Delivering measurable results through pricing (DMRTP) outlines challenges faced by organizations in delivering transformational results through pricing and approaches that have proven to be effective in overcoming those challenges. I delivered this presentation at PPS fall 2011 conference in Las Vegas

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Delivering Measureable Results Through Pricing
Professional Pricing Society: October 27, 2011
Copyright © 2011 by Monitor Company Group, L.P.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means — electronic, mechanical, photocopying,
recording, or otherwise — without the permission of Monitor Company Group, L.P.
This document provides an outline of a presentation and is incomplete without the accompanying oral commentary and discussion.
COMPANY CONFIDENTIAL

2. Session Objectives
 Discuss factors that typically contribute to the challenge of delivering
transformational results through pricing
 Share approaches that have proven to be effective in overcoming key
challenges
 Describe how to start down the path to transformational results
Copyright © 2011 Monitor Company Group, L.P. — Confidential 2

3. 5 Challenges to Delivering Transformational Results through
Pricing

1 Insufficient integration between pricing and other strategy choices

2 Pricing strategy designed for margin OR volume, not both

3 Value and cost-to-serve insights not sufficiently integrated into
strategy design
4
 Future scenarios not planned for in today’s pricing strategy

5 Limited accountability for building pricing as a core capability
Copyright © 2011 Monitor Company Group, L.P. — Confidential 3

4. 1 To deliver transformational results, pricing must inform and
support integrated go-to-market strategy choices
What are our
goals and
aspirations?
 Purpose Where will we
 Financial Goals play?
 Key growth
drivers
 Customers How will we
 Non-financial
Goals  Channel win?
Partners
 Product
 Value What capabilities
Categories
Proposition must be in place
 Geographies to win?
 Sources of
Defensible
Advantage
Many companies don’t link pricing to  Organizational
broader strategy choices or elevate the  Pricing Structure
pricing discussion to inform broader  Sourcing and  Skills
strategy choices distribution  Technology
model
 Incentives
Copyright © 2011 Monitor Company Group, L.P. — Confidential 4

5. 2 Goal of pricing should be to maximize contribution by balancing
margin and volume
Maximize
Contribution
Dollars
= (Price – Unit Cost) x Volume
You can increase net margin realization
. . . you can also drive profitable unit
by driving customers to acknowledge
growth through better price-value
greater value and aligning costs with value
positioning and segmentation
created . . .
Companies deliver transformational results when they use pricing as a
strategic lever to optimize margin AND volume potential
Copyright © 2011 Monitor Company Group, L.P. — Confidential 5

6. 3 Value and cost to serve insights must be integrated to create
customer choices that maximize contribution
Value Analysis Cost to Serve Analysis
Economic
Negative worth of
Differentiation competitor’s High
Value ($) unique
Economic Positive features C
worth of Differentiation
your
unique
Value ($)
features
Total
B
Price of next
best Competitive
Total
Economic
Value
A
Economic
Value
+
competitive Reference
alternative Value
Low
Segment Size
Value-based Choices Cost-based Choices
Customers can . . . Customers can . . .
. . . pay for value received . . . pay for incremental service costs
or or
tradeoff value in exchange for lower Change behavior to reduce cost in
prices exchange for lower prices
Copyright © 2011 Monitor Company Group, L.P. — Confidential 6

7. 3 There are multiple ways to create value and cost based choices for
customers
Value-based Choices Cost-based Choices
Customers can . . . Customers can . . .
. . . pay for value received . . . pay for incremental service costs
or or
tradeoff value in exchange for lower Change behavior to reduce cost in
prices exchange for lower prices
1. Tiered offerings — when value and / or cost to serve tracks with
difference in need for product or service features
2. Price metric — when value and / or cost to serve tracks well with
some observable attribute of the customer that is easily measured
3. Policy driven price fences — when value and / or cost to serve
correlates to when, where, or which customers buy; arbitrage
opportunities must also be limited
Copyright © 2011 Monitor Company Group, L.P. — Confidential 7

8. 4 Companies must plan for alternative, yet plausible, future
scenarios
Pricing strategy is highly influenced by To deliver sustainable and
the changes in internal, transactional, and transformational impact companies
contextual environment need to . . .
1 Identify critical
uncertainties
2 Define integrated
alternative
scenarios and
indicators of
those
materializing
3 Be ready with a
pro-active action
plan
Copyright © 2011 Monitor Company Group, L.P. — Confidential 8

9. 5 Finally, it takes strategy and capabilities to drive profits
Operating Profit vs. Industry Peers
1.0 = Industry Average
1.3
1.24X
1.2
1.1
1.04X
1.0
0.93X
0.91X
0.9
0.8
0.7
Value Strategy / Value Strategy / Inferior Strategy / Inferior Strategy /
Strong Capabilities Poor Capabilities Strong Capabilities Poor Capabilities
The most profitable firms are those that combine value-based pricing with
strong execution capabilities
Source: Monitor Pricing Capability Study; n=204
Copyright © 2011 Monitor Company Group, L.P. — Confidential 9

10. 5 Cornerstones of Durable Pricing Capabilities
Organization and Information Skills and
Decision Rights and Metrics Motivation
 Senior accountability  Process / system to track  C-level priority
customer value, competitive
 Baseline processes with  Training
intelligence, and account
tools and templates
level cost drivers  Demonstration projects
 Clear decision rights
 Price tracking systems  Performance metrics and
 Role and structure of pricing incentives
 Purchase trend analysis
organization  Expert support
 Dashboards and analysis
 Integration with marketing,
tools
strategic planning and
product development
processes
Copyright © 2011 Monitor Company Group, L.P. — Confidential 10

11. Case Study
Delivering Transformational Results for a Retail Chain (1/2)
Context
 North American retailer facing margin
and volume pressure due to increased
competitive intensity and customer price
sensitivity
Complications
 Lack of alignment on need / direction for
change
 Pricing strategy designed to manage
product profitability not overall
profitability of the business
 Limited clarity on customer purchase
patterns and role of pricing
 Conflicting beliefs on the value of
services
 Unrealistic breakeven requirements to
justify price decreases
Copyright © 2011 Monitor Company Group, L.P. — Confidential 11

12. Case Study
Delivering Transformational Results for a Retail Chain (2/2)
Key Insights Outcome
 There is a significant opportunity with  Pricing strategy that drove profitable
existing customers growth through mix of price
reductions and increases
 Perception of value and price
sensitivity varies significantly across  Decision trees, tools, and capabilities
customers to proactively manage pricing based
on internal and market changes
 Even for price sensitive customers,
sensitivity varies across product types  Pilots demonstrated simultaneous
improvement in volume and margin
 Many (non-sensitive) products are
priced unprofitably  Quick wins and pilot alone delivered
over $20M in incremental EBIT
 While there was a real need to lower dollars over year 1
prices on many items, there were
many items where RetailCo could  Chain wide rollout on track to deliver
raise prices over 200 basis point improvement
in operating profit
Copyright © 2011 Monitor Company Group, L.P. — Confidential 12

13. Getting Started
 Conduct a thorough diagnostic that focuses on the root causes of
organization’s inability to deliver transformational results
 Prioritize actions based on impact and the ability of the organization to
deliver and digest change
 Identify the benefits and make a case for C-level priority
 Invest significantly in organization buy-in and commitment
Copyright © 2011 Monitor Company Group, L.P. — Confidential 13

14. Thank You!
Gagan Chawla
Associate Partner, Monitor Group
Gagan_Chawla@Monitor.com
617-252-2861
Copyright © 2011 Monitor Company Group, L.P. — Confidential 14