Improving the Value Proposition for New Products
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The document outlines a presentation by Dick Braun, corporate vice president of strategic pricing at Parker Hannifin, discussing strategic pricing initiatives that have contributed to the company's earnings growth. It details the company's revenue, product assortment, and strategic pricing processes including metrics, market price analysis, and innovation strategies aimed at enhancing the value proposition for new products. The content serves as a guide for implementing effective pricing strategies in a competitive market.
Improving the Value Proposition for New Products
- 1. Improving the Value Proposition for New Products with Dick Braun, Parker Hannifin Monthly Webinar Series - October 2011 Copyright © 2011 by LeveragePoint Innovations Inc. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means — electronic, mechanical, photocopying, recording, or otherwise — without the permission of LeveragePoint Innovations Inc. This document provides an outline of a presentation and is incomplete without the accompanying oral commentary and discussion. COMPANY CONFIDENTIAL
- 2. Today’s Presenter Dick Braun is Corporate Vice President of Strategic Pricing at Parker Hannifin Corporation. Dick's work was detailed in the Wall Street Journal feature article, "Seeing Perfect Prices, CEO Tears Up the Rules." Previously, he had a 24-year career at GE. As leader of Parker Hannifin's pricing program, he significantly contributed to Parker's earnings growth over the past 7 years. 2
- 3. Parker Strategic Pricing Webinar Dick Braun V.P. Finance Corporate Strategic Pricing
- 4. Key Facts about Parker: FY2011 • $12.4 Billion in Revenue • 839,000 Products Sold • 471,000 Customers • 55,000 Employees • 13,000 Distribution/MRO Outlets Worldwide • 1,100 Markets • 132 Divisions • 46 Countries 4
- 5. Broad Technology Platforms Aerospace Refrigeration Electromechanical Filtration Fluid Handling Hydraulics Pneumatics Process Control Sealing & Shielding 5
- 6. Strong Global Presence More than Half of Industrial Sales now International FY11 Sales: $12 Billion NA Industrial 28,000 Employees 1,600 15,000 Employees 7,000 Employees 8% 187 Plants Employees 91 Plants INTL Industrial Plants 33 5 Plants 18% 36% Aerospace 38% Climate Industrial Controls 6
- 7. Significant Product Mix >800,000 Products Sold 7
- 8. Diverse Markets Served OEM and Distribution
- 9. Parker Strategic Pricing Introduction Strategic Pricing = Key Center-Led WinStrategy Initiative Vision The #1 Motion & Control Company #1 Premier Financial Profitable Goals Customer Service Performance Growth S Delivery of Quality Products Suppliers STRATEGIC Internal on Time PROCUREMENT Acquisitions Globalization T R A Operation LEAN Innovative Products T Value Added Services E G Customers STRATEGIC Systems Solutions I PRICING E Best Systems-PHconnect S European Initiatives Strong Distribution Empowered Employees 9
- 10. Parker Strategic Pricing Value Streams 3 Key Value Streams With Distinct Strategies, Processes & Objectives List Prices New Quotations Contract Renewals ~500,000 Quotes ~5,000,000 Prices ~50,000 Contracts $5.6B Value $5B Sales $5B Sales $2B Sales 10
