LeveragePoint Value Management Blog

Ask the Expert, Follow-Up on March Webinar, Part II

In our March webinar, Stephan Liozu, CEO of Ardex Americas, talked with us about how his mid-sized manufacturing company transitioned from a cost-based to a value-based pricing strategy. Click here to watch the recording or to download a copy of the slide deck. This is part two in a two-part series in which we review some of the questions which came from the audience.

Q: Can you clarify your definition of “dollarization”?

Stephan: There's a book called The Dollarization Discipline by Jeff Fox (found here on Amazon), which I give to every distributor and contractor that visits us. Dollarization is the monetization of differential value. So if you look at the EVE, the Economic Value Estimation, you dollarize or monetize the differential value. You take the value driver, measure your differential value, and then transfer that into the next step of the EVE. (Note: see here for more information about the EVE process, pioneered by Tom Nagle and John Hogan in their ground-breaking book, The Strategy and Tactics and Tactics of Pricing.)

Q: How are you measuring your success? What's the ROI that you've received? What are the different KPIs that you've used, other than ROI, to determine whether you're moving in the right direction?

Stephan: The number one success factor is the transparency of our pricing strategy, in terms of customer complaints about not understanding our pricing models. Selling the value story and making it very clear why a customer pays a specific price creates satisfaction with that price. It builds credibility with your customers as well. If you look at the tangible measurement, because it's a pragmatic internalization of value-based pricing, we can measure incremental pricing with pilot programs. The way we used to do pricing, and the way we do it today, is completely different. Sometimes our prices are lower, but most of the time our prices are higher. That incremental price capture can be measured as incremental ROI. I would recommend reading my blog post on the LeveragePoint blog and in the Professional Pricing Society journal for more on this. It's important to sell this program internally to your management, and have a value-tracking mechanism (incremental profit, incremental innovation power, pricing satisfaction, etc.) specifically for value-based pricing expenses.

Q: You talked a little about how customers and the channel are responding to your transformation, but how is your competition responding?

Stephan: We are the price leader in the market. We are not always the highest priced, but are usually the first to market for price increases and price management. We do an excellent job with value management, as we do face some cost-cutting competitors and some price-followers. But it is very dynamic. We are still going through a recession in the construction industry in the US. The bottom line is that our competitors make their decisions independently on whether to attack us. I don't think any changes are related to us being more value oriented, it’s simply how they run their business. For Ardex, we focus on bringing to market innovative products that are priced at the right level based on the value drivers and value propositions. We do value maps which are very dynamic, and sometimes we are forced to respond and adapt a specific pricing program. But because we dollarize every single product, we know the thresholds. The LeveragePoint platform and the dollarization process help you react in a more intelligent manner. You know exactly what competition is doing, and whether you are willing to follow or not, and how much you are willing to give back. It creates a more scientific process internally for you to respond.

Freemium – How to Price Your Product for Free

Can you believe that there is a wrong way to price a free product?  That premise sounds a bit counter-intuitive.  Giving it away should be the easiest pricing strategy to implement.  Actually, it isn’t. 

Recently, a group of executives shared their insights about so-called freemiums at the annual MassTLC unconference. By the way, the term “freemium” as defined by Wikipedia refers to the marketing strategy of using a free offer to build a base of users who can be converted into paying customers (free + premium = freemium).  Freemium is often used in the context of web 2.0, but when you think about it, the general concept has been around for ages.  We've all seen those “try if free – cancel (or send it back) at anytime” type offers.   Like many, I tend to be suspicious of such deals, particularly the ones that credit cards companies have tried to hard-sell me.

Web 2.0 freemiums have evolved from aggressive promotional tactic into a legitimate business strategy.  Provide users with a taste of real functionality in order to establish credibility, build trust and then let it blossom into a customer relationship.  For SaaS companies especially, freemium is an essential part of a pricing strategy. At the unConference, we identified two freemium models that trade-off functionality versus volume.

