Taking the Art Out of Pricing in Business-to-Business Markets

2© 2006 Holden Advisors Corp., Concord, MA

The Age of the Pricing Professional

• Pricing is now viewed as a strategic priority• Core concepts of good pricing practices are

converging• This is a good thing!• Means that pricing can be:

– More widely understood across functions– Based on consistent, repeatable processes – That are more likely to be accepted

• Pricing is now more science than art!

3© 2006 Holden Advisors Corp., Concord, MA

Moving From Art to Science

• B2C pricers have some great tools– Conjoint analysis– Price optimization software

• Unfortunately these are of limited use in B2B– Complex buying centers– Smaller segments– Driven more by financial value than attitudes/perceptions

• The focus for B2B pricers – consistent:– Definitions– Criteria for what is/isn’t effective– Processes

4© 2006 Holden Advisors Corp., Concord, MA

What Every Pricing Program Must Have

DefinedPricing

Approach

PricingStrategy

PricingModel

PriceMetrics

OfferingMatrix

PriceLevels

ListPrices

Polices &Controls

MeasurableResults

Net PricesList

Prices

5© 2006 Holden Advisors Corp., Concord, MA

Choosing a Pricing Approach

• “Value-based” pricing is the long-run objective– Often difficult to start here

• Requires cross-organizational buy-in – And capabilities development

• Need to consider other options– Better cost-plus pricing– Better market-based pricing– Pricing to value

• Better to plan for evolution - not revolution

The Expert believes that there is only one answer. The Master knows there are many answers.

6© 2006 Holden Advisors Corp., Concord, MA

Pricing StrategyMaking the Best Choice

Principal Drivers

• Product Lifecycle

• Value position relative to competitors• Differentiated• Parity• Disadvantaged

Influencers

• Market Economics

• Competition• Cost position• Response profile and history

• Objectives for product/service line

Three Choices1. Skim 2. Penetration 3. Neutral

7© 2006 Holden Advisors Corp., Concord, MA

Elements of a Price ModelGood Price Metrics

• Relate to customer’s– Profit model– Ability to pay– Willingness to pay

• Can be easily audited • Limit gaming by sales and clients• Examples:

– Power by the hour– Assets under management

8© 2006 Holden Advisors Corp., Concord, MA

Elements of a Price ModelThe Matrix

• The specific offering elements and bundles that have prices attached to them

• Objective is to enable segmented pricing• Think in terms of platforms

– Silver - for price buyers– Gold - for the majority of customers– Platinum - for relationship buyers

• Add in a la carte elements to move between– Provides means to trade price and value

9© 2006 Holden Advisors Corp., Concord, MA

Price Levels

Align process with approachBetter

Cost-PlusPricing

• Adjust cost multipliers based on perceived value

• Low for low value or undifferentiated offerings

• Higher for differentiated offerings

BetterMarket-Driven

Pricing

• Base prices on:

• Qof value

• Clevels

• Use costs as benchmark forof possible price range

ualitative indicators

ompetitor price

low end

Pricing to Value

• Must understand offering cost and revenue impactscustomer

• And differentiation relative to the competition

• Take a “

• Reasonable to target 10% -

for the

fair” share

40%

10© 2006 Holden Advisors Corp., Concord, MA

Tying It All TogetherPricing Model Architecture Example

Deal Guidance

+%

Deal Guidance

-%

- Region- Competition- Strategic Importance- Project Risk

GoldPackage

SLA’s

BasePackage

SLA’s

Price Levers

+%

+%-%

-%

Price Levers

Initial Fixed-Price Level Set by:

Type of ApplicationSize

ComplexityCriticality

11© 2006 Holden Advisors Corp., Concord, MA

Process and Task Level Criteria

System Level DefinitionRepeatable Same input = same output

Communicated and well understood across entire organization

Supports growth and staff transitions

Data generated at key points in process and is easily accessible

XX% of pricing covered in standard process, YY% exceptions

Visible

Scalable

Trackable

Standardization

Criteria for effective pricing processes

TransactionPrice Mgmt.

ValueDrivers

CompetitiveScanning

Relative Customer Value

Model &Policies

Comm-unications

ProcessMeasures

Point to key information and process needs

12© 2006 Holden Advisors Corp., Concord, MA

Final Thoughts

• There is a science to pricing• Emphasize standards, processes, and

definitions• Facilitates understanding of the pricer’s role• Predictability and visibility build

– Trust– Confidence– Buy-in

Thank You!

Mark BurtonVice President, Holden Advisorsmburton@holdenadvisors.com