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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Value based pricing is a hot topic in industry today, but what exactly is it and why is everyone talking about it?
Value based pricing is a hot topic in industry today, but what exactly is it and why is everyone talking about it?
Is value based pricing simply about getting as much price from your customers as possible? Or is it about valuing your longer-term relationship with your customers, or perhaps improving your service? In fact it is each of these and potentially more. What is clear however, is that cost-plus pricing for services does not always offer the customer or the supplier the best value - yet there may now be options to combat this with value based pricing.
The following report co-authored by Dr Shaun West, Lucerne University and Dominik Kujawski, Arvik Bolting Solutions brings together good industry practices in a solid academic framework. The report provides business leaders with a guide on how to create a value based strategy to price B2B services - as such it is essential reading for all business leaders...
Why value based pricing?
During a conference we recently attended, a phrase that kept coming up in conversation was “We should all switch to value based pricing”. An increasingly topical statement in industry today, however, the approach of value based pricing is also one which is not being discussed any further. No one seems to be speaking about HOW to actually achieve this goal.
Pricing is not new- even Oscar Wilde said: “Nowadays people know the price of everything and the value of nothing”
Companies need to focus on customer value in developing pricing strategies as pricing pressure in the industrial B2B market has been increasing as a result of changing customer buying behaviors. In this article we’ll delve deeper into why value based pricing can be challenging and why it has a huge impact on companies’ business.
Is pricing really a strategic capability?
Pricing is an important management tool to help achieve the firm’s objectives and has a huge impact on the financial results. It is a multi-departmental activity influenced by several functions within the firm that may attach different importance to pricing and the value drivers of the business.
Every business manager needs to be aware that pricing has an impact on customer satisfaction and that pricing is not only dependent on price itself.
Pricing of services is dependent on situations in which a customer finds themselves in and the jobs in which they need to do at that time.
This relation of pricing to customer engagement in this process includes three strategies:
- Cost plus strategy;
- Competition/market base strategy;
- Value based strategy.
Cost plus pricing
The process of cost plus pricing starts with the firm determining the scope of their service. Here, a unit cost is simply calculated and a pre-determined margin is applied to set the price. This margin reflects the desired profitability of the firm. The customers are then told what will be ultimately delivered in exchange for the set price
Competition/market based pricing
This process begins with pricing based both on the scope and the costs, then additionally on what the competition charges for a similar service. Setting the price here has an influence on the market situation. Large competitors tend to have a scale advantage over the smaller ones since their fixed costs are mostly lower due to a larger customer base. The last step of this process is presenting the customer with the value that is being offered through the service.
Remember that data is in your CRM system and in the market – keep track of it.
Value based pricing
The value based pricing approach is based on analyzing each customer’s needs, pains and gains, and their willingness to pay. It depends on the customer interest and acceptance of price for a provided value. Here, the price is set for the offered value, and later the scope of the service itself is determined.
Calculating the costs in this strategy is also necessary as they used to make a reality check and afterwards calculate the margin achieved.
Listen to your customers
The process of pricing in cost and competition based strategies suggests to ask the question “why is the customer situated at the end of the process if all of the companies always state that customers are the most important?”. A juxtaposition to the truth, you will always hear stated that companies involve their customers in the co-creation of service value from the very beginning, but how can this be actually possible with a cost plus and competition based pricing strategy?
Now, how do we turn this approach around and place focus back on the customer? Straight away, let’s forget about pure cost plus strategy.
This ‘simpler’ pricing strategy shows that the supplier can have a lack of understanding of the customer value and as a result the customer offering can be weak.
In addition to this, the competition/market base strategy, which is endorsed by many companies, indicates that pricing is controlled by the market. As such, this removes focus from the customer and indicates that the supplier does not entirely understand customer value, showing that the resultant value outlined by the firms offering can also be low.
So, how should service companies price in order to bring the customer into the focal point? The answer is quite straightforward; by aligning pricing objectives, strategies and tools according to the holistic strategy of the company.
Note: pricing needs to be strategic… it must not be left solely to Sales,
Production or Marketing departments. It needs to be driven by management and agreed by all the departments influenced by pricing Companies should create more customer focused objectives to choose pricing strategies that consider customer value.
