With the world of business changing faster and becoming more complex every decade, organizations today have to adapt, reinvent, differentiate or die. Over the past few years, the nature and intensity of these changes in the business landscape has created organizational disruption and a realistic need to redesign organizational strategy and leadership approaches.
The process is not easy, and this is why many executives in organizations decide to stay the course, bury their head in the sand, and copy and paste what others are doing. Today, businesses are realizing that they cannot cut their way to prosperity and that their growth potential has been severely reduced due to the continued recessionary trends.
They are starting to look at their business models and are reinventing their value propositions in order to generate customer excitement, boost value-creation programs and capture value through value-based pricing. These companies get it. Many, though, do not.
The following are tips on how you can embrace the value imperative and design and implement leadership initiatives to place customer value at the center of business.
Organize a series of off-site meetings with key people to have a realistic, candid and mindful conversation about your value proposition: Why are customers buying from us? What makes us truly different? Are we paying enough attention to our business model? Are we working on the right projects to support our value proposition?
This meeting should be led by top executives to demonstrate the importance of the process. I recommend you avoid the use of consultants, keep the agenda semi-structured to create conversational flow and reinforce that this is a confidential and safe environment.
Define your core
Identify what your true “core business” is that brings most of your revenue and profits: Are we bringing enough value to customers? Are we losing steam in our differentiation? Are competitors catching up on us? Does the core business need to be reinvigorated? Defining the true core business might end up being an interesting process as a team.
I recommend you avoid the use of the constraining and sterile strategic analysis tools such as SWOT analysis, market forces analysis and others. Start with a white sheet of paper and see where it takes you.
Find ‘hidden assets’
Identify your “hidden assets” that are creating excitement with customers and generating profit but that you have taken for granted, not paid attention to or underestimated. List these assets, celebrate having them and evaluate their contribution to the overall value proposition.
The definition of what a hidden asset is might get tricky, but it is worth having it. Launch the conversation of what-if scenarios: What if we had more of this or we did more of that? What would be the impact on customers?
Based on the previous steps, start redesigning your core business and value proposition by reinforcing the strengths you clearly have identified and by leveraging your hidden assets. While it is important to fix gaps or work on weaknesses, leveraging strengths and hidden assets might have a greater return.
Eventually, the result of this business model redesign process will need to be integrated in the strategic planning process. This process is critical to re-energize your value proposition and your overall business model. It is also a great opportunity to emphasize with your leadership team that all you need to do is create customer value and increase loyalty.
When times are tough, customers will make quality/performance sacrifices, will try other alternatives to reduce costs and will challenge your value proposition. My view is that the best defense is a calculated offense. ?
Stephan Liozu (www.stephanliozu.com) is the founder of Value Innoruption Advisors. He specializes in disruptive approaches in strategy, innovation and value management. He is also a Ph.D. candidate in management at Case Western Reserve University and can be reached at email@example.com.
“Nowadays people know the price of everything and the value of nothing.”
— Oscar Wilde, “The Picture of Dorian Gray” (1891)
Value is probably one of the most frequently used words in business. Yet it is extremely difficult to define, to measure its drivers and fully capture it with customers. Given that most companies create their own social construction of value, we propose to explore what it might mean and introduce some practical steps to increase your understanding of it.
We focus on the definition of value proposed in 1998 by James Anderson and James Narus. Value is the “monetary terms of the technical, economic, service, and social benefits a customer firm receives in exchange for the price it pays for a market offering, taking into consideration competing suppliers’ offering and prices.”
Why is it that few suppliers in business markets are able to define and measure value?
In a 2008 survey of business executives, 79 percent attributed this difficulty to a lack of capabilities and skills needed to assess value, apply the appropriate methods, and extract the exact value differential between two products.
Second to the value-assessment issue, communicating value to the market was associated by 65 percent of the executives with difficulty in elevating the value message above the advertising noise in the market.
Bottom line: there is a need for more research related not only to theory on value but also to marketing tools for understanding, measuring and delivering value in business markets.
Scholars agree that there are six characteristics of business value that make value difficult to measure: value is 1) a subjective concept, 2) a trade-off between benefits and sacrifices, 3) multidimensional, 4) defined relative to competitors, 5) segment-specific, and 6) future-oriented.
At Ardex America, we have embraced the difficulty and complexity of measuring value and have put long-lasting value at the center of everything we do. We adopted Andreas Hinterhuber’s approach that value in business markets is composed of six tangible and intangible benefit categories: product quality, delivery capabilities, services, ease of doing business, vendor characteristics, and self-enhancement (social status, prestige, aspirational benefits).
Our mission is to be able to measure the level of value we provide customers in each of these categories. To quantify economic value correctly, we have implemented a six-step approach called Economic Value Analysis:
Identify the cost of the competitive product and the process that customers view as the best alternative. Understand who you’re competing against for your customer’s share of wallet and who might be able to substitute for your products or services in your customer’s mind.
