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Pricing Right in a Price-Transparent World

Pricing Right in a Price-Transparent World. Mike Marn. Behavioral Pricing Conference. September 19, 2008 Drexel University. TODAY’S DISCUSSION. The proliferation of price transparency today. The challenges and opportunities presented by price transparency.

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Pricing Right in a Price-Transparent World

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  1. MW-ZXG849-20070605-109 Pricing Right in a Price-Transparent World Mike Marn Behavioral Pricing Conference September 19, 2008 Drexel University

  2. MW-ZXG849-20070605-109 TODAY’S DISCUSSION • The proliferation of price transparency today • The challenges and opportunities presented by price transparency • Imperatives for pricers in a price-transparent world

  3. Profit decrease of 9.0% • Decrease price by 1% MW-ZXG849-20070605-109 AVERAGE P&L STRUCTURE – S&P 500 Percent • 11.1 • 100.0 • Operating profit • Variable cost • Price • Fixed • cost • Source: 2006 S&P 500 Economics

  4. MW-ZXG849-20070605-109 COMPARISON OF PROFIT LEVERS Percent • Deteriorate by 1% • Operating profit decline • Price • Variable cost • Volume • Fixed cost • Source: 2006 S&P 500 Economics

  5. MW-ZXG849-20070605-109 THE PRICE SQUEEZE TODAY • Tougher, more sophis-ticated buyers • Customer and channel consoli-dation • Rise of discount resellers/ distribu-tors • Excess supplier industry capacity • World-wide sourcing • Open-book costing • Leaner and meaner compet-itors • Growing price/cost trans-parency PRICES

  6. MW-ZXG849-20070605-109 A FEW DEFINITIONS • Price Transparency – the ability of customers (and competitors) to see the price levels you are charging other customers • Cost Transparency – the ability of customers (and competitors) to see your total product costs (or costs of critical components) • Asymmetrical Price Transparency – price transparency that is biased toward lowest prices in a market

  7. MW-ZXG849-20070605-109 PRICE TRANSPARENCY HAS CLEARLY AFFECTED MULTIPLE CONSUMER MARKETS . . . • Airlines • Books/music • Consumer electronics • Hotels • Car retailing • Event tickets

  8. MW-ZXG849-20070605-109 . . . but price transparency has proliferated across B2B markets as well . . . • Drivers of B2B price transparency • Personnel mobility across companies • Easy, instantaneous information transfer between buyers • More shared purchasing across BUs and across geographies within individual companies • Vertical price-sharing information services (e.g., MD Buyline.com)

  9. June 1, 2007 • Federal Government Launches Price Transparency Initiative for Hospitals • and Health • Plans MW-ZXG849-20070605-109 . . . and price transparency has even been mandated in significant markets • Text • December 22, 2007 • Medicaid Reimbursement for Generic Drugs to be Based on Publicly Reported Manufacturer Prices

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  11. MW-ZXG849-20070605-109 TODAY’S DISCUSSION • The proliferation of price transparency today • The challenges and opportunities presented by price transparency • Imperatives for pricers in a price-transparent world

  12. MW-ZXG849-20070605-109 THE EFFECTS OF PRICE TRANSPARENCY ARE OFTEN TANGIBLE AND SIGNIFICANT • AUTO RETAIL EXAMPLE • Internet sourced* • Non-Internet Transaction price by buyer segment – Model X • Average Internet sourced • Price: $21,500 • Average Non-Internet sourced • Price: $22,300 • Percent of • transactions • Consumer price transparency • Narrowed the price band • Lowered the average price • Not all consumers exploit available price trans-parency • 17 • 18 • 19 • 20 • 21 • 22 • 23 • 24 • 25 • 26 • 27 • 28 • Normalized transaction price – $ Thousands * Internet sourced includes Internet purchases and Internet-informed purchases Source: JD Powers PIN

  13. 10 MW-ZXG849-20070605-109 MORNINGSTAR PROVIDES BOTH PRICE AND BENEFIT TRANSPARECY Context • Early 1980s: mutual fund industry experienced dramatic growth • 1997 – nearly 6,800 funds of different specializations • Currency funds • Geography sectors • Industry sectors • Information on these funds was not readily available • Inconvenient to access • Inconsistently formatted • Fund performance increasing difficult to measure • Required detailed knowledge of fund’s distribution and reinvestment policies Morningstar’s innovative product • Overall ratings of funds • Detailed analysis of the fund’s historical performance, expenses, style, and fees • Information on the actual holdings of the funds it covered • Commentaries covering topics poorly understood by the average investor • Star ratings system to "provide a quick, easy way to initially identify quality funds” • Visual summary of a mutual fund’s underlying investment style Source: Harvard Business Review; www.corporate.morningstar.com; Hoovers.com

