Value-based pricing: Still worth the trouble?

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In the face of rising commodity prices, it’s tempting to make the break from value-based pricing in favor of a simpler approach. But is that really the most effective response?

There’s no way around it: the prices of commodities are rising, seemingly with no end in sight. The result is that many companies are feeling the pinch when it comes to pricing. Raising prices may stir up a backlash that can leave the business hobbled. But standing by and hoping for a desired outcome while prices continue to rise can chip away at margins until nothing’s left. Are indexing, surcharges and fees an effective response to the rising cost of commodities?

Here’s the debate:

Value pricing is too complex for us to deal with now. Just tie it to an index and let’s move on.
Even if we could master a value approach to pricing, it would take more time than we have. There’s also value in clarity, which is what indexes, surcharges and fees can deliver.Indexing is just going to move the complexity somewhere else – like sales.
Indexing is easy enough on paper, but think of the impact it may have on other parts of the business. Is your sales force ready to handle it?Indexes, surcharges and fees only put more focus on cost.
Focusing on cost comes at the expense of our ability to sell value. If we give that up now, it may be gone forever.We already sell on cost. What does value have to do with anything?
Hello? Cost is already the subtext for every sales conversation we have. Value pricing doesn’t apply to us.Switching to surcharges and indexes is only a short-term strategy.
Plus, it can hinder your ability to grow, even as it introduces new risks (such as price volatility). That’s not worth it, no matter what the short-term benefits are.If we don’t figure this out in the short term, the long term won’t matter.
We need to solve our pricing issues now – particularly rapid increases in commodity materials – so that we can move on to other issues.Indexes and surcharges result in too much transparency.
Do we really want to give customers and competitors a clear window into how we price? We shouldn’t give up that control.Since when is transparency a bad thing?
Does linking prices to an index or adding surcharges and fees really leave us that exposed?We don’t have the brainpower to make value pricing work.
We can’t all be Olympic gold medalists. Let’s stick to what we’re good at.Nobody is great at this today – so value pricing can give us a leg up against our competitors.
That doesn’t mean we should just wave the white flag and move to indexing, surcharges and fees. Our competitors certainly aren’t. And when they get great at value pricing, they’ll eat our lunch.

Julie Meehan, Principal, Deloitte Consulting, LLP

First things first. This isn’t necessarily an either/or proposition. Indexes, surcharges and fees have their place – often right alongside value pricing strategies. There are probably some products in your portfolio where index-based pricing makes a lot of sense.

But…

I’ve seen companies take an overly enthusiastic leap to indexing, only to find that they’ve given up options along the way. Don’t get me wrong, the relative simplicity of indexing can be refreshing. But relying too heavily on indexing, surcharges and fees can result in a significant loss of control. Suddenly your customers are able to see the elements of your pricing strategy much more clearly – which means they’ll likely start maneuvering to take advantage of it quickly. And what happens when commodity prices slip? Customer expectations may shift just as quickly, possibly leaving you in a less desirable spot than before. There’s just some inherent risk that comes with the territory in indexing.

A key to leveraging value pricing is having a clear understanding of the differences between the cost and value components of your price. From there, you may be able to find some components of your price that you can tie to an index, or cover with surcharges and fees. But what’s left is a real competitive advantage for you – if you manage it correctly. Value pricing is still one of the most powerful ways for companies to keep their edge, even in the face of rising commodity prices. And despite many reports to the contrary, it’s not rocket science.

Don’t give up on value pricing when the going gets tough. Dig in.

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Overview: Strategy & Operations, Pricing and Profitability Management

As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

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Isn’t more analytics the answer to solve your pricing challenges?

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Analytics promises to deliver more data-based insights to pricing decision-makers. Is that all you need?

Pricing has always been perceived to be a numbers game. So it’s not surprising that, encouraged by new technologies, a lot of companies are pushing for advanced analytical tools to help take their pricing strategies to the next level. But, at the same time, some are wondering whether more analytics is really the answer to their problems. After all, they’re already swimming in numbers. In fact, they could probably rely on intuition alone to identify the obstacles in their way today. Right?