ConstantContact, a leading email marketing firm, has had success by providing full functionality, but limits volume to 100 email addresses.  Beyond that threshold, charges kick-in.

SurveyMonkey, an online survey tool, allows users to create any number of surveys and participants, but limits the functionality – number of questions, types of questions, branching, etc.   More sophisticated surveys require an upgrade.

Both models are viable because they cleverly take into account the user’s economics.  That’s the key take-away: to establish a reasonable threshold where a free customer is willing to pay a little more to get more.  

And what about “freeloaders”, those users who will never cross the paid threshold?  They can turn out to be an important referral base to other paying customers. Speaking from my own experience, this has certainly been true for ConstantContact and SurveyMonkey.

I’d welcome other great examples of freemium.    Feel “free” to comment!!

Ed Arnold
Director of Products
LeveragePoint Innovations

Everybody Has a Pricing Problem

Yesterday I attended the MassTLC annual Innovation unConference  with hundreds of other professionals from the region’s high technology community including luminaries like Dan Bricklin and Bob Metcalfe.  The principle behind unConferences is self-organization; rather than have a pre-defined agenda, participants develop the agenda dynamically at the start of the meeting.  I’ve attended 3 of these so far and find them amazingly effective.  Participants tend to be more engaged and approachable than in traditional gatherings.

This time around I took a chance and pitched a session called “Talking about your Pricing Strategy.”  Admittedly my topic was different from most others, which were heavy on themes around cloud computing, venture funding, green technology, and the like.  Since people vote with their feet at an unConference, I wasn’t sure if anyone would even show up, especially for a non-luminary guy like me.  So I was pleasantly surprised when about a dozen or so folks came by – and then doubly pleased when a dozen more appeared for a late afternoon encore.

We had a good mix of individuals from start-up and established firms.  Both product and service-based companies serving a variety of b2b and b2c markets.   Young just out of school entrepreneurs and seasoned veterans.  Yet there was one common denominator: everybody has a pricing problem.  To be precise: a large array of thorny pricing problems … here is just a sample of the multitude we captured on the whiteboard:

• Having a new solution without a clear competitive point of reference
• How to best use the “freemium” model
• How to charge different pricing for different segments
• How to deal with aggressive purchasing agents

The flipside to “everybody has a pricing problem” is that many have developed innovative pricing insights and tactics.  Several best practices were shared – too many to include in this blog post (but stay tuned). Let me share one that is a good general rule for us all to follow:  Understand that your pricing strategy is part of your overall service offering, so design it around your customer’s needs and give them clear, transparent choices.

Ed Arnold
Director of Products, LeveragePoint Innovations
[email protected]

Using Value Charts to Plot Pricing Strategy

Value Charts are an easy and effective way to communicate how much economic value your product offering provides to your customers. Reading a value chart lets you tell a rich story of why your offer is better than your competitor's. It also supports the claim of why your price is a better deal even though it is higher than the competition. Why? Because of higher value!

Value Charts can also illustrate a more complex narrative around the implications of differing pricing strategies. Let's compare different strategic scenarios based on the example of a medical device maker for a healthcare provider. We can use value charts to visualize each scenario (see Figures 1-4 below). Btw - An excellent explanation of these pricing strategies and when to use them is found in "Pricing with Confidence" by Reed Holden and Mark Burton. Note that none of these scenarios are inherently best or worst because the outcome depends on other factors.

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Figure 1: Premium or Skim Strategy. Typically, a Value Chart is used to justify a higher price relative to the competition. This is the classic value communication scenario. The customer is willing to pay more because they perceive higher economic use value. This is represented in the Value Chart by a (i) relatively large green area in the left bar (e.g., the unique value that the medical device provides overall) and; (ii) relatively large blue bar on the right (e.g., the medical device costs $10.99 per patient procedure or $9.49 more than the competitive alternative). The implication of this strategy is that the marketer of the medical device maker is willing to forgo gaining market share to maintain a premium price.

