CASE STUDY OPTIMIZING PRICING STRATEGY for a PRODUCT PORTFOLIO METHODOLOGIES USED: 1. Qualitative Interviews 2. Adaptive Conjoint Analysis (ACBC) o simPRO™ Preference Simulator o Reactor™ Market Modeling & Forecasting
Nov 22, 2014
CASE STUDY
OPTIMIZING PRICING STRATEGY for a PRODUCT PORTFOLIO
METHODOLOGIES USED: 1. Qualitative Interviews 2. Adaptive Conjoint Analysis (ACBC)
o simPRO™ Preference Simulator
o Reactor™ Market Modeling & Forecasting
The following case study and data is from an actual CLIENT project, however the data has been de-identified to avoid sharing any sensitive client or confidential information and is intended for general information only.
First….let’s meet the CLIENT
LOOKING TO LAUNCH A NEW PRODUCT TO REPLACE AN EXISTING PRODUCT
Dominant market leader in…..
1
2 LOOKING TO MAXIMIZE PROFITS FOR ITS PRODUCT PORTFOLIO
3 SEEKING TO AVOID CANNIBALIZING EXISTING PRODUCT SALES
NETWORKED HOSPITAL EQUIPMENT
The CLIENT wanted to know…..
Research Objectives CENTRAL RESEARCH QUESTION: What impact will different pricing models and timing of our product launch have on our revenues and profits?
Research Objectives CENTRAL RESEARCH QUESTION: What impact will different pricing models and timing of our product launch have on our revenues and profits?
1. What is the purchasing process and who are the key
decision makers and influencers?
Research Objectives CENTRAL RESEARCH QUESTION: What impact will different pricing models and timing of our product launch have on our revenues and profits?
2.
1. What is the purchasing process and who are the key decision makers and influencers?
What is the preference for different product and non-product features and pricing models?
Research Objectives CENTRAL RESEARCH QUESTION: What impact will different pricing models and timing of our product launch have on our revenues and profits?
2.
1. What is the purchasing process and who are the key decision makers and influencers?
3. How do we maximize our 5 year profits?
What is the preference for different product and non-product features and pricing models?
P hases
23 IN-DEPTH INTERVIEWS Hospital C-Level Executives
Hospital Managers and Directors
GOALS Identify key decision makers Understand the decision-making process
PHASE Qualitative Analysis
1
2
We IDENTIFIED DOPs and CFOs as the DECISION MAKERS that should be the key TARGETS for sales and marketing.
In-Depth Interviews Key Findings 1
Identify key decision makers
GOALS 1
Risk Managers are not the decision makers CNOs and CIOs are potential influencers
In-Depth Interviews Key Findings 2
Understand the decision- making process
GOALS 2
Incremental changes or expansions to these networked hospital equipment typically fall under the operational & financial authority of DOPs…
In-Depth Interviews Key Findings 2
Understand the decision- making process
GOALS 2
…while larger additions or entire system upgrades require C-level approval.
Incremental changes or expansions to these networked hospital equipment typically fall under the operational & financial authority of DOPs…
In-Depth Interviews Key Findings 2
Understand the decision- making process
GOALS 2
Decision-making is based on:
…while larger additions or entire system upgrades require C-level approval.
Incremental changes or expansions to these networked hospital equipment typically fall under the operational & financial authority of DOPs…
→ Overall Cost of Ownership → Brand → System IT Architecture → Product Usability Features → Time to Market
442 WEB-BASED SURVEYS DOP, CFO, CEO, CIO, COO, CNO,
IT Director, VP Nursing
Determine intention of upgrading or replacing existing product Statistically validate preference for different pricing models
1
2
GOALS
PHASE Quantitative Analysis
Key Findings 1
Half of customers plan to upgrade within 2 years...
PLAN TO
UPGRADE/REPLACE
WITHIN 2 YEARS
53% PLAN A REPLACEMENT
28%
Surveys
Determine intention of upgrading or replacing existing product
GOALS 1
Key Findings 1 Surveys
…because of the following 5 reasons:
Product Lease Expires 60%...
Significant New Product Benefits Offered 61%...
Current Products No Longer Supported 46%...
Equipment No Longer Functions Properly &
Too Costly To Maintain 46%...
The Price Declines 16%...
To DETERMINE the most important PURCHASING DRIVERS, respondents were asked to select their most preferred product configuration in a conjoint exercise.
