Pricing Trends Accenture

Trends in Strategic Pricing
Servigistics Exchange
March 13, 2007
Pricing has emerged as a top focus item for many CxOs.
Strategic Pricing
An Art A Science A Discipline
Sales Volume
(in million tonnes)
Profit (Index)
1.1
Profit
110
1.0
100
0.9
Sales Volume
90
0.8
Price ($)
1000 1100 1200 1300 1400
Optimal Price
Pricing has become a top priority for businesses today

• 70% of leading B2B companies put pricing in their top quartile of priority initiatives
• 56% of B2B companies planned to invest in a pricing solution in 2006
• Pricing is now top of mind for shareholders and analysts
• Chief Pricing Officer is emerging as a new high-demand position at major
corporations
• There is a chronic shortage of pricing skills among our clients
Sources: Pricing Society, AMR, Yankee Group, Forrester research, HBR
Copyright © 2006 Accenture All Rights Reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture. 2
Most aftermarket businesses continue to rely on traditional
habits and “instinct” to guide their pricing decisions.
• Conventional Wisdom
• Pricing not treated as strategic focus area for
aftermarket businesses
• Pricing decisions fragmented across the
business with undisciplined process
• Pricing decisions driven by generic margin
assumptions, competitive reaction, and/or
customer complaints
• Simple tools using limited, fragmented, or
outdated data / reports
• Limited or no visibility into effects of pricing
decisions cause past sins to be repeated (“Let
it Ride”)
• Execution slow, inefficient, and incomplete
(“Set it and forget it”)
We see many organizations struggling to execute the basics
of pricing.
The Pricing Process Observations From the Field

(Marketing 101)
Typically only done at the Common mismatches between
Select Pricing
aggregate level pricing objectives and
Objectives technique
Frequently undocumented
Inaccurate rules of thumb Total delivered cost or
Determine Costs are pervasive customer-specific costing is
rare
Informal and often Non-standardized ad-hoc tools
Assess Competitors inconsistent processes for for data collection and analysis
tracking competitors
Market intuition and Forecast accuracy rarely
Analyze Customers
experience used as proxy in tracked or updated
and Demand many organizations Lack of proper segmentation
Little to no focus on the Customer value and
Select Price “effective” price willingness-to-pay are rarely
considered
Despite long-standing challenges, a number of leading
companies are using a combination of strategy, process,
and technology changes to improve pricing effectiveness.
1 Unclear and historically grown Pricing 2 Market Observations often “too little,
Strategy: too late”
Aggressive competitive
Pricing strategies are & customer intelligence
being overhauled gathering/analysis
3 “Gut-feel” driven Determination of Target 4 Limited or inappropriate Price Logic &

Prices & Price Performance Analysis Manual Price Setting :
New pricing analytic New decision support and

applications available price management apps
5 Poor Price Compliance & little 6

Slow Price Updating & poor
Negotiation Support Supporting IT Tools:
Integrated price
Renewed focus on administration and
governance and controls execution systems
Source: Accenture, client experience

The payoff for getting the pricing function right is considerable.
Pricing and Revenue Optimization SVA impact…

The benefits of • 1-8% incremental annual revenue
strategic pricing creation with no additional resources
extend well beyond Revenue
Enhancement
• Pricing cycle time reductions of up to
the purely revenue 90%
side • 5-15% reduction in promotions
spending on same level of sales
Shareholder Asset • Improved customer satisfaction!
Value Productivity • Improved asset utilization
Added* • 15-30% reduction in transportation
costs
• 12-33% reduction in inventory
Cost • 10-25% improvement in order fill rate
Containment
• 15-25% improvement in forecast
accuracy
*These metrics represent the mid-range of actual client benefits achieved across industries
Value from any pricing change initiative is obtained by
addressing one or both of the pricing “profit killers”.
Profit Killers Root Cause Result

0Over-pricing Lost volume
0Under-pricing Lost margin
1. Sub-optimal price
2. Price Erosion
0Excessive Lost margin