A quick explanatory note about "competitor value" is in order. In value charts, the competitor price and value are assumed to be equal. So in our example, the competing medical device costs $1.50 per patient procedure and is therefore assumed to provide only $1.50 worth of value to the healthcare provider. In reality, the competitor probably provides more than $1.50 worth of economic use value, but Value Charts won’t give the competitor any credit for this. Reason: the competitor’s price is assumed to be the going market price for that bundle of economic value, in other words, a commodity. The customer would therefore never pay more for this base level of value because they can easily get it elsewhere. True differentiated value, however is a different story.

Figure 2: Penetration or Discount Strategy. Alternatively, a marketer may choose to aggressively grab market share with a low price. Here the left bar is exactly the same as in Figure 1 (e.g., $18.84 of differentiated value) but the right bar also shows a large green area indicating $18.34 worth of customer value -- nearly all the available differentiated value. This should be a very attractive proposition for the customer assuming that the underlying value story is credible. Obviously, the price-market share tradeoff can be taken much further – even to the point of under pricing the competitor (more on that in Figure 4 below).

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Figure 3 - Neutral Strategy. For this scenario, we have significantly reduced the amount of differentiated value down to $0.61. This is clearly displayed in the Value Chart via the relatively small green area in the left bar. Note that the customer value in the right bar is also $0.61 (again the customer gets to keep all the differentiated value). The pricing is considered neutral because it matches the competitor's price. A marketer would chose to be neutral in order to deliberately avoid competing on price, instead aiming to be the preferred vendor because of better differentiation.

Figure 4 - Low Cost Leader. Using the same value story from the previous scenario (Figure 3), the marketer has chosen to price the medical device significantly below the competitor's price. This is essentially a more extreme form of Penetration Pricing (Figure 2 above). Here the left bar is exactly the same as in Figure 3 (i.e., relatively low differentiated value) but the right bar shows a much larger green bar. Not only does the customer gain all the differentiated value, but also receives the entire "commodity" value that the competitor provides at a lower price – in this case $1.01 lower! Obviously this strategy can only be sustained with a significant cost advantage by the medical device maker.

So in conclusion, value charts reveal four distinct visual patterns associated with the main pricing strategies. We suggest that they are a useful tool for marketers when evaluating possible strategic moves during their product planning.

Ed Arnold
Director of Products

Connecting Strategy to Results With eWorking

eWorking is a new way of activating business methods using an online platform that combines online tools, collaboration, and data eith eLearning in a single interface. It is used while people are actually performing their jobs, which is when the best learning takes place. Unlike conventional training, with eWorking the required expertise is collected in the background and delivered at the point of need, reducing the distance between learning and doing to zero. eWorking is an impactful way to activate corporate strategy because it creates measurable business results in real time.

eWorking is also an extremely practical way to rapidly drive best practice to the people in the field, where day-to-day operating decisions are being made. By embedding learning within doing, needed knowledge is available at the point of application. The person in the field is more aware of the choices they are making and of their anticipated outcomes.

eWorking creates a "virtuous cycle" that leverages collective intelligence by embedding "carbon" (human collaboration) in the "silicon" (online tool). The result is real-time change management, evolving and improving methods, tools, and best practice through application, measurement, and feedback from the users in the field.

The CMO of a large chemicals company recently told her colleagues of an eWorking program—LeveragePoint for Value Management—that they put in place last year to increase speed and business impact of their marketing pricing professionals.

She told the story of a marketing professional who had just come onto a project. He had some of the needed expertise and knowledge, but was lacking the full picture and there was nobody to quickly bring him up to speed. However, with eWorking, the previous project leader’s expertise had already been embedded in the tool he was using to create the required output, an Economic Value Estimation (EVE) for an important new product launch. Even though his predecessor was no longer with the company, the new project leader was able to benefit from his experience and expertise. The eWorking tool made the required coaching and examples available exactly as he needed it; no more, and no less. The output was created on time and was of very high quality and contributed greatly to the successful launch.