This means that when pricing services, you as a firm need to firstly understand how your customer creates value and secondly, where you and your equipment fit into this process. You need to know that pricing tools used also need to support the objectives of pricing and the pricing strategies. For example, a pricing tool supporting customer oriented objectives can be bundling as it is a way for firms to present the scope/price negations, thereby providing a different approach to customer value discovery and leading to improved customer experiences.
Source of pricing power
Here, a B2B example is given, showing that the source or pricing power comes from customer need states. Let me take you through the example of a simple bolt used in industrial equipment. Bolts are widely present in everyday life and more specifically, they are present in almost every technologically advanced machine or construction, from compressor valves and turbines, to the foundations of wind mills.
So, what is the price of tightening a single bolt? The price of a single bolt varies from market-to-market, from machine-to-machine and from company to company.
The most significant result of bolting, however, is the residual load that a customer requires from the bolting supplier. Now, to show where the pricing power of services come from, let’s imagine a situation where you exchange a single bolt worth a couple of dollars, in a compressor valve which is worth hundreds of thousands or install one in an offshore wind turbine, worth even
more. How much should the tightening of one bolt be worth to keep the compressor running or the turbine safe on its foundation?
In this case, bolting provides safety and savings on a huge scale however, the value of the service to each customer varies depending on the scope of the project. Here, not all customers are the same, so they should also not be treated with the same approach.
Customer value connection based on colors
Customer value connection shows that companies need to do what their particular customer values. If the value proposition you offer creates no customer value, it is then only a purely basic cost to your customer.
It is time to use the “knowledge” about your customers to move to customer value propositions and find ways to deliver what is really valued. Hence, what they are really ready to pay for?
Firms need to consider what is core and what is standardized.
It is important to be aware that pricing can be different for different modules. This means that the customer can pay a different price based on the “menu” or “á la carte”, and shows that there are multiple pricing points for services but what is really interesting, is that its components don’t change. So what is changing?
It is the location and more importantly the type of service provision together with the customer need state. In the first mentioned case, the compressor valve is available in a workshop where the bolt can be tightened with use of onshore equipment, in a quite friendly environment.
However, the tightening of wind turbine requires going offshore to harsh conditions with special trainings and guaranteeing the customer that a bolt tightened worth a percentile of the whole wind mill will provide safety from failing the whole project.
This clearly shows that the customer gets usage, location and utility from the supplier. And if a firm is able to segment customer needs states and purposes for buying. It is also able to find the right pricing points for it.
This helps to identify margin and revenue opportunities available to a company.
This shows that that customer value identification process work for product based firms too.
Pricing waterfall for value based pricing
A prototype of pricing waterfall diagram provides guidance towards value based service pricing. It considers the most important aspects of pricing, starting from benchmarking competitors to considering the customers’ willingness to pay. As such, it helps you to triangulate on the value based price that your customer is willing to pay.
The pricing waterfall presents that single, inflexible offerings can limit companies to sharing limited value. Whereas, flexible offerings respond to customers’ changing needs.
Also, flexible pricing based on all important factors helps to increase customer value. Offering flexible service dimensions that support customer choices, together with flexible pricing strategies can provide the supplier with additional pricing dimensions that can have a positive margin increase impact. The pricing waterfall also highlights the importance of triangulation of pricing based on market analysis, internal value creation and customer value.
This article presents that pricing is a strategic capability and needs to be kept in line with the company’s overall strategy. There is a great need to focus on customer value creation during service pricing, and aligning strategies and tools to support the objectives set by the company. Understanding customer value rather than simply relying on cost-plus or market-based approach, is a key to pricing industrial services. Another very important step in the process of pricing, is margin calculation based on the identified costs and value price offered. It is essential to calculate the margins in order to assess the correctness and validity of the price.
To summarise, consistency in pricing is of great importance and needs to be maintained across all pricing objectives, strategies and tools used to determine the final price of a service offering. So after reading this article, ask yourself again, “Should I switch to value based pricing?”. The answer is not always, but one can learn to determine situations, locations, needs and pains to price according to value.