Discounting
0Contract Non-
Compliance Lost margin
Profit Killer #1 – Sub-optimal Price
A detailed analysis of price response and unit variable cost provides an

understanding of optimal price and the impact of a price change on profit.
Required Increase
In Sales Volume (%) 100
Sales Volume
(in million tonnes)
80
Profit (Index)
1.1
60
80
Profit
110
1.0 40
100
0.9 20% price decrease 20 Variable Unit
Sales Volume
Cost in % of
10% price decrease 20 40 60 80
Current Price
90
0.8 10% price increase
<<lost margin>> <<lost volume>> 20% price increase
- 20
Price ($)
1000 1100 1200 1300 1400
- 40
Optimal Price
Acceptable Decrease
In Sales Volume (%)
Derived from Robert J. Dolan, Herman Simon, Power Pricing
Profit Killer #2 - “Hidden” Price Erosion
Traditional
focus of
pricing, deal
negotiation
and analysis
Significant sources
of “hidden” price
leakage destroy
operating margins
Aftermarket pricing is perhaps the most complex and
demanding price management environment.
Role
Roleof
of“Price”
“Price”
B2B B2C B2B2C
9Contract/Deal 9Shelf Pricing 9Channel pricing

Pricing 9Promotions 9Price Lists
9Price Lists 9Mark Downs 9Promotions
9Discount Envelopes 9Discount Envelopes
9Contract/Deal Pricing
$ $ $ $
The challenge of precision pricing is complicated by the vast
mix of materials, information, and service labor required for
parts and accessories.
Materials + Information + Service

labor
Replacement parts Maintenance agreements Installation
Part remanufacturing Plant maintenance Technical support
Service kits Facility management Customer service
Parts management Warranty sales, contracts and Depot/dealer service
Accessories administration/management Field/on-site service
Product enhancements Configuration management Maintenance, repair and

Publication services overhaul
Product maintenance and repair
Strategic pricing capabilities…
Confusing? Messy? Hard to Build?
The path to strategic pricing has been successfully navigated
by high performing businesses in a number of industries.
Maturity of Strategic Pricing in Leading Industries Over the Past 20 Years

Travel &
Many industries are now joining the Freight Hospitality
pack of early pricing adopters Chemicals
• 1st came the airline and hotel Retail
industries
• Retailers have moved to broad
adoption in the last 4 yrs
Oil and Gas

Aftermarket • Cyclical industries (90% of
Financial Parts/Service Chemicals, Oil & Gas) have
Pharma Services embraced pricing as their #1
priority since 2005
• Industrial Manufacturing, High
tech, Aftermarket Parts/Service,
Pharmaceuticals, and Financial
Services are just starting to tune
in to pricing opportunities
Accenture has developed a comprehensive, integrated
approach to help our clients effectively manage all phases of
the pricing lifecycle.
Accenture’s Integrated Pricing Model
Strategy
Supply Chain/
CRM Plan
Yield Mgmt
Pricing
Competitive Cost To Serve &
Assess Lifecycle Profitability Mgmt
Intelligence
Optimize
Channel/ Sales Promotion

Mgmt Execute Mgmt
Long product lifecycles in aftermarket businesses
accentuate the need for a rigorous pricing approach.
Product cost, supply, and demand characteristics will change considerably throughout a
part’s product lifecycle.
Strategy
Pricing
Plan
REGULAR PROMOTION EXIT

Assess
PRICE PRICE PRICE

Lifecycle
Optimize
Execute
• Customer influences • Assortment influences

Strategy • Marketplace influences • Company influences
• Category/merchandise portfolio tactics • Proactive and reactive tactics

Planning • Price presentation to customer • Business rules/priorities
• Price zones/geographies • Financial objectives/targets
• Initial price • Traffic/sales- • “In-season”

Optimization • “Base”/normal driving promotions markdowns
price • Profit-generating • “End-of-season”
promotions markdowns
• Process • Technology • Organization

Execution efficiency enablement alignment
• Financial results • Strategy/plan refinement

Assessment • Consumer price perception • Execution effectiveness
We believe there are four essential ingredients that are
required to build and sustain world-class pricing capabilities.
1. A Dedicated Pricing Organization… Innovative Technology… 2.