- 11. Parker Strategic Pricing Metrics Pricing Team Improvement Board At Every Division Sell Prices Quotes Renewals Win/Loss Hit Rate Sell Price Index Price Adjustments New Quotes Requotes PRICE ADJUSTMENTS NEW QUOT AT IONS (CURRENT M ONTH) REQUOTES (CURRENT MONTH) ANNUALIZED HIT RATE BAD FACT OR/LOW MARGIN (CURRENT MONTH) $160 120 $3.00 50 $35 $2.75 45 $3,500 14% $140 $30 $600 35% 100 $2.50 40 $120 $25 Predetermined Time Lag = 3 months $3,000 12% $2.25 30% TH U N S 35 $500 O SA D $2.00 80 $100 $20 Tosn s hua d $2,500 10% 30 25% THOUSANDS $1.75 Hus or $400 COUNT $15 $1.50 25 $80 60 usands 20% Thousands $2,000 8% $1.25 $10 20 $60 $300 % Tho $1.00 40 %R V N E $1,500 6% 15 $5 15% EE U $0.75 $40 10 $200 $0 $0.50 20 10% $1,000 4% $20 JULY AUG SEPT OCT NOV DEC JAN FEB MAR APR MAY JUNE 5 $0.25 Annualiz ed Price Change on Requotes Planned Impac t $100 5% $500 2% $0.00 0 $0 0 JULY AUG SEPT OCT NOV DEC JAN FEB MAR A PR MAY JUNE JULY AUG SEPT OCT NOV DEC JAN FEB MAR APR MAY JUNE JULY AUG SEPT OCT NOV DEC JAN FEB MAR APR MAY $0 0% $ of New Opport unit y Quot ed P75 P95 P75 PLA N P95 PLAN $0 0% COUNT OF REQUOTES 205 175 20 47 15 460 120 14 16 38 50 JULY AUG SEPT OCT NOV DEC JAN FEB MAR APR MAY JUNE # THAT INCREASED 145 130 3 30 10 300 92 11 14 21 20 JU LY AUG SEPT OCT NOV DEC JAN FEB MAR APR MAY JUNE COUNT OF PRICE RELATED ADJUSTMENTS IN MONTH VALUE OF ADJUSTMENTS FOR MONTH IN THOUSA NDS # THAT DECREASED 35 10 1 10 5 100 17 2 1 14 25 JULY AUG SEPT OCT NOV DEC JAN FEB MAR APR MAY JUNE $ IMPACT OF INCREASES $ 17 $ 19 $ 2 $ 5 $ 3 $ 45 $ 13 $ 17 $ 25 $ 6 $ 9 YTD NET SALES IN THOUSANDSAT MARGIN <10%, FACTOR >90 % OF SALES AT BAD FACTOR COUNT 75 38 62 47 55 39 79 82 89 65 72 61 % OF OPP T W ON YTD $ WON YTD $ LOST YTD $ PENDING $ IMPACT OF DECREASES $ 6 $ 6 $ 1 $ 3 $ 1 $ 16 $ 3 $ 13 $ 17 $ 3 $ 3 Large Customer Results Bad Factor Untouched Quotes % Follow Up Win Rate By … Top SPI Negative Customer Impacts YTD SELLING PRICE CHANGE (FISCAL YTD) %OF QUOTES TRACKED LOSS CODE REASONS BY $ UNTOUCHED QUOTES (CURRENT M ONTH) 90% Customer Numbe r 70 $120 $45 0.60% B47317 A63735 A29451 A14829 A05641 A63051 A61859 A63240 A60410 A65450 A65630 A59122 A61984 A60967 A63818 A37661 A60714 A65447 A86295 80% $140 $40 $0 60 $100 0.50% 70% $120 $35 -$5,00 0 50 60% $100 0.40% $30 $80 -$ 10,00 0 THOUSANDS Thousands % Change 40 -$ 15,00 0 $25 50% $80 0.30% $60 -$ 20,00 0 $20 $ Price Impact 30 40% $60 -$ 25,00 0 $15 0.20% 30% $40 20 -$ 30,00 0 $40 $10 0.10% 10 20% -$ 35,00 0 $20 $5 $20 -$ 40,00 0 10% $0 0.00% $0 - -$ 45,00 0 JULY AUG SEPT OCT NOV DEC JAN F EB MAR APR MAY JUNE $0 JULY AUG SEPT OCT NOV DEC JAN FEB MAR APR MAY JUNE 0% Application or Price Availability Relationship Prototype Quality Projec t Quote Speed -$ 50,00 0 SPI$ MATERIAL COST$ MONTH $ OF REQUOTE UNTOUCHED (LAST YEAR SALES) JULY AUG SEPT OCT NOV DEC JAN FEB MAR APR MAY JUNE Product Speed Cancelled % OF QUOTES TRACKED BY COUNT SPI% MATERAIL COST% MONTH COUNT OF REQUOTES UNTOUCHED % OF QUOTES TRACKED BY $ OPPTY Journey Assessment Large Wins/Losses Project Acquisition Cusromer Products $ Comp Reason ;lksadfjkl kskuvisdfj ;kdjf kk sfj dqkj 1233 dskk kdfj ask d dkfjdkjf Cusromer Products $ Comp Reason jskdfjk ksdj askdkk kkdj skk ;lksadfjkl kskuvisdfj ;kdjf kk sfj dqkj 1233 dskk kdfj ask d dkfjdkjf kdsjkf kdu sdkfjpai