  14. MW-ZXG849-20070605-109 THE TRANSPARENCY BY MORNINGSTAR CAUSE THE MUTUAL FUND INDUSTRY TO TAKE OFF • “There has been a huge power shift," says Don Phillips – President of Morningstar, Inc. – "from those who sell financial services to those who buy them" • Ratings became most widely used and quoted metrics of fund’s performance Morningstar’s mission – to offer products that help people make better investment decisions • Keys to success • Independence and objectivity • Accessibility • Simplicity of screening criteria used for evaluation by investors • A key factor in fund’s abilities to attract and retain assets was the Morningstar rating • 49% of leading financial advisors said investment-rating reports such as those from Morningstar have a positive influence on their clients. “Clients are influenced by what they hear, rather than by what they experience . . . " Source: Harvard Business Review; www.corporate.morningstar.com; Hoovers.com

  15. MW-ZXG849-20070605-109 ELEVATOR MANUFACTURER USED CREATIVE COMMUNICATION TO HELP OFFSET ASYMMETRICAL PRICE TRANSPARENCY • Context • Elevators custom engineered with standard components • No 2 customers/ installations identical • 3-5 manufacturers bidding on every new installation • No clear industry level price benchmark • No vehicle for manufacturers to communicate price direction to market • Poor industry performance • Impact • Industry pricing conduct enhanced through price transparency • Competition still robust, but at higher base price levels • Action • 1 player created price transparency by publishing list prices for 3 standard elevators • Pricing intent communicated by adjusting prices in the list

  16. BUT . . .Competitor X is only emptying its pipeline of obsolete package sizes – NOT repositioning product • Competitor X has cut price and strategically repositioned its product. We need to CUT our prices! MW-ZXG849-20070605-109 TODAY’S PRICE TRANSPARENCY MUST BE ACCOMPANIED BY INTENT TRANSPARENCY WHEN “MIS-READABLE” PRICE CUTS ARE MADE

  17. . . . resulting in cannibalization of leading product and a downward shift in price across markets Perceived price Comp A Comp B Comp A Comp C Comp B Comp C Perceived benefits MW-ZXG849-20070605-109 TODAY’S PRICE TRANSPARENCY MAKES MOVING DOWN-MARKET MORE CHALLENGING THAN EVER Market leader introduces low-end product but price transparency occurs before benefit transparency . . . Perceived price Comp A Comp B Comp A new (perceived) Comp C Comp A new (intended) Perceived benefits

  18. MW-ZXG849-20070605-109 INTERMEDIARIES CAN HELP DELIVER THE RELATIVE BENEFIT/VALUE MESSAGE . . . Easy comparison shopping Proprietary quality ratings • Both price and benefits ratings communicated for easy comparison shopping Best available price displayed for easy comparison Special negotiated deals with suppliers

  19. MW-ZXG849-20070605-109 TODAY’S DISCUSSION • The proliferation of price transparency today • The challenges and opportunities presented by price transparency • Imperatives for pricers in a price-transparent world

  20. Most prices (particularly lowest ones) will be visible to customers and competitors • Execute pricing with extreme discipline • Enforce rules for customers who only get standard pricing • Aggressively manage pocket price/pocket margin scatters • Resist “floor-defining” quotes Asymmetrical transparency biases market level price perception downward • Create alternative price communication vehicles to offset asymmetrical transparency Price transparency tends to heighten price sensitivity/decrease benefit sensitivity • Redouble effort to create and communicate benefit positions more deliberately, both when • Trying to maintain a premium price • Going down-market (i.e., create benefit transparency) Competitors assume that their price initiatives are highly visible (i.e., lack of response will be perceived as intentional) • Read market and competitive price levels more carefully and more completely MW-ZXG849-20070605-109 PRICER IMPERATIVES IN A PRICE-TRANSPARENT WORLD • Price transparency effect • Pricer imperative

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