MAP 2 Pricing Strategy

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Pricing Strategy: A focus on profit,

not sales Diah Sastri

An evolved role for Pricing strategy 1

Against the backdrop of an ever more challenging landscape 2

Leading success in Pricing Strategy requires a strategic step-change 3

Supply & Demand

Price supply

demand

Quantity

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“Making it up on quan&ty” Required increase in sales volume (%) 100 80 60 40 20% price 20 decrease 20 40 60 80 20% price 20 Variable unit cost increase as % of price 40

60

80 Acceptable decrease in Sales Volume (%) 100

Pricing over Product Life Cycle

Introduction Growth Maturity Decline

Pricing strategy plays a major role in driving growth, but needs to evolve into

a core strategic asset

But – in many businesses, Pricing is under-leveraged, too tactical and designed from the “bottom-up”… …given current market dynamics, this has to change - Pricing has to evolve into a strategic growth lever

•  Drive strategy through a consumer-lens to develop the right price, & range across the portfolio

•  Develop & embed best practices to transform Price Pack into a strategic capability across the business

•  Enhance innovation with increased commercial insight, rigour & focus at key stages to sustain success

•  Evolve price positioning across channels to drive margin & differentiate based on consumer need

A fundamental driver of long-term growth, directly connecting commercial teams to the consumer…

PORTFOLIO STRATEGY

PRICE ARCHITECTURE

CUSTOMER TERMS

CONSUMER BENEFIT

Drive brand equity & consumer-value

through innovative pricing

Work with retail landscape to develop

terms across channels

Optimal price/pack architecture to drive

penetration

Direct average prices across the portfolio to

growth sales & margin

Develop fundamental skills, capabilities

and structures

INTERNAL CAPABILITIES

PRICING STRATEGY JOURNEY

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Industry-wide issues are having a significant effect on growth &

profitability…

£££

£££

£££

£££

£££

Margin Dilution Value created through sales diluted through costly customer terms & promo cycles

Rise of the Discounter Emergence of discounters as credible alternatives to traditional retailers, enticing consumers with compelling value-based propositions at comparable quality

Retailer Price Wars Destructive price wars undercut competition & combat discounters, as suppliers see margin & brand equity erosion

Consumer Promo-Promiscuity Consumers buying more on promo, amplifying margin pressures & creating a culture of discounting

£££

Lack of Sustained Innovation Success Significant investments made in Innovation & NPD, but most fail within the 12 month mark

£££

£££

The Future…? More of the same, or can companies turn it around with evolved, integrated Pricing thinking?

…with companies beginning to feel the pressure…

Revenue & margin growth in decline, whilst spend is increasingly difficult to

control

Innovation process lacks commercial rigour, is too reactive, and rarely delivers after the first 12 months…

Customers feel we lack credible commercial strategies, affecting relationships…

Annual trade investments are increasing ahead of

margin… P&L is increasingly geared through significant promo investment…

Price & Pack strategy still isn’t considered as an internal strategic capability…

Our channel strategy & price positioning lacks clarity &

clear governance…

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…suffering from a visible impact on performance

• Business Impacts •  Failure to capitalise on growth opportunities diverts

focus & resources & detracts from successful innovation

•  Significant costs emerge from write-offs and excess stock sold below market value to discounters

•  Overly intensive resource, energy & capital spent in developing unsuccessful NPD

•  Increased trading & reputational costs as customer & consumer confidence falters

24% • N

PD L

ife C

ycle

•  12 Months •  24 Months •  36 Months •  0-6 Months

76% of FMCG launches fail in the first year

Highly-geared, unsustainable P&L

• £

Rev

enue

5 years ago 2 years ago Today •  8 years ago • Business Impacts

•  Baselines decline as a result of chronic price wars

•  Shoppers become increasingly promo-promiscuous, driving promo downward-spiral

•  Significant & continuous investment in Promo required to sustain revenues, at detriment of margin

•  Urgent need to reverse “promo junky” consumers, without any sustainable mechanism to do so

• %

Pro

mo

Baseline

Sold on Promo

Differences in pricing strategies

•  In a “old fashioned industry” o Operators fight with price o Customers become more price sensitive

•  In a “smart industry” o Operators fight with…

•  More complex pricing •  More varied pricing plans •  Greater subtlety of pricing options •  Greater use of techniques from other fields




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Companies need to shift focus to lead success in Pricing Strategy

Drive strategy through a consumer-lens to develop the right price, pack & range across the portfolio

Evolve price positioning across channels to drive margin & differentiate based on consumer need

Enhance innovation with increased commercial analysis, rigour & focus at key stages to sustain NPD success

Develop & embed best practices to transform Pricing into a strategic capability across the business

1

2

3

4

Develop & embed best practices to transform Pricing into a strategic capability

across the business

Integrate & align functions to transform ways of working across & within teams

Promote a strategic, innovative culture to develop robust & sustainable commercial strategy

Simplify & rationalise data streams to leverage existing resources & unlock new value

Develop simple and effective analytic models & tools to improve insight depth, range & quality