siusdfj dkkj fd sdkfj kd wkeuue 5434 dsisu jdfkdsjk jskdfjk ksdj askdkk kkdj skk kasdjf kdk dskjfdk dk dfkdf dk kdsjkf kdu sdkfjpai siusdfj dkkj fd sdkfj kd wkeuue 5434 dsisu jdfkdsjk kasdjf kdk dskjfdk dk qiuiu dkusdiu ksdfui iuisduf sduidf kdfi di iuioi dufidfu 9890 aiudiu isdfuu diid fid idusf dfkdf dk skduid i difdiu d difudi idfu qiuiu dkusdiu ksdfui iuisduf sduidf kdfi di iuioi dufidfu 9890 aiudiu isdfuu diid fid idusf sdiufdiu sidu idfuid diuf dfudiu diuidfu idifuioa iduidu 8089 diufidu skduid i difdiu d difudi idfu oidi difui idfuiu sdiufdiu sidu idfuid diuf dfudiu diuidfu idifuioa iduidu 8089 diufidu sdiufdi di idfu difuiduf diuud diufdi uidiu 3439 oidi difui idfuiu sdiufdi di idfu difuiduf diuud diufdi uidiu 3439 diufdi diuf d iidufiui sui kdsiekcsd. dskfui xci kdju 8908 sdu dkuckjkcj k idiuf kdu dfksdu difdi idufi kdfikuufkdu diufdi diuf d iidufiui sui kdsiekcsd. dskfui xci kdju 8908 sdku sdu dkuckjkcj k idiuf kdu dfksdu difdi idufi kdfikuufkdu dfkjdk dk djfkd d dkdk kdk kdjd 3448 sdku dfkjdk dk djfkd d dkdk kdk kdjd 3448 A3 A3 A3 REPORT - PROBLEM SOLVING A3 REPORT - PROBLEM SOLVING * Date: Date: Task List I. Theme "What are we proposing to do?" V. Target Condition Approval: V.P. G.M. GLM DLM Mgr. Orig. I. Theme "What are we proposing to do?" V. Target Condition Approval: V.P. G.M. GLM DLM Mgr. Orig. Diagram of proposed new process Diagram of proposed new process Customer Key Products $ When Actions Needed II. Background II. Background ;lksadfjkl kskuvisdfj ;kdjf kk sfj dqkje 1233 dskk kdfj ask d dkfjdkjf Problem content and importance Problem content and importance jskdfjk ksdj askdkk kkdj skk VI. Countermeasure VI. Countermeasure kdsjkf kdu sdkfjpai siusdfj dkkj fd sdkfj kd wkeuue 5434 dsisu jdfkdsjk III. Current Condition Summary of action to be taken III. Current Condition Summary of action to be taken kasdjf kdk dskjfdk dk dfkdf dk VII. Cost/Benefit Analysis VII. Cost/Benefit Analysis qiuiu dkusdiu ksdfui iuisduf sduidf kdfi di iuioi dufidfu 9890 aiudiu isdfuu diid fid idusf skduid i difdiu d difudi idfu > Diagram of current process > Diagram of current process sdiufdiu sidu idfuid diuf dfudiu diuidfu idifuioa iduidu 8089 diufidu > What about the system is not ideal? > What about the system is not ideal? VIII. Implementation Plan VIII. Implementation Plan > Extent of the problem(s), i.e., measures. > Extent of the problem(s), i.e., measures. oidi difui idfuiu What? Where? Who? When? What? Where? Who? When? sdiufdi di idfu difuiduf diuud diufdi uidiu 3439 diufdi diuf d iidufiui sui kdsiekcsd. dskfui xci kdju 8908 sdu dkuckjkcj k idiuf kdu dfksdu IV. Cause Analysis IV. Cause Analysis difdi idufi kdfikuufkdu sdku dfkjdk dk djfkd d dkdk kdk kdjd 3448 IX. Follow-Up IX. Follow-Up Plan Actual Results Plan Actual Results Most likely root cause of problems in the current condition: 5-why analysis Most likely root cause of problems in the current condition: 5-why analysis > Predicted performance > Date check done. > Predicted performance > Date check done. > How, when to check? > Results, compare to predicted. > How, when to check? > Results, compare to predicted. 11
- 12. Parker Strategic Pricing Metrics Parker Operational Pricing Measures Year To Date Selling Price Change Changes In Selling Price Index (SPI) – By Part, By Customer Material Cost Recovery Quote Speed (SPAN) Win Rate % 12