Key Findings 2 Conjoint Analysis
Statistically validate preference for different pricing models
GOALS
2
Brand Brand A Brand B Brand C
Upgrade Guarantee Plan S/W only Not Included S/W & H/W
Time to Commercial Availability 6 months 6 months Available Now
Service Levels Service Only Service with Parts None
Product Feature #1 Fast Slow Fastest
Product Feature #2 High Low Low
IT Architecture Hardware Hardware Web-based
Payment Model Purchase Lease Lease
Total Networked Equipment Price $160K for all units ($40K per unit)
$2.3K per month ($30K per unit purchase price
equivalent for 5 years of operation at 6% discount rate)
$3.9K per month ($50K per unit purchase
price equivalent for 5 years of operation at 6% discount
rate)
Total Price of Service Plan $6K for all units ($1K per unit)
$4K per month ($900 per unit)
$5K per month ($1.2K per unit)
⃝ ⃝ ⃝
Please select the product that you most prefer. Assume everything about the 3 products is identical EXCEPT for those differences presented in each scenario.
Choose the product you most prefer by clicking on of the buttons below.
By forcing respondents to make various trade-offs between features and price, it becomes possible to measure which product features are more likely to drive product selection.
Key Findings 2
0%
5%
10%
15%
20%
25%
30%
Total
Monthly Service Plan PriceBrandService LevelsUpgrade GuaranteePayment PlansPrice per UnitIT ArchitectureProduct Feature #1Time to MarketProduct Feature #2
Imp
ort
ance
27%
MONTHLY SERVICE PLAN PRICE is validated to be the MOST IMPORTANT purchase decision driver. 12% 13% 13% 12%
9% 6%
5% 4% 3%
Conjoint Analysis
Next, we used our proprietary market forecasting simulator, ™, to assess how the Client could maximize profits based on the survey and market data.
Revenue
Market Share Profitability
Conjoint Analysis
Historical Market Data
INPUT FORECAST FOR:
Combine survey findings with historical market data to model various strategic options
Determine impact of product and non-product features on:
Revenue Market Share Profitability
Assess likelihood of adoption of the new product
1
GOAL
PHASE Market Forecasting
2
Using Reactor™ Market Model, we TESTED alternative business decisions…
Market Model Scenario Modeling
CLIENT PROJECT System
Price
Monthly
Lease*
Service
Price
Months to
Launch
Unit cost
System
Unit Cost
Service
Long-Run
Annual
Units
Long-Run
Unit Share
Long-Run
Brand Unit
Sales
Long-Run Brand
Unit Share Year 1 Revenue** Year 2 Revenue** Year 3 Revenue** Year 1 Profit** Year 2 Profit** Year 3 Profit**
Discounted
3-Year Profit
Discounted
5-Year Profit
New Red Lease $55,000 $700 $300 0 $12,000 $50 1,914 10.46%
New Blue Purchase $55,000 $300 0 $12,000 $50 302 1.65%
New Red Purchase $55,000 $300 0 $12,000 $50 344 1.88%
New White Purchase $55,000 $300 0 $12,000 $50 158 0.86% 2,718 14.85% $116,240,492 $185,984,786 $185,984,786 $92,196,643 $147,514,629 $147,514,629 $348,420,503 $579,322,702
Legacy Red Lease $45,000 $677 $275 $10,400 $50 6,809 37.20%
Legacy Blue Purchase $45,000 $275 $10,400 $50 886 4.84%
Legacy Red Purchase $45,000 $275 $10,400 $250 1,161 6.34%
Legacy White Purchase $45,000 $275 $10,400 $250 585 3.20% 9,440 51.58% $530,815,537 $530,815,537 $530,815,537 $382,195,592 $382,195,592 $382,195,592 $1,042,200,103 $1,640,444,516
Client Total 12,158 66.43% $647,056,029 $716,800,324 $716,800,324 $474,392,235 $529,710,221 $529,710,221 $1,390,620,605 $2,219,767,218
Comp#1 Legacy Lease $35,000 $677 $200 1,332 7.27%
Comp#1 Legacy Purchase $35,000 $200 1,515 8.28% 2,847 15.55%
Comp#1 New Lease $40,000 $773 $200 0 444 2.43%
Comp#1 New Purchase $40,000 $200 0 569 3.11% 1,013 5.53%
Comp#1 Total 3,859 21.08%
Comp#2 Legacy Lease $55,000 $850 $250 354 1.94%
Comp#2 Legacy Purchase $55,000 $250 1,258 6.87% 1,612 8.81%
Comp#2 New Lease $55,000 $850 $250 0 183 1.00%