Segment the market: Understand why customers buy from you and what needs you satisfy; identify the true nature of these needs and the level of differentiation you enjoy in each segment.
Identify all factors that differentiate the product from the competitive product and process. Identify value drivers or unique selling propositions that really differentiate you. The rule of thumb is that you cannot have more than half a dozen. These product or service drivers are your real USPs.
Determine the value to the customer of these differentiating factors: Quantify value drivers using assessment techniques such as engineering assessment, value-in-use analysis or focus groups.
This is where it gets complex! We have done well for product-related drivers and are now moving to less-tangible elements of our value proposition. Determining the value of services remains a challenge, however, and it is ongoing work.
Add the reference value and the differential economic value to determine total economic value: Define a price point by adding the reference value (price of next-best alternative) to the differential economic value you generated for your customers. At this stage you might decide to share some of the value surplus with customers to entice them to keep doing business with you while paying a premium.
Use the value pool to estimate future sales at specific price points. Assess price elasticity by market segment based on various price points and relevant volume levels. For each segment you can then establish your value positioning and your pricing strategy.
The process is not easy. It requires skills, capabilities and sweat equity. But you deserve to capture some or most of the value you create for your customers. Before you can capture it, however, you must understand it and measure it well.
Join us for more discussions on value and pricing management during a regional pricing workshop on Oct. 11, 2012 in downtown Pittsburgh.
Stephan Liozu is president and CEO of Ardex America Inc. (www.ardex.com), an innovative and high-performance building-materials company located in Pittsburgh. He is also a Ph.D. candidate in management at Case Western Reserve University and can be reached at firstname.lastname@example.org or www.stephanliozu.com.
Warren Buffett recently said, “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.” Yet, in most companies pricing receives scant attention.
Data from the Professional Pricing Society indicates that less than 5 percent of Fortune 500 companies have a full-time function exclusively dedicated to pricing. Research from McKinsey & Co. shows that less than 15 percent of companies do any systematic research on this subject. Similarly, only about 9 percent of all AACS-accredited business schools offer courses that emphasize pricing significantly.
Despite this, numerous consulting studies suggest that pricing affects profitability both substantially and immediately. Small variations in price can influence profitability by as much as 20 percent or 50 percent in both directions. Are you paying enough attention to your pricing strategy? Who is managing pricing and value in your firm?
Over the past three years, my dissertation work has focused on better understanding how firms manage their pricing strategies. First, we interviewed 44 managers — from CEOs and CFOs to heads of business units and professionals — in 15 U.S.-based industrial companies. These varied in size from a few hundred to thousands of employees, and notably, differed dramatically in pricing capabilities.
In conducting this research, we identified common features of companies that have deployed pricing approaches as a key profit driver. Most important was that in successful companies, top management was attentive to two areas of their pricing function: the development and practice of skill in price orientation (or price setting) and price realization (or price getting). Armed with these qualitative findings, we asked more than 8,000 CEOs, presidents, and business owners around the world a series of questions relating to pricing. The findings revealed some interesting myths and facts.
Of the 100 points of attention allocated between cost-cutting, price-management and growth strategies, pricing received only 16 percent. Most attention, as expected, focused on cost-cutting, at 55 percent. While these top leaders indicated that pricing was strategically important, they paid little attention to it.
A commonly held belief that emerged from the research is that pricing is expensive, requires tremendous resources and is only for large firms. Au contraire! There are several steps in the pricing maturity progression model. But to get started, you can follow some of the simple steps:
Create a pricing council that meets every month just to discuss price trends, competitive pressure and new-product pricing prior to launch. Invite your marketing, sales and finance leaders and champion the process. Cost = $0.
Buy several copies of the best pricing book and give it to your staff to read. Then meet to discuss what you learn, what you can quickly adopt in your firm, and what the gaps are. Cost = $200 (depending on number of employees).
Send your marketing managers to a pricing conference held twice a year by the Professional Pricing Society. There you will learn from the best, meet top pricing professionals and get lots of insights. Cost = $2,000.
Take your best costing or financial analyst and give him or her responsibility to apply the basic techniques you will have learned in the book and at the conference. Cost = $0 incremental (part of your fixed cost).
Join our Western PA Professional Pricing Group on LinkedIn. This group gathers pricing and marketing professionals from the region. We meet twice a year, share best practices, and have fun. Cost = $45 in gas and food.
There you have it. You are at Level one of the pricing-maturity process. You have spent $2,245 in total to get started. We at Ardex, stand between level three and level four of this maturity model. Complexity and cost increase with each level. What you want to do is to find the level that suits you, your industry and your goals. Of the 15 firms we studied in 2010, 11 did not have a pricing function and did not manage pricing with intention. A staggering fact.
