From Pricing Management To Value Managementv3

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From Pricing Management to Value Management: the Next Big Leap

September 23, 2009

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Discussion Flow

• Value Management—What is it? • How is Value Measured in Practical Terms?• Business Cases

Value Management for New Products….for Market Management….for Key Accounts

• How do you institutionalize Value Management across a business?

• Wrap-up

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Value Capture is usually the missing link…

Value Capture

Value Creation

1. Creating measurable, differential value for the

value chain

2. Maximizing the profit captured by the enterprise

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Diagnosing Organization Capability: Value vs. Price Management

• Segmentation•Targeting

Who?

• Offer• Brand

What? • Value Proposition

• Differential value

Why?

•Commercial Roadmap

When? • Channel• Geographic markets

Where?

•Customer Engagement Process

How? • Price/Value• Volume

How much?

Value Management TRANSACT

Sense

Set

Manage

Convey

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Diagnosing Price Capture

Information is Lineage Power Confidential & ProprietaryDo Not Reproduce or Distribute

Capabilities

Process

Tools & Methods

Structure

IT

Sense Set Manage Convey

•Market Segmentation•Customer Prioritization•Comp Value Assessment

•Pricing Strategy•Service definition•Offer Rules & Options•Standard T’s & C’s

•Reporting•Account Planning•Account Targeting•Key Account Management

•List & ref price structure•Price change notification•Price communication•Internal communications

•Perf Target Setting•Price & Profit Monitoring

•Price Guidance•Price Controls•Deal/Proposal/Quote review

•Price Mix Management•Price Change Campaign Orchestration•Price Control & Compliance•Deal Compliance•Price Perf Review & Accountability

•Master Data to ERP communications•Special deal to Master Data Communications

•Price segmentation•Competitive Intelligence •Customer Value Models•Economic value Analysis•Cost-to-serve allocation methods

•Price fences•Bundle options•Deal analyzers•List/reference prices•Discounting Rules

•Contracting Terms & Conditions•Negotiation Boxes•Value Prop Tools•Pricing Reports & Analytics•Variable Compensation•Pricing visibility

•Price/quote automation•Value Communication Framework

•ERP System Capability, Configuration & Optimization•Pricing System Selection, Configuration, Implementation, and Roll -out

•Pricing Orientation & Culture•Price Management & Enrichment Model•Organization, Roles & Accountabilities

•Metrics, Measures & Review•Compensation, Recognition & Reward

Information is Lineage Power Confidential & ProprietaryDo Not Reproduce or Distribute

Sense Set Manage Convey

Developing Developing Developing Developing

Basic Basic Basic Basic

Formal Formal Formal Formal

Advanced Advanced Advanced Advanced

World-Class World-Class World-Class World-Class

Transaction Management

1

10

8

5

3

0

Maturity Stages

Baseline process is ineffective

Process is in place

Basic tools,Cont

Improvement

Advanced tools & process

Pricing Innovation & Excellence

Moving up one level across the board is worth 2-5 points (ROS) conservatively

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Diagnosing Value Capture

Project Approach & Deliverables

Interview SMEs to assess Value Management capability relevant to NPI & Price Mix Management

1° identify strengths and weaknesses

relative to Price Mix Management

Recommend improvements

2° identify strengths and weaknesses

relative to NPI

Cus

tom

ize

diag

nost

ic

inst

rum

ent

Diagnostic Tool for

future use

Interview scripts & “Quotable Quotes”

Objective gap analysis with an

informed perspective

Business case for

change and improvement

Value Management Diagnostic Sub-categories

Segmentation & Targeting

Product Positioning

Value Proposition

LaunchPlanning

Channel

Engagement

Price

•Targeting & De-selection•Techniques & Tools

•Communication•Competitive Strategy•Product Attributes•Brand

•Voice of the Customer•Competitive Validation

•Reason to Believe•Plans & Roadmaps•Message & Materials•Process•Communication/Coordination•Strategy

•Performance Mgmt & Incentives•Cooperation & Partnering

•Engagement Process•Tools & Support•Performance Measurement & Tracking•Core Data

•Competition•Execution

•Strategy/Rationale

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Sample Diagnostic Results for an Industrial Mfg Co.