- 13. Parker Strategic Pricing Processes Lean Enterprise - Value Stream Mapping 13
- 14. Parker Strategic Pricing Processes Pricing Cell ‘Set And Execute Prices’ Market Price Analysis Contract Renewals List Prices PFEC – Plan For Every Customer Pricing Guidelines 14
- 15. Parker Strategic Pricing Processes Market Price Analysis Stop Stupid Pricing! Discount On Exception Deals OEM Price Index Vs Annual Sales Discount on Exception Deals 11.0% Market Segmentation y = 1E-07x + 0.0891 R2 = 0.0139 10.0% Incremental Discount 9.0% 8.0% 7.0% Customer Scoring 6.0% $10 $100 $1,000 $10,000 $100,000 $1,000,000 OEM Price Index Order $ vs Annual Sales Product Scoring 1.5 1.25 Price Index 1 0.75 y = -2E-07x + 1.107 R2 = 0.0334 0.5 10 100 1,000 10,000 100,000 1,000,000 Annual Sales 15
- 16. Getting Price in the Playbook Science Take of the Magic Out of Pricing Price Segmentation Customer Product • Annual spend • Prod Line • Size • Core Status • Industry/Type • Velocity • Geography • Lifecycle stage • Growth rate • Number of substitutes • Average order size • Number of customers • Product breadth • Performance, dimensions • Tenure • Recency • Frequency • Pricing science applied to transactional data to determine what deal attributes affect pricing outcomes • Common to include 4–10 attributes in the final segmentation definition Order • Combinations of attribute values yield • Size 1,000s of pricing segments • Urgency • Product mix • Contract/spot 16
- 17. Good Deal Management Process Global Quotation Platform Deal Profitability Analysis Scoring & Recommendations Rule Based Exception Routines
- 18. Parker Strategic Pricing Processes PFEC – Plan For Every Customer Plan For Every Customer Database Plan-Do-Check-Act On Contract Business Analytical Account Scoring To Find Leakage Operational Project Management Tool 18
- 19. Innovation Parker’s Winovation Process FY10 % Sales from Winovation: 2.4% 19
- 20. Winovation: Creating Value Our ability to produce profitable growth (price value) from Winovation relies on promoting those projects with good value propositions. Winovation Stage Gate Process Identify Value Quantify Value Qualify Price Proposition Proposition Value Value Proposition Proposition Gate Gate Gate Gate Gate 1 2 3 4 5 STAGE 0 STAGE 1 STAGE 2 STAGE 3 STAGE 4 STAGE 5 Discovery Concept Feasibility Development Qualification/ Launch Preproduction
- 21. Parker Strategic Pricing Analytical Tools Value Proposition Calculator Value Proposition Calculator Tool Value Proposition - Calculator Instruction Examples $1.2B In Winovation Solution Type Solution Description Supplier Existing Solution New Solution Value Driver: Manufacturing, Assembly & Supply Chain Benefit Change Cost Rate Description Labor Install Rate $ 55.00 X Hours 4.0 Labor Assembly Rate $ 55.00 X Hours 3.0 Installed Value Calculator Labor Setup Rate $ 55.00 X Hours - Labor Rate $ 55.00 X Hours - Labor Rate $ 55.00 X Hours - Capital Equip Cost ############ / # Units 125,000 Expediting Rate $ 55.00 X Hours 9.0 Receiving Annual $ Rec Change $ 350,000.00 0.6% 0.6% Packaging Per Piece $ Packaging Reduced $ 15.00 # Vendors Rate $ 55.00 X Hours - Warehousing Rate 44 X Hours 15 Freight Rate