining customer relationship
-‐ Firm 3 had the best defined pricing objectives
The basis of pricing objectives were inward looking rather than customer
Competition-‐related pricing
Service quality-‐related pricing
Stability in the market
Financial objectives (in general)
23rd EurOMA Conference | June 2016 |West, Kujawski & Schmitt
Results and analysis Pricing strategies -‐ top 4 showing cost plus basis to support pricing objectives
Key findings-‐ Popular strategies
-‐ Market-‐based/competition based-‐ Cost plus pricing plus with performance measures
-‐ Firms had limited consideration of customer value-‐ Price was used to measure customer value-‐ Firm 3 had the most comprehensive pricing strategy-‐ Too few firms focused on customer value
There were gaps in the pricing strategies in most of the firms interviewed
Market based
Cost plus
Customer value
Willingness to pay
23rd EurOMA Conference | June 2016 |West, Kujawski & Schmitt
Results and analysis Pricing tools -‐ top 4 showing attempts to identify customer value
Key findings-‐ All firms applied market benchmarking, cost build up, and bundling
-‐ Benchmarking was a direct comparison with the competition
-‐ Trade discounts often provide a 'feel good', although do not directly reflect customer value creation
-‐ Bundling extend the model to do-‐it-‐for-‐me, do-‐it-‐with-‐me and the extreme do-‐it-‐yourself
-‐ Limited customer segmentation does not help price optimization
There were gaps in the pricing strategies in most of the firms interviewed
Cost build up
Trade discounts
Customer value
Willingness to pay
23rd EurOMA Conference | June 2016 |West, Kujawski & Schmitt
Results and analysis of the studyPricing tools and methods – basic tools and their use
Key findings-‐ Cost based
-‐ Cost build-‐up supports financial objectives-‐ Discounts general are reflected in margins-‐ Price lists are often cost plus based
-‐ Market based-‐ Benchmarking supports consistency in the market
-‐ Historic data support consistency in prices-‐ Value based
-‐ Negotiations help to identify customer value-‐ Sales managers are poorly used
Basic tools are generally supporting the financial pricing objectives
Tool Method PopularityMarket benchmarking Market HCost build up Cost HNegotiated pricing Value HDiscounts Cost HHistoric Market HPrice lists Cost/Market MSales manager Market/Value L
23rd EurOMA Conference | June 2016 |West, Kujawski & Schmitt
Results and analysis of the studyPricing tools and methods – advanced tools and their use
Key findings-‐ Cost based
-‐ Cost models are the basis of margin forecasts-‐ Market based
-‐ Demand/capacity pricing creases market singles-‐ Value based
-‐ Bundling supports customer value discovery-‐ Willingness to pay indicates customer value-‐ Capacity pricing supports internal value-‐ Revenue models support customer value-‐ Performance modelling/payback and value in use all measures customer value
Not all of the firms have the tools to support value-‐based pricing
Tool Method PopularityBundling Value HWillingness to pay Value HCost/revenue models Cost/value MDemand/capacity based pricing Market/Value M
Performance modelling Value LValue in use Value LPayback/ROI Value L
23rd EurOMA Conference | June 2016 |West, Kujawski & Schmitt
Results and analysis of the studyThe key observations from the analysis were
Findings confirmed that pricing of services is complex:-‐ Different pricing models help with margin optimization-‐ It was hard to move away from a cost-‐plus model-‐ Firms had a desire to move to value-‐based pricing but were unsure of the implications
-‐ The buyer might be more advanced in pricing model innovation than the seller
-‐ Pricing also provides a focus on measuring customer value
Within a firm there should be an alignment between the pricing objectives, pricing
strategies and tools. “Such tools are needed to create a value based pricing model.”
Anderson et al. (2009).
Firms are not using information that could help them to identify the customer value
23rd EurOMA Conference | June 2016 |West, Kujawski & Schmitt
ClosingConclusions
There is a need to focus on customer value creation during pricing by aligning pricing tools, strategies to support firms pricing objectives
Pricing services is challenging due to a large number of dimensions
Pricing was treated more as a cost-‐plus calculation
Many firms had unclear pricing stratergies
Pricing objectives and tools in line with pricing strategy is critical
23rd EurOMA Conference | June 2016 |West, Kujawski & Schmitt
ClosingRecommendations
Determining the right steps to improve co-‐creation of value with the customer could allow improving pricing strategies
Research into pricing dimensions impacts on pricing objectives
Additional insights and surveys to understand different segments
Identification of the most effective pricing tools
Best practice roadmap to improve value-‐based pricing
23rd EurOMA Conference | June 2016 |West, Kujawski & Schmitt
DraftInitial prototype: value-‐based pricing using many inputs to identify the ’fair-‐price’
Triangulation of value-‐base pricing based on the data and analysis: market, internal and customer
cost build-‐up
Total value delivered
Benchm
ark price
ßPains
value-‐based price
Value
share?
Willingness to pay region
Cost build-‐up
Gains à
Margin
Price paid (features )
Tangibles
Intangibles
Goods/services
Gain makers
Pain relievers
Margin
Top line
Sustaina-‐bility
Bottom line
CustomerMarket Internal Value Internal
Thought: working to reduce pains could lead to increased price