The process of creating a price that reflects a company’s soft value is truly a journey. Reaching directly into a world where your products and services serve your customers, the value/price journey is an intense process in which companies can learn how to keep their customers loyal and the company on the right track.
Writing for Copperberg, producers of a series of service and manufacturing industry conferences across Europe, Iva Danilovic brings us a story about soft values with spares and wear parts pricing management from a webinar by Outotec’s Commercial Product Manager, Martin Brändström, organized by Copperberg Research.
Want to know more? You can watch the full webinar on Copperberg’s YouTube channel @ https://youtu.be/egQsqZy8ENE
The webinar was centred around topics such as differentiating a company with soft value drivers, how to communicate value with the sales team, and the importance of engaging market areas before implementing a price strategy.
In order to set the best price of spare parts in each of the market areas, Mr Brändström works together with the frontline sales team and communicates the product values to them.
In a company of 4200 employees that brings together experts of 60 different nationalities, Mr Brändström is accountable for automation and flotation product line of spare parts. He is in charge of the ownership to develop product strategy, which demands a thorough knowledge of segmentation and pricing mechanism in this niche market.
In order to set the best price of spare parts in each of the market areas, Mr Brändström works together with the frontline sales team and communicates the product values to them. To explain the joint efforts of the two departments in the value pricing process, he offers an example from the process of building a pricing strategy for Outotec’s rubber spare parts, identifying its most important soft values.
Developing the soft-value pricing mechanism
“It is very difficult to put a value-based price on these sort of product”, says Brändström. “There are many competitors. It is a fierce competition, the market is extremely cost-price driven, and the price of the elements is based on the weight of the element and the price of raw materials,” An additional problem is that the design of these sort of elements hasn’t changed much during the last 20 years. So, how does a company calculate the value-based price for such products?
The key to solving the problem lies in better understanding clients’ challenges: “We need to understand what challenges customers face when they need to change the spare parts elements (…) This can involve hard work in dangerous and confined environments. It is labour-intensive manual work. They are exposing their personnel to high hazard risks, including cutting, falling, pinching and electrical hazards”.
To better understand the clients’ situations we have to look at their needs and practices. “In this case, spare parts need to be changed from 3 to 12 months’ time. The customers have thousands of contractors coming to perform shutdowns and to work on other repairing processes”.
However, the problem of differentiating a company from other competitors may become an advantage. By understanding the soft value of our products and services we are able to be a step ahead of the competition and create a good value-based price. For Outotec, the process of managing and removing hazards led to the cognition of a soft value that has since become central in companies’ pricing process.
Having in mind that some products are being used in dangerous environments, product owners have to know exactly how unsafe usage of the product is, and how to prevent possible injury. That’s why safety is the most important soft value for Outotec. “We all take safety for granted, but there is more space to increase and improve safety,” Brändström explains, “A seller that can deal better with a safety hazard has the highest chance of gaining the job.”.
Outotec’s Pricing Initiative
After relying on an ERP system, and tools such as Excel, email and phone calls, Outotec realised its approach on the pricing strategy was not systematic enough. Therefore, in 2013 Outotec started building a pricing framework that would improve the process of setting prices.
Later, from 2014 to 2016, Outotec sought to improve the framework and make value-based pricing operational within the organization, so they had to incorporate value-driven pricing logistics in the framework and start with process harmonization.
From 2017 Outotec continued with the improvement of processes and practices. Now, out of 47.500 items available on Outotec’s price list, 45% of prices are market-driven (based on the position of Outotec vs other commercial suppliers) and 25% value based.
“Harmonization of prices and the data that ERP system provided showed us that things needed to be improved in order to adjust to the global target price. (…) There is a lot of money to be made, and, on the other hand, a lot of money is left on the table. Product managers don’t usually spend a lot of time on harmonizing the prices, and I think we should do that more, because it is by far worth of effort. You will get on top of your figures and prices, and it is a good way to adjust local market prices,” claims Brändström.
Explaining the Price and Communicating the Values
However, the value pricing journey is a complicated process. Outotec faced difficulties when the price of their PU industrial goods increased by 54% in just a couple of years. The customers were confused and demanded an explanation for such an increase. The Outotec frontline sales team needed to convince the clients to keep purchasing the spare parts from them, and not go to other competitors.
Clients want to know exactly what contributed to the price, and whether it is something worth their money.
“Have right responses prepared. Keep the customer loyal by knowing your facts,” he suggests. If there is an increase in price, identify where the price increase comes from, use the company’s ERP system that can give you the data. Share that knowledge with the Sales Team to increase the confidence of sellers.
Outotec decided to concentrate on specific data that can help clients to understand the reasons for an increased price within a few minutes. The sales team have become equipped with a few simple – but very concrete – answers such as: What is included in the price calculation? How the retail price is calculated in various local markets?
Factors affecting the price
This is also a great opportunity for the producers of premium goods and services to position their products on the market. Outotec underlined the safety as a value and added their industry experience and higher reliability and availability of their equipment among other benefits that help them differentiate from competitors.
Additionally, it was a Brändström’s role, as a commercial product manager, to work closely with frontline sales representatives to come across different scenarios that could contribute to even better communication of facts and values to buyers.
When talking to customers about their challenges, companies are able to hear some information that could allow them to be one step ahead of others in the market. On the other hand, research on how a product is being used deepens the understanding as to what can be improved in the production process.
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