The process of creating a price that reflects a company’s soft value is truly a journey. Reaching directly into a world where your products and services serve your customers, the value/price journey is an intense process in which companies can...
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Dec 24, 2018 • Aftermarket • Aftermarket Pricing • copperberg • Features • field service • field service technology • Inventory Management • Logistics • Martin Brändström • Outotec • parts management • Pricing • Service Logistics • Spare Parts Pricing
The process of creating a price that reflects a company’s soft value is truly a journey. Reaching directly into a world where your products and services serve your customers, the value/price journey is an intense process in which companies can learn how to keep their customers loyal and the company on the right track.
Writing for Copperberg, producers of a series of service and manufacturing industry conferences across Europe, Iva Danilovic brings us a story about soft values with spares and wear parts pricing management from a webinar by Outotec’s Commercial Product Manager, Martin Brändström, organized by Copperberg Research.
Want to know more? You can watch the full webinar on Copperberg's YouTube channel @ https://youtu.be/egQsqZy8ENE
The webinar was centred around topics such as differentiating a company with soft value drivers, how to communicate value with the sales team, and the importance of engaging market areas before implementing a price strategy.
"In order to set the best price of spare parts in each of the market areas, Mr Brändström works together with the frontline sales team and communicates the product values to them..."
For more than a century, Outotec has had a comprehensive portfolio of technologies that provide a complete mineral processing and metals refining solutions. Outotec is a company that is proud to say that it develops leading technologies and services for the sustainable use of Earth’s natural resources. It is the fifth most sustainable company in the Global 100 ranking of the world’s most sustainable corporations, thanks to its efficiency in reducing CO2 levels in technological processes.
In a company of 4200 employees that brings together experts of 60 different nationalities, Mr Brändström is accountable for automation and flotation product line of spare parts. He is in charge of the ownership to develop product strategy, which demands a thorough knowledge of segmentation and pricing mechanism in this niche market.
In order to set the best price of spare parts in each of the market areas, Mr Brändström works together with the frontline sales team and communicates the product values to them. To explain the joint efforts of the two departments in the value pricing process, he offers an example from the process of building a pricing strategy for Outotec’s rubber spare parts, identifying its most important soft values.
Developing the soft-value pricing mechanism
“It is very difficult to put a value-based price on these sort of product”, says Brändström. “There are many competitors. It is a fierce competition, the market is extremely cost-price driven, and the price of the elements is based on the weight of the element and the price of raw materials,” An additional problem is that the design of these sort of elements hasn’t changed much during the last 20 years. So, how does a company calculate the value-based price for such products?
The key to solving the problem lies in better understanding clients’ challenges: “We need to understand what challenges customers face when they need to change the spare parts elements. This can involve hard work in dangerous and confined environments. It is labour-intensive manual work. They are exposing their personnel to high hazard risks, including cutting, falling, pinching and electrical hazards”.
To better understand the clients’ situations we have to look at their needs and practices. “In this case, spare parts need to be changed from 3 to 12 months’ time. The customers have thousands of contractors coming to perform shutdowns and to work on other repairing processes”.
However, the problem of differentiating a company from other competitors may become an advantage. By understanding the soft value of our products and services we are able to be a step ahead of the competition and create a good value-based price. For Outotec, the process of managing and removing hazards led to the cognition of a soft value that has since become central in companies’ pricing process.
Having in mind that some products are being used in dangerous environments, product owners have to know exactly how unsafe usage of the product is, and how to prevent possible injury. That’s why safety is the most important soft value for Outotec. “We all take safety for granted, but there is more space to increase and improve safety,” Brändström explains, “A seller that can deal better with a safety hazard has the highest chance of gaining the job.”
Outotec’s Pricing Initiative
After relying on an ERP system, and tools such as Excel, email and phone calls, Outotec realised its approach on the pricing strategy was not systematic enough. Therefore, in 2013 Outotec started building a pricing framework that would improve the process of setting prices.
Later, from 2014 to 2016, Outotec sought to improve the framework and make value-based pricing operational within the organization, so they had to incorporate value-driven pricing logistics in the framework and start with process harmonization.
From 2017 Outotec continued with the improvement of processes and practices. Now, out of 47.500 items available on Outotec’s price list, 45% of prices are market-driven (based on the position of Outotec vs other commercial suppliers) and 25% value based.
“Harmonization of prices and the data that ERP system provided showed us that things needed to be improved in order to adjust to the global target price. There is a lot of money to be made, and, on the other hand, a lot of money is left on the table. Product managers don’t usually spend a lot of time on harmonizing the prices, and I think we should do that more, because it is by far worth of effort. You will get on top of your figures and prices, and it is a good way to adjust local market prices,” claims Brändström.
Explaining the Price and Communicating the Values
However, the value pricing journey is a complicated process. Outotec faced difficulties when the price of their PU industrial goods increased by 54% in just a couple of years. The customers were confused and demanded an explanation for such an increase. The Outotec frontline sales team needed to convince the clients to keep purchasing the spare parts from them, and not go to other competitors.
"Clients want to know exactly what contributed to the price, and whether it is something worth their money..."