Stephan Liozu is President & CEO of Ardex America Inc. (www.ardex.com), an innovative and high-performance building-materials company located in Pittsburgh, Pa. He is also a PhD candidate in Management at Case Western Reserve University and can be reached at email@example.com.
As electricity prices continue to drop, is now the time for businesses to evaluate electricity prices offered by suppliers?
Yes. With the overabundance of natural gas supply from Marcellus Shale driving electricity prices lower, there has never been a more advantageous time for businesses to evaluate the prices, products and services energy suppliers are offering. Energy suppliers are competitively offering some of the best pricing options in response to the current market trends. However, although businesses are seeing some of the lowest prices for electricity, the trends are cyclical and prices may very well trend upward once again, says Robert T. Homa, P.E., CEP, regional sales manager at PPL EnergyPlus.
“That is why assessing current prices from suppliers and researching what products suppliers can offer is in a business’s best interest to help it take advantage of the opportunities that exist in the market today,” says Homa. “To keep your business as a customer, a supplier should be well versed in market trends and should be providing you updates on energy prices and industry related news affecting the energy market and should be offering your business the tools to understand and apply these fluctuations in price to your benefit.”
Smart Business spoke with Homa about what to look for in an energy supplier.
Should businesses be looking to lock in electricity prices now?
Absolutely. We haven’t seen wholesale electricity prices and the natural gas market trending at levels this low in several years, which is good news for businesses. It’s a good market when you have so many choices and the ability to compare and contrast them. Keep in mind, though, that while now is a great time to shop for the some of the best prices, the market is volatile and electricity prices are cyclical, which means they will trend upward at some point. That’s why there has never been a better time to evaluate your energy supply needs and consider locking in your supply price to take advantage of low electricity prices.
What else should businesses look for in a supplier beyond price?
Certainly, price is a driving factor to help a business meet its bottom line. However, a solid energy supplier can offer much more beyond price to help your business in the long term. PPL EnergyPlus, for example, offers a consultative approach, helping customers understand the market and navigate fluctuating market trends with prices and demand.
Your energy supplier should constantly review your business needs in tandem with market trends to be sure the products and services you’re purchasing are giving you results. Your supplier should create a relationship with your company that goes beyond the sale. Your energy supplier can help you take advantage of pricing trends and other products and services to help your business achieve its energy purchasing objectives for the long term. Your supplier should know what peak times are crucial to your business’s energy usage and be able to deliver customized solutions and strategic options to help you benefit overall.
Another strategy is to purchase a product that allows you to dollar-cost average electricity. You can purchase a three-year contract that locks in 100 percent of your power needs in year one, 66 percent in year two and 33 percent in year three. The next year, you can lock in the remaining 34 percent for the second year, buy an additional 33 percent for year three and extend the contract to buy 33 percent for the fourth year. This allows you to dollar-cost average your purchases but still gives you time to find the soft spots in the market.
Do suppliers offer the same types of products and services?
No, and some vary greatly. PPL EnergyPlus, for example, offers a core set of structured products. Our products offer varying degrees of flexibility and stability, with budget certainty and the opportunity to take advantage of the market. We have the ability to tailor these products to specifically align with your business’s direct needs.
An energy supplier that can customize their product line to adjust to your business’ unique energy usage needs is crucial. Your energy supplier should understand that not every business operates in the same manner or has the same energy usage needs, so why should the products you choose be regimented? A comprehensive energy supplier will also offer your business services supporting your business objectives such as demand response, renewable energy services, mechanical services and other types of advanced electricity supply products and services. Finding a supplier that offers a full array of services allows your business to benefit from a comprehensive energy supply solution. Your energy supplier should know your business well enough to provide guidance as to the right type of products, services, terms and other supply solutions that would be the most beneficial to your business.
What services are available for businesses to be greener and more energy efficient?
Many suppliers offer a comprehensive program to help businesses support their green initiatives by minimizing their carbon footprint and investing in a greener future. We offer a green power program through our Renewable Energy Program for businesses. The program provides a financial foundation for the development of additional renewable energy projects, reducing the amount of energy in the electricity grid generated by traditional fossil fuels. PPL EnergyPlus offers businesses the opportunity to participate in this program and to purchase Renewable Energy Credits, which we then retire from the energy marketplace. An energy supplier that offers a renewable or green program can help you evaluate your environmental footprint and advise on the type of renewable energy supply that allows your business to best meet its corporate commitment toward greener initiatives.
PPL EnergyPlus, LLC is an unregulated subsidiary of PPL Corporation. PPL EnergyPlus, LLC is not the same company as PPL Electric Utilities Corporation, the electric utility. The prices of PPL EnergyPlus, LLC are not regulated by the Pennsylvania Public Utility Commission, and you do not have to buy electricity or other products from PPL EnergyPlus, LLC in order to receive the same quality regulated services from PPL Electric Utilities Corporation.