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Discussion Flow

• Value Management—What is it? • How is Value Measured in Practical Terms?• Business Cases

Value Management for New Products….for Market Management….for Key Accounts

• How do you institutionalize Value Management across a business?

• Wrap-up

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How is value measured?

Two Schools of Thought

“Value is Relative”- -

Perceived Value

“Value is Quantifiable”- -

Calculated Value

Value mapsPrice vs. performance

Relative market position

Waterfall chartsEconomic Value Analysis

Return on investment

Decision to use oneor both depending

on the uniquesituation

Alignment of Price and Value

Tools

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School #1: Perceived Value

Higher Cost

Relative Price

Lower CostInferior

Superior

Relative Perceived Value

Worse Value

Fair Value Line

Better Value

Economy

Average

Premium

The Value Map shows the position of each competitor in terms of the

overall cost versus the overall benefit. 

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School #2: Calculated Value

A Value Waterfall is used for estimating the economic value-in-use of solutions.  This tool is most effective when your business has a clear economic advantage over a specific competitor or when you

are weighing purchase decision (e.g. as a consumer)

$ Variance Benefit

vs. CurrentSolution

Current Solution

Break Even

Savings

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Discussion Flow

• Value Management—What is it? • How is Value Measured in Practical Terms?• Business Cases

Value Management for Market Management….for New Product Launch….for Large, High Stakes Proposals

• How do you institutionalize Value Management across a business?

• Wrap-up

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Case #1: New Material for Home Insulation

• 54% of energy in the US is consumed by buildings (residential and commercial) and their construction

• Department of Energy reports that over 40% of the cost of heating and cooling is lost through uncontrolled leakage through the building envelope

• Sharp spikes in energy prices in 2008 increased homeowner awareness related to insulation solutions

• Energy-efficient, or “green” construction is the main trend in the building and construction sector

A new technology is available which reduces energy leakage through the building envelope while maintaining or increasing

the R value of the insulation in the wall and roof space in conventional homes, relative to traditional fiberglass insulation

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ValueDrivers

CalculatedTotal cost of ownership over an expanding time frame (2-5 years)

One Offer. Four Value Propositions.

Scope of enterpriseBasic

MaterialsManufacturer

ResidentialInsulation

Manufacturer

InsulationInstaller

ResidentialHome Builder

Homeowner

CalculatedFair trade on order fulfillment activity performed by distributor in return for appropriate margin and inventory turnover

CalculatedApplication training and technical support augmented by cooperative marketing spend and effectiveness

CalculatedReturn on investment for labor and material inputs during home construction process leading to maximum retail price capture

Perceived Value: functional and emotional benefits of reliability

“My home is ‘green”

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Value proposition to the homeowner is clear…

“install better insulation in your home and save 25-40% on your monthly energy bill…”

Variance Cost/Profit vs. Fiberglass

Additional Installed cost of Insulation

HVACSizing

Elimination of Humidifier

Present Value of Future Energy Savings

Current Option: Fiberglass Insulation

Break Even in x months

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…but big problem for the Homebuilder

“Build your homes with our insulation….and increase your cost/home?”

Variance Cost/Profit vs. Fiberglass

Raw Material & Installation Costs

HVAC Sizing

Elimination of Humidifier

Extra Ventilation

Construction Site Disruption

Current Option: Fiberglass Insulation

Break Even

Price Markup on House

Profit

Problem: homebuilders don’t understand how to cover the costs of better insulation

Homebuilders select and install the majority of insulation used in homes across North America!

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Case #2: Beyond Hot & Cold: Ideal Home Environment

Clean Air is a Big Deal• 45% households with

respiratory problems• 20M with asthma• Indoor Air 5x worse than

Outdoor Air (EPA study)• Consumers willing to pay for

proven solution

Launch• 2 Different

Products• ‘Bolt-on’ air

cleaner • Integrated air

cleaner• $1400 MSRP

Results• Tremendous positive consumer

experience• ‘Bolt on’ configuration hit

targets• Integrated configuration under

performed

Room Air Purifier

Typical HVAC System

Electronic Air Cleaner

Clean Air Technology

Solution• Exclusive, proprietary

technology• 99.98% efficient at 0.1 microns• Removes the flu virus!• Highest available Clean

Air Delivery Rate (CADR)

CA

DR

Cle

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Eff

ects

t

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Eff

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Value Promise

• Extension of successful clean air launch

• Premium price to dealer (vs ‘bolt-on’ solution)