“We did a lot of nice PowerPoint presentations in which we explained how the price is calculated. We used nice stories and nice pictures, but that didn’t really support the frontline sales team who deal with the customers directly,” says Brändström. Clients want to know exactly what contributed to the price, and whether it is something worth their money.
“Have right responses prepared. Keep the customer loyal by knowing your facts,” he suggests. If there is an increase in price, identify where the price increase comes from, use the company’s ERP system that can give you the data. Share that knowledge with the Sales Team to increase the confidence of sellers.
Outotec decided to concentrate on specific data that can help clients to understand the reasons for an increased price within a few minutes. The sales team have become equipped with a few simple – but very concrete – answers such as: What is included in the price calculation? How the retail price is calculated in various local markets?
Factors affecting the price
This is also a great opportunity for the producers of premium goods and services to position their products on the market. Outotec underlined the safety as a value and added their industry experience and higher reliability and availability of their equipment among other benefits that help them differentiate from competitors.
Additionally, it was a Brändström’s role, as a commercial product manager, to work closely with frontline sales representatives to come across different scenarios that could contribute to even better communication of facts and values to buyers.
When talking to customers about their challenges, companies are able to hear some information that could allow them to be one step ahead of others in the market. On the other hand, research on how a product is being used deepens the understanding as to what can be improved in the production process.
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Despite huge leaps forward in technology coming at us left right and centre, the companies that will get the most from a process of digitalisation are those that keep fundamental, traditional values of putting the customer first at the core of...
Despite huge leaps forward in technology coming at us left right and centre, the companies that will get the most from a process of digitalisation are those that keep fundamental, traditional values of putting the customer first at the core of their ethos writes Nick Frank, Managing Partner, Si2 Partners.
Those companies that are successful in implementing a digital-led growth strategy don’t bother with the jargon of the moment!
The leaders in this field start with the basics – a deep understanding of their customer’s problems and then work backwards to offer solutions that create value or reduce risk. As part of the journey, they look hard at their own DNA and take action to fill their capability shortfalls. They identify the actual data they need and then automate the data collection/analytics process to deliver scalable solutions.
Businesses starting this shift to service led growth would do well to note that successful companies do not focus on the rhetoric, but rather have an intense obsession with how to make their customers more successful. The lesson to be learned is using the latest jargon does not put you ahead of the game. Believe this and you might not realise that you are leaving your business ‘naked’ to competitive actions, just like the emperor in the children’s story.
In the last year, I have heard this same story time and time again. At the recent After Market conference in Hamburg, we heard speakers from SKF, Outotec, Caterpillar and Serco tools all starting with the customer problem, defining the customer pain map in terms of real money.
Talk to experts in machine learning or knowledge management and one hear’s exactly the same story. Start with the business problem or the KPI and then work back to the data solution. For some, this means adding services such as analytics or remote access to products to create customer value. Others go further and no longer sell a product but an outcome such as leasing a tractor unit of a truck by the mile.
In all the success stories there is a common theme. Each company is able to articulate in terms of money, why their customers should buy their solutions.
They almost all do this following what I call the Value Iceberg principal.
The cost of the product or service you provide can be clearly seen above the waterline.
However, from the customers perspective, there are many other costs within their business below the ‘waterline’. Some are easy to define such as labour, material throughput and energy. Others are much harder such as overheads or obsolescence. And then there is RISK and UNCERTAINTY that are extremely intangible and frightening when quantified, but which have a strong emotional impact on companies buying decisions.
The most profitable manufacturing companies understand the iceberg very well. By adding services to their products and creating integrated solutions, there exists a huge opportunity to capture more value that is hidden deep within the customers’ business processes. Take the truck example. The tractor unit represents maybe only 8% of the annual running costs. Below the waterline 50% of the operating costs is the fuel used, 25% the driver and profit accounts for perhaps 2-3%.
Over 20 years ago, MAN truck’s UK distributor identified this value and added maintenance services to their portfolio that were designed to reduce fuel consumption by 10% and so double the profitability of a tractor unit over the year.
Using telematics technology in the cab, they were able to manage the running costs so well, they could shift their business model to effectively lease trucks by the mile. The resulting value argument was so compelling, that over a 20-year period their business grew from £50M to 550M. The other OEM’s are now following!
For leaders of change, this deep, almost obsessive understanding of customer value, gives them the confidence to know in what businesses and technologies to invest. It allows them to understand whether customers can afford more outcome-based services and how far their business should move along the Product to Service continuum.
This value-based phenomenon is also very real when we start to look at the UK macroeconomic viewpoint. When we redefine manufacturing as a product plus associated services, a 2016 study by Cranfield University estimated this to make up 16.8% of the UK Gross Value Added(GVA) versus the traditional definition of manufacturing at 10% GVA
Perhaps this realization that our view of manufacturing is fundamentally changing, is the reason why many people focus on the digital or IR4 technologies, forgetting that these are only enablers of change. In most part, it is through services that the technologies add new value and not the other way around. But sadly many companies have yet to grasp this notion. The reality is that unless they do, many players will be left wondering why digitization and IR4 have never quite delivered on the promise!
If you would like to know more about your Value Iceberg to drive your investment priorities, then you can contact Nick at firstname.lastname@example.org
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