Transition Strategy to Implement Value Based Pricing in Your Organization

Within a Sales Business Units of a manufacturing multinational responsible for selling, installing and servicing products, the positive effects of a successful cost-cutting program across the organization were offset by steady price decrease due to the sales manager habits to price service level agreements (SLA) and spare parts by cost plus pricing method, thus redistributing costs optimization gains directly to customers.
To achieve turnaround, top management agreed to focus on pricing to transform the sales organization from reactive cost-plus into proactive value based pricing and selling. The resulting pricing project was designed based on 3 pillars: research, findings analysis, and implementation.

Research Method
To harvest, cross-check and consolidate research coming from company, customer and competition, the “3 Cs’ Triangulation Method”, Exhibit 1, was implemented in this project. This approach allows data comparison, assessment and validation from different sources (Customers, Competitors and Company), improves the probability of a flawless buy-in among internal stakeholders, and proactively decreases the resistance of sales people to change their selling habits. Coupled with a communication strategy designed to raise internal awareness about the project, its streams and goals, the method tends also to provide more reliable, less subject to bias and more close-to-reality data.

With the goal to acquire employees’ perception of competitors and customers and their suggestions about optimizations and improvements areas, focus group, one to one interviews and surveys were implemented. Customers’ opinion was assessed in different ways to grasp their perception about company and competitors’ SLAs offered and the trade-off between set of benefits received and the sacrificed price. In the voice of the customer (VOC) survey, respondents were asked to rank a list of preferred attributes, including price, and score them against competitors. Its results were also used as inputs for the value map tool to deliver perceptual value maps.

To assess customers’ willingness to pay, four additional questions were asked in the VOC to know at what price level they would have perceived the SLA too cheap, cheap, expensive and too expensive.

To assess prices and services offered from competitors and to compare them with data gathered from company and customer investigation, a market research was commissioned to an external service provider. Competitive data allowed, in addition, a comparison with company products and services attributes and price to position them at wished market level, can be used by sales during customer negotiation, and support the design of a competitive attributes’ matrix.

Value Estimation
Three years internal cost data provided a clear picture of customers’ average cost per year and service attributes which were grouped under 5 main areas as shown in Exhibit 2. The differential between this total “pay-as-you-go” and the price set for the premium SLA would have been used in the implementation phase as a part of value selling trainings to propose customers a saving opportunity.

Price Sensitivity
The Van Westendorp direct questioning method was implemented to assess the ‘real’ willingness-to-pay, which is close to what respondents consider to be an expensive price, and provided results used to calculate a ‘normal’ and a ‘penetration’ price. The outcome indicated an average willingness to pay 20% higher than actual price levels.

The Sales’ Habit
Historically, new products were sold together SLAs from equipment sales teams, priced with any business rationale but rather according personal relations and customers’ requests. KPIs of equipment sales people were set at volume and revenue level only for products and non-existing for SLAs. It favored the development of the “service discounting habit” by which equipment sales used to heavily decrease SLAs price as a mean to discount products, keeping in this way top line artificially high and securing end of year bonus. For the installed based, Customer Relationship Managers (CRM), contacted by customer toward the expiration of the SLA, or after it was expired, mainly granted the same old conditions.

The new pricing strategy was based on the economic, technical and emotional value delivered to customers in comparison to competitors, and included different strategies designed to better satisfy customers’ needs in different segments. Customers were allocated into different groups also on the basis of the results provided by value maps and by assessing value drivers, satisfiers, purchase behaviors and elasticity.

Pricing Organization
Pricing was organized following a “center-driven” structure in which know-how was centralized and daily operations delegated to regional sales –Exhibit 3-. Pricing authority within established corridors and accountability for tactical pricing was decentralized to sales teams. In case further discount was requested, competitive information and, or, a meaningful business motivation needed to be included allowing the center to grow deep knowledge about regions, their customers and competitors.

Service Sales Transformation
To shift the organization mindset from reactive customer care cost plus to proactive selling value, a new service sales organization was deployed with new job specifications, accountabilities and targets. The new team required a new set of skills to implement consultative selling and sell the value of a product/service as this involves a different approach and skillset then selling by discounting. Among the others, main differences can highlighted in at least in 3 aspects: time, as the sales process has different and higher number of steps; knowledge, as customers need to be educated, attributes’ economic, technical and emotional value presented; language, as sales need to be able to explain customers how service’s attributes will help them to save costs, improve efficiency and reduce budget to mention only a few.
All CRMs were interviewed to evaluate motivation, willingness and attitude to change, their CVs and abilities assessed and all openings filled-in accordingly.

Change Management
To preserve the new organization’s durability a Change Management program was launched based on the Prosci © method. It comprehended 3 phases: preparing for change -where change management strategy was defined, change team was prepared and sponsored on a project management basis-, managing the change –where the change plan was developed and actions implemented-, and reinforcing the change –where feedback was collected and analyzed, resistance was managed and corrective actions implemented.

To allow and sustain performance and train junior, senior and top management, a Sales and Pricing Master Class tour sponsored and supported by top management was launched. Its agenda covered three main areas: service contracts, applied Value Based Pricing, and After Market Pricing. Each of the master class days was organized in 3 main parts: theory, workshop and role-plays. The latter resulted pivotal to apply theory and methods in practice as attendees played sales and customers’ role while simulating the sales process. All sessions were recorded and files available in a database including pictures of material created in flip charts.

After one year from implementation, the new department delivered outstanding results. Beyond achieving turnaround, revenues increased 14%, service contracts renewals registered a +234%, while service contracts upgrades total value accounted 60% of annual revenues against 0% of the previous year. Employees’ satisfaction, motivation and loyalty increased 16% up to 80%. In overall, the department was set as a benchmark among other SBUs.

Author: Fabio Cicalini

Mr. Cicalini developed his pricing expertise over the last 8 years in Automotive, Semiconductor, Healthcare, Consulting and Energy verticals for product, service and spare parts at Infineon AG, GE Healthcare IT, Pricing2B. In the last 3 years he led Vestas’ organizational transformation
from cost-plus to market and value based pricing. His specializations includes strategic, commercial and operational pricing, market research, value based pricing, processes optimization, change, project and communication management, organizational transformation and training. Mr. Cicalini hold a CPP from the Professional Pricing Society (NOTE: complete it September 2013), an MBA from Berlin Management Institute in Germany and a BA (Hons) from Lancaster University in the U.K..