Robert T. Homa, P.E., CEP, regional sales manager at PPL EnergyPlus. Reach him at (610) 774-4573 or RTHoma@pplweb.com.
Insights Energy is brought to you by PPL EnergyPlus
Although pricing plays a pivotal role in generating profits, most firms end up leaving money on the table, because they rely on ad-hoc or undisciplined practices instead of a well-honed strategy. Worse yet, they don’t establish a price based on the product’s value, or forgo profitability by hastily initiating discounts to grab market share.
“Executives don’t run enough ‘what if’ scenarios before establishing a price for a product or service and then hope that something good will happen,” says Dr. Jagdish Agrawal, associate dean and professor of marketing for the College of Business and Economics at California State University, East Bay.
Smart Business spoke with Agrawal about the dos and don’ts of pricing management.
Why do companies overlook the need for disciplined pricing management?
For starters, academia hasn’t paid enough attention to pricing so MBAs aren’t familiar with the tools or the need for a rigorous methodology. In fact, there isn’t a single academic journal on the benefits of good pricing. Executives also tend to think that the market establishes the price for goods and services, when it’s up to the seller to educate buyers on their product’s value.
What are the components of an effective pricing strategy?
These best practices are integral to an effective strategy.
- Start with a profit objective. Market share and profits aren’t necessarily related; conceptually, you can reduce your price to zero, lose money and capture the entire market. Start with a profit objective before establishing a price for the product and then research the market to see if it’s on target.
- Practice value-based pricing. Pricing should be determined by the value of a product or service, not production costs. Research the competition and then adjust your price up or down based upon the inferiority or superiority of your product.
- Understand market segmentation. Airlines are experts at market segmentation based pricing. They understand that business travelers don’t pay for their tickets so they don’t care about price, but families always shop for the best deal when booking a vacation.
- Price proactively. Avoid knee-jerk reactions to competitive price changes by continuously monitoring buyer preferences as well as social and economic changes so you can adjust prices proactively.
- Develop prices collaboratively. Solicit input across the entire enterprise, because each group offers unique expertise and perspective that leads to better pricing.
- Invest in marketing. It’s not that buyers won’t pay more, but they need education and data to appreciate your product’s value.
How can companies utilize tools to attack pricing both tactically and strategically?
Savvy companies understand price elasticity and customer preferences and use niche software programs to conduct incremental break-even analyses. For example, what will happen if you drop the price of a product by 5 percent? How much will sales go up and will you still make a profit? Conversely, what will happen if you don’t reduce the price? Start with a conjoint marketing analysis to uncover the nexus between price and value by forecasting the impact of various price changes and then conduct trials or tests to validate the results before initiating wholesale price changes. Some product managers are turning to a new field called behavioral economics, which helps them understand buyer motives and strategically offer rebates or other discounts to communicate a product’s price and value to customers.
How can companies avoid typical mistakes?
Marketing has four variables, or ‘Ps’: price, product, promotion and place. Because price is the most flexible, people tend to use it for instant gratification. But it’s a mistake to temporarily lower prices for competitive purposes, because it compresses margins across the entire industry. Another error is incorporating irrelevant or non-incremental expenses into the cost assumptions because it results in an inflated price that isn’t based on the product’s value. Fixed costs like managerial salaries aren’t necessarily impacted by the number of products a company produces, so you stand a better chance of developing value-based pricing and realistic forecasts by excluding them from the estimated costs. Isolated pricing decisions made by a single department like marketing or accounting are usually off the mark. Instead, develop the brand’s positioning and profit objectives before creating a coordinated promotion and advertising campaign. Next, develop various pricing scenarios through a collaborative effort and run ‘what if’ models to validate your sales and profit goals. If necessary, adjust your product’s positioning or marketing strategies until they align with the desired outcomes, because everything should flow from the brand’s positioning.
How can companies boost profitability through pricing improvements?
Start with the actual product or service to uncover untapped market segments and incremental profit opportunities. Does your product solve a problem? Are there prospective customers who would be willing to pay more for a solution? For example, retailers usually charge less when customers buy online, but some people are willing to pay more for the experience of shopping in a pleasant environment. Train everyone in the company on pricing fundamentals and methodology so they make better pricing decisions and spot additional opportunities to sell goods and services for a higher price. Remember, price is the only marketing variable not associated with the product’s cost, and price allows you to realize the value of all your investments and boost profits.
Dr. Jagdish Agrawal is associate dean and professor of marketing for the College of Business and Economics at California State University, East Bay. Reach him at (510) 885-3290 or firstname.lastname@example.org.