Booz & Company
Europe
ProFIt
Our client is a packaging coating company that produces coatings to protect beverage cans. They are experiencing a profit margin erosion and would like you to help them restore profitability without modifying their cost structure.
Q: Where and what is the company producing?
A: They provide European fillers with coating for the inside of beverage cans.
Q: What explains the margin erosion & is competition facing the same challenge?
A: The reason is macroeconomic: a slow economic recovery since the financial crisis & a raw material volatility have been affecting the entire market.
Q: What is the specific objective & what is the deadline?
A: A 5% profit margin improvement is expected within 2 yrs
Without touching at the cost structure, volume, price &
product mix are the key levers to improve margins.
The most effective margin lever is price, hence we shall focus on improving the pricing strategy.
Part A
Let’s review the main pricing strategies to fix prices.
Discuss the main 3 pricing strategies:
cost-based; value-based; competitive-based pricing strategies.
Part B
Identify some innovative service Let’s look at a value-based pricing approach for their product: what could be the benefits that customer are looking for?
Imagine potential customer benefits from product features & services offerings.
Part C
Let’s estimate the price increase that could be realized thanks to a value-based pricing approach on their product.
Based on the following 3 benefits - Technical Assistance; Coating Waste Reduction & Scratch Resistance - let’s assess the potential price impact (total gain, gain per Kg and % price increase).
Case Question
Case at a glance
Intro Facts (tell the candidate if asked) key Insights (do not tell the candidate)
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Booz & Company
rapid Margin Improvement
London Business School Case Book 2012 / 13
Example of Structure
Margin Levers (Excluding Cost) revenue = Price x Volume
Maximising Pricing
Increase Average Selling Price of existing products (Elasticity)
Increase Market Share at existing customers (more often, more per command, for longer, etc.)
Improve Product Mix by selling more high margin products (Positioning)
Reach out to new customers (within the existing area or in new regions)
Increasing Sales Volume
Structure – How do you set price and what are the main pricing strategies?
raw Material / Cost Driven Market / Competitor Driven Value / Benefits Driven
Base prices on product and service benefits to be shared between the customer and the supplier
• Works better if product or service benefits are explicable to the customers – ideally quantifiable
• Works better if customer knows the next best alternative prices and features
• Works better if raw materials are increasing and are expected to continue to do so
• Works better if price negotiation period is shorter than the purchasing period
• Works better if competitor prices are known and collecting them is legal
• Works better if price elasticity is calculable
Base prices on raw materials volatility to reduce margin exposure
Base prices on competitor prices, supply-curve, and supply/demand balances
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Booz & Company
rapid Margin Improvement
London Business School Case Book 2012 / 13
Creativity – Let’s now focus on value-based pricing: what could be the customer benefits of a coating product for the inside of cans of soda?
Quantitative analytics – What is the potential price increase to be realized thanks to a value-based pricing strategy on a coating product for soda cans?
Below Average:
Thinks about a couple of product features but does not manage to translate them into benefits for the customers
Q: What is the price and volume sold of our product?
A: We sold 500 tons of AquaCoat at €2.25 / kg to our only client Q: What is the next best alternative and what is its price?
A: The closest competitive product is Prime Coat and costs €2.00 / kg Q: What are the key differentiating benefits of our products?
A: The main benefits are technical expertise, coating waste reduction and scratch resistance Average
Suggests:
• Reduce down time to increase productivity
• Reduce product usage
• Reduce labour cost
Above Average
Same as before plus a couple of the following:
• Protect brand image (scratches, taste, customer claim)
• Provide local support
• Extend product life expectancy
• Fulfil legislation compliance
• Shift ordering responsibility to the supplier
Comes up not only with product related but also service based benefits
total Saving &
Price Impact / kg
€18,000 Total
Coating Waste Reduction
Scratch Resistance
Assumptions
• Technicians on site: 20 Days / Year
• Cost of a technician: €150,000 / Year
• Travelling Expenses: €400 / Day
Days of Technician 20
x [ Daily Cost €500 (150K / 300) + Travelling cost €400 ]
• 4% product saved
• Cost of disposal: €250 / Ton
Product Saved 4%
x Volume 500,000Kg
x [ASP €2.25 + Disposal €0.25]
• Reduce scratched cans by 4% of the overall production
• 2 grams of coating / can
• Filled can cost: €0.02 / Can
Product Saved 4%
x Cans 250M (500,000/0.002) x Can cost €0.02
€143,000 total {268,000-[(2.25-2.00)*500,000]}
Potential Price Increase: €0.29 / kg (0.54-0.25): +24% (2.79/2.25)
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Booz & Company
rapid Margin Improvement
London Business School Case Book 2012 / 13
‘Differentiation between poor, average and superior performance’ (for review after the case interview)
Poor performance Average performance Superior performance Framing problem /
prioritizing issues
Focusses on potential cost savings (off topic)
• Only one level tree
• Just mentions price &
volume
Drawsatleasta2level tree:
• Price from ASP &
product Mix
• Volume from new &
existing customers
Explains with case terminology Identifying relevant
information
• Comes up with less than 2 pricing strategies
• Comes up with less than 3 product benefits
• Understands the industry
• Figures out objectives
• Comes up with ideas to improve volume & price
• Lists 2 pricing strategies
• Imagines 3-5 relevant potential customer benefits
• Refers to the filler’s supply chain
• Finds all 3 pricing strategies
running calculations / drawing conclusions from facts
• No clue on how to assess the premium generated by each benefits
• Forgets to include the price difference vs.
the competition in final outcome
• Mixes units (day vs.
year or tons vs. Kg)
• Multiple calculation errors
• Mixes units or makes a calculation error once
• Finds the potential financial gain of each benefits but does not put findings in perspective and does not do the “So What?”
• Perfect flow to come up with the numerical solution & proactive about assumptions
• Puts outcome in perspective: +24%
• Mentions next steps:
Difficulty to pass it all to the customer
Identifying key implications and next steps;
demonstrates creativity
• Just thinks of increasing the price by the exact number estimated during the case
• Articulates wrap up including clear answer to improve margins
• Understands the need to share the benefits with the customer
As before plus:
• Thinks of a strategy to conduct the pricing negotiation
• Includes next steps in the wrap up
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