• Reduces workload and
• Sets the strategy
informs decisions
and vision
• Sustains new
• Manages change Strategy capabilities over time
• Measure’s Plan • Manages
performance
complexity
• Owns results
• Centralizes
Pricing information
Assess Lifecycle
• Share • Reduces errors and
accountability Optimize ensures quality
• Inform and align • Drives efficiency
the strategy
Execute • Makes responsibilities
• Execute key pricing explicit
elements • Drives pricing functions out
• Ensure compliance to the extended enterprise
3. Cross Functional Stakeholders… Integrated Process Architecture… 4.
Copyright © 2006 Accenture All Rights Reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture. - 1616
-
The Role of Pricing Technology
Pricing technology is essential for creating sustainable value, however

technology advances must be supported with complementary improvements in
strategy, process, organization, and analytics.
Common Errors
Relative Value of Pricing Initiatives Over Time 0Pricing seen as a mechanical
initiative – failing to deliver
ILLUSTRATIVE the value shown in “studies
and diagnostics”
0No guiding pricing strategy
to set context for technology,
V or operating principals to
A guide actions
PRICING MANAGEMENT &
L 0Failure to institutionalize
OPTIMIZATION TECHNOLOGY - Submerging pricing in ERP
U
E - Process change is ad-hoc
- Limited change mgmt
PRICIN
G ANAL
PRICING YTICS 0Insufficient adherence to
OR GA N
IZATION process/performance metrics
PRICING PR
OCESS
0Common misperception that
PRICING STRATEGY
pricing is “easy” once you
TIME have the tools
Common indicators of an opportunity to improve your
organization’s profitability through precision pricing.
Common Indicators of Ineffective Pricing

(Across Most Industries)
Complex business Sales operations are loosely

environment controlled
• Large number of SKUs • Ad-hoc discounting practices
• Bundled products and solutions • Significant “giveaways”—
• Low-cost competition rebates, terms, delivery, etc.
• High sales velocity Pricing • Each deal is treated uniquely
• Distributed sales channels Opportunity • Broken approval and control
• Rapidly fluctuating prices processes
• Little or no tracking of price
performance
Company’s core infrastructure to inform and execute pricing is weak

• Pricing data resides in no single place across the organization (spreadsheets)
• Manual price quoting and execution
• Product costing is done at high-level instead of SKU- or part-level
• Costs to service different products, channels, and segments are not understood
Case Example - Retail
Several factors pointed to a Pricing Initial Rollout – Drive Insight & ROI
complete transformation
Build
approach” Modeling
Regular, Promotion Or Markdown
Phase One Launch & Evaluation
Platform
Scale
Scale
• No clearly defined pricing strategy; Capability,
Capability,
followed the competitions’ lead Pricing
Pricing Measure
Measure
Diagnostic
Diagnostic Strategy Pricing Support & Pricing Impact
Impact &
&
• Large amount of item prices Model Capability Capability Refine
Design & Refine
Org Infrastructure Integration
determined by the vendors Gap
IT Analysis
• Price decisions were being driven out
of 5 different areas of the business
with no visibility across stakeholders Pricing Capability Design
Results
• One retail price set across the nation
(700 stores) with no distinction for • 379% ROI against the project/software costs in first 12 months
market/zone makeup
• Drove $104Mn in incremental gross margin dollars without unit decline
• New alternate channels entering
competitive marketplace and eroding • Developed a clear pricing strategy aimed at ‘best & opportunity”
market share customer segments and aligned across stakeholder groups
• No central organization with analytical • Designed a dedicated pricing organization to centrally manage and
skills to support/recommend price executive price management and setting
setting
• Limited view into financial impact of
price decisions
Case Example – Semiconductor Manufacturer
Pricing Capability Building Roadmap

