The Strategic

Power of Pricing
Metrics
Tom Lucke
Monitor Group

October 17-18, 2006 l Santa Clara, CA

Agenda
Overview: The Opportunity from Metrics
Identifying Metrics Based on Value
Screening Metrics
Supporting New Metrics
Summary

October 17-18, 2006 l Santa Clara, CA

Metrics The Dimension We Price

Per K byte

Per Server
Per Desktop
Per Incident

October 17-18, 2006 l Santa Clara, CA

Innovative Metrics Can Drive Growth

From number of days

From number of CDs

To number of
concurrent DVDs

To number of songs

October 17-18, 2006 l Santa Clara, CA

Inappropriate Metrics Create Barriers

Absolute
no-brainer

Fairly
priced

Not cheap
to buy

Low
Concurrency

October 17-18, 2006 l Santa Clara, CA

Completely
out of line

High
Concurrency

The Problem and the Opportunity

Economic
Benefit

Price

Good metrics align price and value for your customers

October 17-18, 2006 l Santa Clara, CA

Whats Wrong with this Picture?

Discount Overlaid on List & Actual Price by Account
30

90%
80%

25

20

60%
50%

15
40%
10

30%
20%

5
10%
0

0%
List

October 17-18, 2006 l Santa Clara, CA

Actual

Discount

Discount percentage

Revenue ($ millions)

70%

Why Talk About Metrics?

Opportunity from metrics is significant
Metrics dont get sufficient attention
Identifying the right metrics takes work
History gets in the way
Need to adapt to changes in technology
Not easy to identify the right ones
October 17-18, 2006 l Santa Clara, CA

Selecting the Right Metrics

Identify potential metrics by understanding
economic value

Screen potential metrics for operational

feasibility and strategic impact

Explain and support the new

metrics in the market

October 17-18, 2006 l Santa Clara, CA

What Creates Value for Customers?

Negative
Differentiation Value
Your Unique
Value Delivery

Price of
Next Best
Competitive
Alternative

October 17-18, 2006 l Santa Clara, CA

Positive
Differentiation Value

Costs Unique to
Doing Business with
You

Appropriate
Metrics Can
Capture a Share
of This Value
Total
Economic
Value

Competitive
Reference Value

10

How Does Value Vary by Segment?

High

Price

Price
Price

Price
A

B
Segment Size

October 17-18, 2006 l Santa Clara, CA

Value

11

Low

Identifying Potential Metrics

Understand
Business
Models
Group
customers with
fundamentally
different
economics
Value accrues
differently
based on
model

October 17-18, 2006 l Santa Clara, CA

Map Value
Drivers

Brainstorm
Metrics

Systematically
define points of
economic
leverage

Link value
drivers,
features and
KPIs

Focus on areas
of greatest
impact to
customers

Use this list as

a source for
potential
metrics

12

Understand Business Models

Example: Operational
software for
manufacturers

Manufacturing

Product
Focused

Product
Innovator

Customer
Focused

Component
Producer

2%

1%

Impact is very different

based on the economic
profile of the company

Service
Focused

Solution
Provider

Industry
Specialist

12%

Operationally
Focused

Downstream
Services

Low Cost

4%

5%

2%

R&D Spending (% of Revenue)

October 17-18, 2006 l Santa Clara, CA

13

Separating business
models helped us
understand
How value was
created
Why this varied

Map Value Drivers

Example: Network
management software
for telecom services
companies

Drivers of Value For

Telecom Companies

Increase Revenue

Additional Share

Improve Asset
Efficiency

Reduce Cost

Additional Revenue
from Existing
Customers

Lower IT and Process

Management Costs

Lower Capital
Expenditures

First To Market

Decrease Direct
Revenue Leakage

Reduce Sales and

Marketing Cost

Reduced Inventory

Increased Customer
Satisfaction

Improve Service
Availability

Reduce Customer
Service Cost

Reduce Inventory
Carrying Cost

Increased Selling

Increase Sales
Conversion

Reduce Billing,
Collection and Bad
Debt Cost

Reduce A/R Carrying

Cost

Reduce Network
Operating Cost

Reduce direct network

operating costs

Reduce the cost of

purchased materials

Reduce the cost of

provisioning,
installation and service

Value driver map let us

identify where value
was created
Comprehensive and
systematic view
Jumping off point for
potential metrics

October 17-18, 2006 l Santa Clara, CA

14

Brainstorm Metrics
Link product features and value drivers
Identify key dimensions along which value varies
Dont constrain yourself to conventional metrics at this point

Network
headcount
Number of
projects

October 17-18, 2006 l Santa Clara, CA

Equipment
inventory
Network
asset base

15

Network operating
costs

Selecting the Right Metrics

Identify potential metrics by understanding
economic value

Screen potential metrics for operational

feasibility and strategic impact

Explain and support the new

metrics in the market

October 17-18, 2006 l Santa Clara, CA

16

Screening Metrics
Potential Metrics

1
2

Measurable and Enforceable

3
4
5

Correlates with Value Across Segments

Compatible with Buying Process

Aligns with Channel(s) Objectives
Favorable Positioning Against Competition

Build
Build business
business
case
case and
and select
select
final
final metric
metric

October 17-18, 2006 l Santa Clara, CA

17

Estimating Economic Value

$0.10
$0.05
$0.85

Economic
Value
(Dollars
Per Call)

$0.65
$3.15
$0.45

$0.75

$0.40
NBCA

More Calls to
Existing
Automation

Note:
October 17-18, 2006 l Santa Clara, CA
Source:

New Simple
Automation
Opportunities

Few er
Defections

Additional
Complex
Automated
Fulfillment

18

Managed
Service

App
Development

Economic Value

Premium Package
Differential Value
= $2.75 (per call)

Look at Value Across Segments

Example: Infrastructure Software

High Complexity
(many servers)
Low Complexity
(fewer servers)

Value

High

October 17-18, 2006 l Santa Clara, CA

Activity

19

Low

Operational and Strategic Screens

Potential Metrics

1
2

Measurable and Enforceable

3
4
5

Correlates with Value Across Segments

Compatible with Buying Process

Aligns with Channel(s) Objectives
Favorable Positioning Against Competition

Build
Build business
business
case
case and
and select
select
final
final metric
metric

October 17-18, 2006 l Santa Clara, CA

20

Selecting the Right Metrics

Identify potential metrics by understanding
economic value

Screen potential metrics for operational

feasibility and strategic impact

Explain and support the new

metrics in the market

October 17-18, 2006 l Santa Clara, CA

21

Transitioning from Traditional Metrics

Product

Traditional
Metric

Value-based
Metric

Manufacturing
Software

$ / seat

$ / schedulable
production unit

Storage
Management
Software

$ / server

$ / Tb of data
movement

Call Center
Hosted Software

$ / minute

$ / call
processed

Financial
Analysis
Software

$ / year

$ / click

October 17-18, 2006 l Santa Clara, CA

22

Set price levels based

on value; check
against current pricing
Test with customers
and sales
Craft the value
message and rationale
for metrics
Develop tools to
explain the value

Why Revisit Metrics? Good Metrics . . .

Effectively communicate the way a product
creates value
Simplify customer decision-making
Reduce the length of the sales cycle
Reduce the need for ad hoc discounting
Open up new market opportunities
Increase overall profitability

October 17-18, 2006 l Santa Clara, CA

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