Here’s the debate:

We don’t need more analysis because data doesn’t tell the whole story.
Analytics may give us facts, but there are other circumstances that need to be factored in with pricing. It’s not all about numbers.Opinions are good. Evidence is better.
Analytics gives us the facts so we can make better pricing decisions. The data can validate a hunch and tell us where we need to go.If we need numbers to tell us what to do, we’re in trouble.
Hard conversations are part of business. If our pricing strategy needs to change, our people shouldn’t need a numbers security blanket to make it happen.Solid facts make the hard conversations easier.
We already know what needs to change. But without cold, hard numbers, getting our people to change their ways will be an uphill battle. Analytics is our secret weapon.Analytics software =  major headaches.
While resources to execute pricing analytics are more readily available than ever before, the process changes and people required can be immense. While the resulting analysis may be faster, it’s not really more sophisticated than what we do today.Pricing analytics tools are finally within reach.
Haven’t we been waiting for this?
Five years ago we were dreaming of the tools we have within reach today. Today, analytics software is faster and easier to install and many packages have out-of-the-box configurations. We should be using them.Let our competitors take on analytics.
We have better things to do.
If our competition is investing a whole lot of time and money into analytics, let them. There are plenty of more immediate, fundamental improvements we can make that will deliver even greater benefits.If we don’t put analytics to work in our pricing strategy, our competitors will.
We can’t afford for our competitors to get the jump on us when it comes to data and analytics.  Competitors across many industries are discovering the value of pricing analytics and are raising the bar for everyone.More analysis will leave us buried even more deeply in numbers.
We don’t have time for analysis paralysis. We already have plenty of data, numbers, and insights, and we’re not even doing enough with them today. Analytics would just add to the pile.Analytics is the best way to identify margin improvement opportunities.
We need to know exactly where margin leakage is occurring before we start fixing the business, and data analytics can tell us. From there, we can take decisive action.

Oliver Griebl, Senior Manager, Deloitte Consulting LLP
Manish Prabhu, Senior Manager, Deloitte Consulting LLP

Today we’re seeing an explosion in analytics technology packages that claim to solve nearly every business challenge under the sun, including pricing. Considering the data- and numbers-heavy nature of pricing, it’s not a stretch to think these packages may live up to the hype.

But we still run into plenty of pricing leaders who remain skeptical and don’t rely heavily on analytics to help improve their growth and profitability. Most feel that their primary challenge isn’t diagnosing or analyzing a pricing problem, but their organization’s ability to take the right action to address the problem. They have an instinctive feel for what needs to happen and no amount of new data analysis is likely to tell them what they don’t already know. In their view, “softer” aspects of the business – cultural issues in sales and marketing, for example – may pay bigger dividends than data-driven insights. At worst, many business leaders believe more analytics might get in the way of action.

Here’s what we tell clients who are on the fence. If you’re looking at it as nothing more than a technology investment, you probably won’t get the results you’re looking for. Pricing analytics works when it’s executed within the context of the entire pricing ecosystem – from corporate, competitive and product strategy to branding and beyond. Just as important, it depends on rock-solid fundamentals. Don’t go after conjoint-based segmentation if you haven’t first focused on making sure your data is clean and accurate.   

In the end, this isn’t about finding a better math equation. It’s about accessing and visualizing data in new ways that are directly connected to other parts of the pricing ecosystem. If that’s not something you can get behind, just make sure you’re taking good notes when your competitors put it to work.

Library: Deloitte Debates
Services: Consulting
Overview: Pricing and Profitability Management

As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

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Users Worry That Microsoft Will Follow Adobe To Subscription-Only Pricing

Many Microsoft Office users are concerned that Microsoft might ultimately follow Adobe's lead into subscription-only pricing, even though Microsoft has announced that it won't do so in the near future. Meanwhile, Adobe customers are already up in the arms that they will no longer be able to buy Photoshop and other Creative Suite (CS) products as packaged software.

After Adobe announced plans last week to abandon development of the packaged edition of CS, a Microsoft official went on record to say that Microsoft will continue to give Office users a choice between Office 365 and the boxed version of the office suite -- for some time, at least.

"Like Adobe, we think subscription software-as-a-service is the future," wrote Microsoft's Clint Patterson, in a blog post. "However, unlike Adobe, we think people's shift from packaged software to subscription services will take time. Within a decade, we think everyone will choose to subscribe because the benefits are undeniable. In the meantime, we are committed to offering a choice -- premier software sold as a package and powerful services sold as a subscription. "

The controversy started last week, when Adobe announced that Creative Suite (CS) and the high-end content creation applications included in the suite -- Photoshop, Dreamweaver, Premiere, InDesign, and others -- will no longer be available as packaged software past CS6. From now on, subscribing to Adobe's Creative Cloud (CC) service will be the only means of upgrading the software.

Photoshop CS6 is list priced at $699, and the Master Collection of the suite at $2,599. Subscriptions to CC run at $50 a month with a one-year commitment, or $75 month to month, although Adobe also throws in 20GB of cloud storage, plus all of its Edge services. Subscriptions to a single product are priced at $19.99 monthly each. Discounts are also available. Adobe is offering users of CS versions 3 to 5.5 a reduced rate of $30 per month for the first year. Current CS6 users are able to subscribe for $20 for the first year.