Several factors pointed to need
Diagnosis, Deal
for a “Pricing Capability” Approach
Analytics
Design
Manager
Workflow
Implement
Optimizatio
Development & Design & n
& Release ation
• High volume of relatively standard SW Selection Release
part; many SKUs with minor variations 3 months 5 Months 6 Months TBD TBD
• Prices determined by market Semiconductor Client: Results Achieved

$60
• Sales force focused on deals. Sales (Eight Months since initial rollout, $Million)
force compensated on volume, not $50 $48
profitability
$40
• Ramp up of volume and drop in prices
at quarter-end $30
• Pricing guidance given by multiple $20

marketing managers
$10
($6)
• Wide variation in customers from very
$0
large to very small
Investment Margin Gain
• No view of customer or deal -$10
profitability • Sales force awareness of pricing levers
• Understanding of customer, channel and product profitability
• Creation of pricing group and establishment of pricing process
• Clear, consistent rules for pricing and discounting
• Behavior-based segmentation
• Monitoring of key performance indicators
Despite considerable obstacles, new best practices are
beginning to emerge in aftermarket pricing.
Traditional Pricing Practices Emerging Pricing Best Practices

• Decisions based on rules of • Decisions based on structured
thumb, institutional inertia, and research, analysis, and
market “intuition” measurement
• Formal pricing is a stand alone • Pricing is integrated across
function, yet multiple departments departments including finance,
impact the real price sales, supply chain, and service
• Pricing is managed through ad- • Sophisticated tools are available
hoc spreadsheets to optimize and manage prices
• Manual, labor intensive pricing • Companies increasingly discuss
processes often viewed as an strategic pricing capabilities with
“administrative” task investors
• Static “set it and forget it” pricing • Timely, market-responsive pricing
throughout the product lifecycle
Questions?
For more information:
Russ Beverly
e-mail: russell.w.beverly@accenture.com
cell phone: (917) 975-1961

Pricing Trends Accenture

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Trends in Strategic Pricing

Pricing has become a top priority for businesses today

The Pricing Process Observations From the Field

3 “Gut-feel” driven Determination of Target 4 Limited or inappropriate Price Logic &

New pricing analytic New decision support and

5 Poor Price Compliance & little 6

Source: Accenture, client experience

Pricing and Revenue Optimization SVA impact…

Profit Killers Root Cause Result

0Excessive Lost margin

A detailed analysis of price response and unit variable cost provides an

Derived from Robert J. Dolan, Herman Simon, Power Pricing

B2B B2C B2B2C

9Contract/Deal 9Shelf Pricing 9Channel pricing

Materials + Information + Service

 Replacement parts  Maintenance agreements  Installation

 Part remanufacturing  Plant maintenance  Technical support

 Service kits  Facility management  Customer service

 Parts management  Warranty sales, contracts and  Depot/dealer service

 Accessories administration/management  Field/on-site service

 Product enhancements  Configuration management  Maintenance, repair and

Confusing? Messy? Hard to Build?

Maturity of Strategic Pricing in Leading Industries Over the Past 20 Years

Oil and Gas

Accenture’s Integrated Pricing Model

Channel/ Sales Promotion

REGULAR PROMOTION EXIT

PRICE PRICE PRICE

• Customer influences • Assortment influences

• Category/merchandise portfolio tactics • Proactive and reactive tactics

• Initial price • Traffic/sales- • “In-season”

• Process • Technology • Organization

• Financial results • Strategy/plan refinement

1. A Dedicated Pricing Organization… Innovative Technology… 2.

Pricing technology is essential for creating sustainable value, however

Common Indicators of Ineffective Pricing

Complex business Sales operations are loosely

Company’s core infrastructure to inform and execute pricing is weak

Pricing Capability Building Roadmap

• Prices determined by market Semiconductor Client: Results Achieved

• Pricing guidance given by multiple $20

Traditional Pricing Practices Emerging Pricing Best Practices

For more information:

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Replacement parts Maintenance agreements Installation

Part remanufacturing Plant maintenance Technical support

Service kits Facility management Customer service

Parts management Warranty sales, contracts and Depot/dealer service

Accessories administration/management Field/on-site service

Product enhancements Configuration management Maintenance, repair and