Comp#2 New Purchase $55,000 $250 0 491 2.68% 674 3.68%
*Assumes 5 Year lease with a 6% annual discount rate compounded monthly Comp#2 Total 18,304 2,286 12.49%
**Undiscounted
14.9%
51.6%
15.6%
5.5%
8.8%
3.7%
Long Run Unit Share
New
Legacy
Comp#1 Legacy
Comp#1 New
Comp#2 Legacy
Comp#2 New
Market Model Scenario Modeling
CLIENT PROJECT
…an iterative process…
… to QUANTIFY the SALES effects of alternative business decisions:
Market Model Key Findings:
Sales Team Guidance
A moderate software upgrade plan with specific features & limited hardware upgrade guarantees is most highly valued option… and leads to increased share, revenue, and profits
The different needs of buying & leasing customers was identified…
o …and those leasers that are potential brand switchers can be captured (or retained) with a specific combination of service and pricing plans
Switching costs are worth a 5% price premium for an incumbent product
Market Model Key Findings:
Product Portfolio Opportunity
If the existing product is taken off the market the new product can achieve
68.0%
14.4%
5.6%
9.6%
2.5%
Long Run Unit Share – NEW PRODUCT ONLY
New Client Product
Competitor #1 Legacy Product
Competitor #1 New Product
Competitor #2 Legacy Product
Competitor #2 New Product
68% market share.
Market Model
Because many customers preferred the legacy product, and really wanted an improved service plan, rather than an improved product…
However, we IDENTIFIED that the Client’s upgraded PRODUCT plan was NOT the OPTIMAL product strategy.
Key Findings: Product Portfolio Opportunity
…by leaving its existing product on the market the Client can achieve
32.8%
41.1%
10.4%
4.0%
9.3% 2.4%
Long Run Unit Share - OPTIMIZED PRODUCT PORTFOLIO
Client New Product
Client Legacy Product
Competitor #1 Legacy Product
Competitor #1 New Product
Competitor #2 Legacy Product
Competitor #2 New Product
Market Model Key Findings:
Product Portfolio Opportunity
Therefore we RECOMMENDED the Client introduce the new product at a premium price and retain the existing product as a value product.
(instead of 68%) market share...
…and an overall increase in profitability
74%
74%
$-
$100
$200
$300
$400
$500
$600
$700
Y1 Profit Y2 Profit Y3 Profit
Scheduled Launch
12-mo Pre-Announce
Market Model
Long-Run Brand Unit
Sales Long-Run Brand
Unit Share Year 1
Revenue** Year 2 Revenue** Year 3
Revenue** Year 1
Profit** Year 2
Profit** Year 3
Profit** Discounted
3-Year Profit Discounted
5-Year Profit
6K 33% $228M $364M $364M $174M $278M $278M $658M $1.1B
7.5K 41% $394M $394M $394M $275M $275M $275M $750M $1.2B
13.5K 74% $623M $758M $758M $449M $553M $553M $1.4B $2.3B
We DISCOVERED that the Client could see a 36% drop in PROFIT because of delayed purchases if a new product is pre-announced.
Key Findings: Pre-Announcement
64%
SAMPLE OUTPUT
Without the pre-announcement, customers will continue to purchase the current product, especially if they can also purchase a S/W upgrade plan.
FINDINGS and RECOMMENDATIONS
We provided guidance on product roll-out management, pricing strategies, product line management, including:
FINAL RECOMMENDATIONS
1
2
3
Schedule new product announcements very close to actual launch dates Minimizes short-term revenue reductions and optimizes financial returns.
Target DOPs and CFOs DOPs and CFOs are the primary decision-makers and should be the primary target for sales and marketing strategy.
Create a two-tiered product portfolio by keeping existing (legacy) product Profits are maximized when both the legacy and new products are available on the market.
Price the new product at a premium Customers who value the new product’s features are willing to pay a higher price. Price-sensitive customers will have a satisfactory value-priced alternative in the client’s portfolio.
4
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