With eWorking, "expertise" is not something that someone has; rather, it is something that one uses—the result of a creative interface of individual experience and knowledge added to the collective experience and knowledge of the organization. It is far more powerful than eLearning because it puts the expertise of the entire enterprise at the fingertips of the user, and captures best practice and experience of the front-line people who apply the methods, driving the evolution of business methods and iterating those methods in real time.

Here’s how it works:

1. Leverages collective intelligence — by identifying, capturing, and transparently linking the knowledge that people carry in their heads with vetted sources of knowledge, and delivering it in the right context to the right people in the right amount at exactly the right time.

2. Embeds carbon in the silicon — by combining human coaches, coworkers, experts, and advisors with personalized learning objects within the same platform at the time they are needed.

3. Real-time change management — by opening a channel from the field that reveals how well strategy is being executed, and the effectiveness of business methods in achieving business goals. As a result, management can be rapidly improve or change those methods to adapt to unpredictable circumstances. The tool can be instantly updated with improved methods and best practice.

The bottom line: eWorking helps professionals move beyond what they know to what is known, transforming what they can do to what can be done. It creates a supportive "productivity zone" around each knowledge worker, an interface composed of tools, best practices, shared information from colleagues, and data, which is contextually linked to knowledge, methods, and process to drive consistently excellent performance.

Jonathon Levy
Chief Strategy Officer

Challenges in Executing a Value-Based Strategy

There’s much attention nowadays around the importance of an organization adopting a value-based strategy, especially given the current economic climate.  Pricing guru Tom Nagle and I recently spoke to a group of managers interested in this topic -- 80% of them indicated that their organizations were attempting to implement such a strategy.  For more details about this event, see: http://members.pricingsociety.com/webinar_details.asp?WID=220

Not surprisingly, these managers shared their specific challenges, such as:

• 50% said they lacked effective models and data 
• 42% said their value proposition was not well understood either externally or internally
• 40% said their sales force reject their sales models or materials
• 15% said their value models didn’t address their customers’ real issues

It is clear that the many organizations struggle with the capabilities to create viable value models and to leverage them effectively to communicate value through their sales channels to their customers.  Traditional approaches of training, “one-off” spreadsheet tools, and pricing specialists have definite limitations. 

This task is simply too large for either one or a small group of individuals to take on for themselves.  We’ve found that good value model building is both a collaborative and iterative process.  To facilitate this process requires tools that are easy to use, have a strong visual interface that supports “what-if”, and are easy to share in a secure, online environment.  One that we are working on is described here LeveragePoint for Value Management.

Ed Arnold

Director of Products

and

Tom Nagle

Member of the LeveragePoint Advisory Board and Partner at Monitor Group

Strategy Execution

I was taught in business school that superior execution usually trumped superior strategy.  The premise being that big ideas can only succeed with the right attention to details. Or, as I think Thomas Edison once was suppose to say, "genius is 1% inspiration, and 99% perspiration"

But recently, I read research that casts serious doubt about that.  First, an excellent book called Billion Dollar Lessons, by Paul Carroll and Chunka Mui which chronicles the most infamous business failures in last 25 years. Forgotten, ill-fated killer apps like Iridium, Zapmail and many other examples are described in detail.  The key point: big, bad ideas inevitably lead to big business losses no matter how well executed they are.  It's interesting reading in the same way as watching a train wreck in slow motion.

A recent Pricing Capability Benchmarking study conducted by colleagues at the Monitor Group reach a similar conclusion.  The research showed that firms that were "directionally challenged" (weak strategy, strong execution) actually performed worse than firms that were "runaway trains" (weak strategy, weak execution)! Which can lead one to the conclusion that if you have a poor business proposition, the best thing to do is to implement it inefficiently.  Think of the capability building requirements around that goal!

Ed Arnold Director of Products