Wgt/Area Freight Rate Distance Component Reduction Total Unit Cost of Components Reduced $ 345.00 Floorspace Sq Ft 100 Cost $ 13.00 Years 2 Handbook And Training Program In Plant Transport $ Inv $ 15,000 Rate 3.3% Inventory Inventory $ 15,000 CCI% (15%) 15% Other Total: Value Driver: Quality & Safety Improvement Benefit Change Cost Rate Description Labor Rework Rate $ 55.00 X Hours 4.0 Warranty Failures Avoided Cost per Downtime Valur/Hr Hours GPM/VP Pricing Review Of Top Scrap Scrap Costs per Clean Up Rate $ 55.00 X Hours 4.0 Disposal Rate Units Litigation Potential Ligigation Costs Programs Lost Sales Sales Lost GM% Other Total: Value Driver: Design & Engineering Benefit Change Cost Rate Description Design Engrg Rate $ 55.00 X Hours 4.0 Testing Rate $ 55.00 X Hours 4.0 Test Equipment Equip Cost / # Units Other Total: Value Driver: Waste / Reduce Energy Reduction Benefit Change Cost Rate Description Electricity kw Usage Change $/KW 21
- 22. Parker Strategic Pricing Learnings And Resluts Get Right Persons In Jobs Focus On Process AND Prices Measure And Track Layer New Capabilities Into The Program 22
- 23. Quote “Value pricing represents the final frontier for Parker pricing leaders. We are compelled to drive shareholder value here” Dick Braun VP Strategic Pricing 10/21/2010 23
- 24. Value Proposition Calculator These Value Propositions Are Tabulated 24
- 26. Value Model NOTE: Data sanitized for demonstration purposes
- 27. Value Price Modeling (Triangulation) NOTE: Data sanitized for demonstration purposes
- 28. Common Mistakes • Not understanding the value that a Parker product brings to the customer • Seeing the value of a product from a Parker (internal) perspective • Understanding the added value of a product, but not pricing it in – giving it all to the customer • Listening, but not “hearing” the customer • Choosing the wrong customer(s) for feedback • “Cost/Scope creep” - adding additional value throughout a long project, but not re-examining the price. • Disconnect between marketing and pricing strategies 28
- 29. Value Pricing Process - Recap 1) Understand all next best alternative choices; what they are and how they performs against us 2) Understand what drives financial value for customer or segment (determine value drivers) 3) Document how we impact each value driver for better or worse against the customer’s/segment’s next best alternative choices 4) Quantify each impact on a per unit or per year basis 5) Rank these value drivers on impact and customer acceptance. Discard those that have minimal impact or that the customer does not believe 6) Sum the impacts to understand TOTAL CUSTOMER VALUE 7) Determine Parker price that retains the right amount of Value for US! 29
- 30. Key Takeaways Strategic Pricing= Key Center-Led WinStrategy Initiative We Continue To Evolve The Practice Of Pricing Analytical Tools, Processes, Metrics, Organization, Change Management Strong Talent Pool, Bench Strength – Continuing To Build World Class Competencies Contributed To Increasing Gross Margins And Maintained Increasing Selling Prices Every Single Year 30
- 31. The World Leader in Motion and Control Thank You 31
- 32. See you in Vegas! www.leveragepoint.com jmanson@leveragepoint.com Jay Manson (781) 727 – 5977 32 3