Pric

ing

as a

Str

ateg

ic C

omm

erci

al

Cap

abili

ty

Data

Strategic Culture

Analytics

Collaboration

Outside In Consider commercial strategy from the consumer, customer and wider value chain

3 Pricing Models •  Cost-based Pricing •  Value-based Pricing •  Flat-Rate Pricing •  Ala-Carte Pricing •  Two-Part Pricing •  Peak Load / Congestion Pricing •  Dynamic Pricing

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Benefits •  Strategy framed by outside-in consumer

trends, rather than bottom-up business mandates

•  Balanced rational & emotional consumer insights

•  Informs credible & compelling category stories for customers

•  Aligns diverse business functions around a single, mutually beneficial goal

•  Refocuses category agendas back to quality, value and equity growth

•  Identifies unique white-spaces and sources of future growth based on genuine need

Drive strategy through a consumer-lens to develop the right price, pack & range across

the portfolio

• Develop an “outside-in” approach, putting the consumer at the core of Pricing

• Drive strategy with authentic and whole-minded consumer insights

• Connect organisation, customers & competitors through a consumer-lens

CUSTOMER /

CHANNEL

COMPETITION

ORGANISATION

SHOPPER / CONSUMER

Segments

Consumer type -‐  age -‐  sex -‐  income -‐  educa&on -‐  geography, etc.

Use of product -‐  sports informa&on -‐  financial reports -‐  informa&on, etc.

Service level –  speed –  quality –  7/24/365 –  op&ons / content

Urgency of need –  immediate –  soon –  overnight

•  Volume of use: o  emergency only o  limited usage o  quan&ty discount o  unlimited usage

•  Time of use: o  off-‐peak o  normal working hours o  unrestricted

•  Length of contract –  1, 2, 3 year sliding scale

•  Longevity of customer –  special extras for longevity –  loyalty programs

•  AWtudes –  high tech (image) –  u&lity

•  Finances –  flush –  &ght

Segments

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Pricing Plan •  Determine target market(s). •  What do those consumers want? •  What can you give them that compe&tors cannot? (or haven’t

thought of yet) •  What are their financial impediments? •  How can you structure your pricing to solve their problems? •  How profitable will that be?

Evolve price positioning across channels to drive margin & differentiate based on

consumer need

£££

£4 £££

£2-‐‑£5*

• Sales-led change in business philosophy to develop channel pricing leadership vs. peers • Develop considered, strategic consumer price positioning price with clear maximin

corridors

• Establish enablers, skills & frameworks to implement defensible pricing structures with customers

Evolve pricing strategy across

channels to drive margin &

differentiate

25p*

35p*

50p*

99p*

£1.50*

25p*

* Actual price (range) at time of publication for a specific Cola brand

Enhance innovation with increased commercial analysis, rigour & focus at key

stages to sustain NPD success

Expanded Ideation Outside-In Commercialisation

Sustained Execution

X-Functional Planning

Incorporate ideation-phase insights with competitor war-gaming, customer review & organisational readiness assessments to comprehensively evaluate & sign-off NPD success from a commercial lens

Include whole-minded & non-obvious consumer insights, and price, pack, portfolio & channel analysis to expand range & depth of ideation

Form cross-functional teams to develop credible commercial foundations, clear category stories and tactical growth levers, driving belief & buy-in across the organisation

Create internal & external branding, communications & launch plans. Develop whole-minded KPIs & methodologies to evaluate success, refine NPDs in-market, and diffuse knowledge & best-practices effectively

Com

mer

cial

isat

ion

Idea

tion

Plan

ning

Laun

ch &

Ev

alua

te

Considered Execution

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A Step By Step Guide to Creating Your Value Based Pricing Strategy"

How to Create Value Based Pricing "

Value Based Pricing - Pricing based on how much customers

will pay for your product "

Value based pricing maximizes your revenue, "

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Reveals what your customers want"

And focuses your product on what your customer needs"

But how do you do value-based pricing?"

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It’s a four step process"

Value Based Pricing Step 1:"Find your buyer persona"

(Most Important!)"

Buyer Persona: Fictional character

that represents your ideal customer"

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Companies usually have multiple buyer personas"

Think about your personas’ needs and pain points"

Value Based Pricing Step 2:"Survey your customer base"

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Your customer base are those people who match your buyer persona"

Find out the features they value, and how much they

value them"

Value Based Pricing Step 3:"Analyze your data and create

pricing tiers"

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Look for patterns in the prices and features for each different

buyer persona"

Create different tiers of your service that match their "

different needs"

Bonus: Tiers also let you charge different prices to customers who have different valuations for your service"

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Value Based Pricing Step 4:"Test and Review"

Pricing is a process!"

Customer preferences and tastes are constantly changing"

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This means you need to continually collect data to track the changes"

Check the match between your tiers and your buyer personas"

For example, if small businesses are flocking to your enterprise tier, you

may need to rethink"

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In the end, you can only charge what your customer is willing to pay"

But, value based pricing should be win-win: "You and your customers should both be

happy!"

MAP 2 Pricing Strategy

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