While Adobe's pricing has been very steep for subscriptions and packaged software alike, subscriptions to CC can be financially advantageous under certain circumstances. Some Adobe users actually prefer the subscription model.

"Personally, I'm slightly ok with the subscription thing. [It] means a lot of money overall but at least it's affordable. No way I could have ever bought a full suite outright, I've only once had that much money in my bank account," wrote a user named October, on the bit-tech.net forum.

Adobe Users: Subscription-Only Pricing Unfair

Yet Adobe's move has kicked off consternation among many customers that the lack of a packaged software option is unfair to consumers, students, small businesses, and anyone who either doesn't need to update often or who uses the software only once in a while.

"I'm hit by this. At home I still use Photoshop CS3 for a number of reasons. Not only is Photoshop expensive, but I haven't had a need to upgrade to a newer version. I'm one of the people who upgrades very infrequently, so in my case a perpetual subscription model would make Photoshop more costly in the long term. The next time I look for new tools, I may take a harder look at some of the cheaper alternatives," said supermonkey, in the same forum.

"The Adobe subscription model in this case would seem to be targeted towards 'frequent usage.' If a company wants to capture 'infrequent' users, it uses the 'by the minute' model. A charge of $50/month isn't going to attract much casual usage," wrote Paul in a Google Groups forum.

Microsoft released Office 2013 in late January, at the same time as the subscription-based Office 365 Home Premium and Office 365. Since then, more than 25 percent of consumers buying Office have chosen Office 365, according to Patterson. However, this also means that close to 75 percent are opting for Office 2013.

Microsoft User: 'Subscriptions Are a Hassle'

"I don't like subscriptions, because they're a hassle. I have about a dozen applications I use regularly. If I had to pay a subscription for each one of them, it would drive me crazy," acknowledged paulej, in responding to Patterson's blog post.

"I also don't like subscriptions because there are times when I just don't want to get new versions of the software. That might be due to the fact I don't want to continue using a particular product any longer or it might be due to the fact that my budget is a bit tight. When buying software, I can upgrade on my own schedule and I can manage my expenses."

Subscriptions to Office 365 can also be financially advantageous, under some circumstances. List priced at $139.99, Microsoft Office 2013, Home & Student Edition, includes Word, PowerPoint, and Excel. It runs on Windows 7 and Windows 8 only. Priced at $8.95 per month for up to five PCs or Macs, Office 365 Home Premium adds Outlook, Access, Publisher and Lync. It also comes with Office Web Apps, editions of these same programs with somewhat limited functionality. The Web Apps can be used from remote locations -- such as while a user is on the road -- without any need to download software.

Many Microsoft Office users, though, are still using earlier editions of the suite.

'NO WAY That I'm Joining the Pay Monthly Club'

"There's NO WAY that Office 365 paid for monthly (or even annually) is cheaper than Office 2007 -- which I got (and 2010 too) via a Use at Home type of program and the Office 2007 Home and Student editions were very cheap and allowed use on 3 computers," wrote Coke Robert, on the Windows 8 Forum.

"I have more than enough software (and hardware) to last me for YEARS yet -- assuming I live that long -- so there is NO WAY AT ALL that I'm going to join the 'Pay Monthly' Club."

Adobe hasn't yet announced a move to subscription-only pricing for other products in its lineup, such as the consumer-oriented Adobe Photoshop Elements & Adobe Premiere Elements.

A move like that, though, could spark defections to any of a number of competing photo editing and video editing software packages, including Corel PaintShop Pro and VideoStudio Pro.

Microsoft Office, on the other hand, faces few rivals on the packaged office suite side. However, beyond sticking with older versions of Office, consumers can opt instead for free online office suites such as Google Docs.

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Chevy's own contest points to C7 Corvette Stingray pricing

As much attention as the 2014 Chevrolet Corvette Stingray has attracted since its debut back in January, we still have no idea how much the car will cost. Thanks to Chevy's Race To Win Corvette contest, we finally have a pricing estimate of sorts for the hot new coupe.

In addition to winning a trip for two to France and tickets to the 24 Hours of Le Mans, the grand prize winner will also become the proud owner of a C7 Corvette, which has an "approximate retail value" of $71,860. While this would be quite a step up from the $49,600 base MSRP of the 2013 'Vette, keep in mind that this may also include options and taxes associated with the car – depending on where the car is sold, taxes alone could easily be in the $5,000 range. Or, it may just be some sort of estimate.

Regardless of how much the car costs, this sounds like an awesome contest. To enter, just head over to the Race to Win Corvette website.

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