• Significant installation labor savings (time, $)

• Compact design needed for some applications

• Wants clean air• Willing to pay

$1400+ for CleanEffects performance

Value Reality

• Extra SKUs drove extra carrying cost

• Low % of dealers who “get it”

• Didn’t adjust price to homeowner to reflect labor savings

• Cost-plus mentality

• Still wants/needs clean air

• Opted for ‘bolt-on’ solution

Value Drain Across the Tiered Channels

HVACOEM

DistributorDealer or

ContractorHomeowner

…Not as rosy for Integrated Clean Air

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Case #3: Large, high stakes proposal

• What is the slope of the line for this particular customer scenario?“How does the customer decision making team weigh price vs. non-price

decision drivers”• How do we assess our “Relative Perceived Performance” for this deal?

“What are the non-price decision drivers?” and “What is the relative importance of each decision driver?”

• How will price be measured by the customer on decision day?“How will the customer evaluate pricing at the moment of truth?”

price

Relative perceived performance

Us????xx

x

x

“The enemy”

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What is the process for acquiring the insight to achieve the right(eous) price?

•Issues •Tactics •Negotiations

Plan Engagement

Assess Needs & Value

Refine Offer & Value

Proposition

Present & Deploy Solution

Assess Results

Listening Event

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Share your analysis with the customer…

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Do we understand Big Helicopter Co. ’s needs?

Absolutes = Product performance and quality

Acquisition Cost50%

Risk Assurance25%

Capability to bring new technology

15%

Engagement Process5%

Relationship/Trust5%

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The details behind the decision drivers at Big Helicopter Co.….

Huge issue. They would like a supplier that can explain their systemic approach to full scale implementation. Also, having a dedicatedteam to support Big Helicopter Co.’s.’s team is key. Team members must have ‘been around the block’with respect to rotary wing industry.

Engagement Process

New technology needs to add ‘saleable’features to Big HelicopterInc.’s products or cost reductions in their process. Being active and involved in cutting edge research has huge perceptual value.

Capability to bring new technology

Critical to know who key management are on ongoing basis—would be important to make commitment to executive review on semi-annual basis…meetings probably need to be hosted at Big Helicopter Co..’s European HQ’s

Relationship and Trust

Technical support needs to be focused on improving the quality of prototype testing prior to deployment on the new helicopter platform. Development of mutually agreed test methodology will go a long way toward reducing Big Helicopter Co..’s risk. Must address personal risk’s of the buying team as well—backup support.

Risk Assurance

Cost = price/unit…would be willing to consider impact of significant , quantifiable issues related to cost-in-use

Price

Which means…..Need

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Outcomes of a typical ‘Listening Event’…

• Ratio of price vs. non-price drivers is almost always quantified“They tell us the slope of their fair value line”

• The non-price decision drivers are characterized in detail and the relative weights are quantified rigorously“They tell us what their critical non-price decision drivers

and trade-offs will be at deal time”• They specify the relative importance of list price versus

other price values (such as payment terms, currency of payment, etc.)“They tell us how price will likely be evaluated down to the

last detail”

xx

xx

x “They tell us how to win without leaving money on the table or over-engineering our value proposition”

price

performance

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Discussion Flow

• Value Management—What is it? • How is Value Measured in Practical Terms?• Business Cases

Value Management for New Products….for Market Management….for Key Accounts

• How do you institutionalize Value Management across a business?

• Wrap-up

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1 Capability 6 Competencies

Value Proposition

Development

Value Proposition

Development

Value Chain Analysis

Value Chain Analysis

Tailored Offers

Tailored Offers

Economic Value

Economic Value

Customer Needs

Assessment

Customer Needs

Assessment

Perceived Value

Perceived Value

Value ManagementValue Management

To ensure that the positioning of our products and services results in the optimum price/benefit equation relative to competitive alternatives

6 Competencies1 Capability

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Mapping VM Capability to individual roles and competencies…

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Discussion Flow

• Value Management—What is it? • How is Value Measured in Practical Terms?• Business Cases

Value Management for New Products….for Market Management….for Key Accounts

• How do you institutionalize Value Management across a business?

• Wrap-up

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Contact Information

Brian [email protected]

www.kalypso.com

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