Celebrate – Pricing Power Pricing principles that capture value and enhance profitability Pricing can no longer be an after-thought, with the pricing strategy and rate structure applied after the service offering is developed. Increasingly, clients want unique pricing structures that include shared accountability – this applies not only to agencies, but is part of a larger trend across many service-business industries. Successfully aligning interests requires integrating the pricing strategy as a core component of the offer – using price to help determine: What is included? How is success defined? How services are delivered. This discussion will take lessons learned from both advertising, and other segments to frame the role of pricing in the sales process. We will also discuss the ways leading-class pricing organizations find success with client procurement teams – who have been very effective at driving down rates. This includes the importance of differentiating cost vs. fees vs. value. Successful alternative fee programs are not positioned as new forms of discounting, but are leveraged as a different way to measure and compensate for value. And, finally, we will discuss the concept of "losing on price." Speaker: Scott Lippstreu, Principal, Deloitte Consulting LLP

1. Celebrate Pricing Power
Pricing principles that capture value and enhance profitability
Scott Lippstreu
Deloitte Monitor Consulting LLP
slippstreu@deloitte.com
March 10, 2013

2. Overview of today’s discussion
I. Evolution of Pricing
 Moving from Labor-Based Pricing to Performance-Based Pricing
II. Fundamentals of Performance Pricing
 Components, Execution, and Obstacles to Effective Pricing Strategies
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3. Evolution of Pricing
Increased pressure on rates and margins are causing ad agencies to
work more for the same total fees
Total Ad Spend & Ad Agency Revenue Growth 2006-2012
400 10%
% Revenue Growth
Total Ad Spend $B
300 5%
200 0%
100 -5%
0 -10%
2006 2007 2008 2009 2010 2011 2012
Ad Spend Agency Revenue Growth
Drivers of Rate Pressure
• New digital elements disrupted the traditional value chain
• Shift to targeting led to decrease in campaign size
• Clients demanding discounts or rate freeze
• Increasing role of procurement – either advising or even limiting CMO
• Increasingly looking at “un-conventional” providers of advertising services
• Increasingly asking for alternative fee arrangements – with limited success…
Source: IBISWorld Advertising Agency in the US Industry Report; Yahoo Finance
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4. Evolution of Pricing
Rate pressure has evolved new pricing strategies to take hold across
service industries
Deloitte Consulting’s Challenge Response & Capabilities
 Designated Value Pricing Experts:
Dedicated senior resources who look at deals and
manage a portfolio
Clients asked us
to put our fees at  Investment Approach: Take real risks that
represent an investment portfolio, rather than a
risk, tied to the
series of one-sided offers
outcome
 Proactive: Not only ready to respond to clients,
but actively seek opportunities and deals
 Cultural Fit: Aligned leadership behind the
concept and managed risk to individual delivery
partners
We are the world’s leader in the performance-base services
model, looking at hundreds of deals a year
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5. Evolution of Pricing
Guiding Principles of Performance Pricing at Deloitte Consulting
 Transparency – The client is entitled to know what the fees would be if the job was
priced traditionally
 Measurement and Baselines –measurable goals must be defined and the means to
compare those measures to a baseline must be established
 Risk/Reward – A portion of fees will be invested in the success of the program
 Goal Alignment – It is essential that all stakeholders that will influence the success of
the program have goals aligned with it
 Scope Commensurate with Goals – The scope of work provided must be
commensurate with the goals and measurement of the risk/reward arrangement
 Beneficiary is Sponsor – The executives whose span of responsibility is most
impacted by the program must be the key program sponsors
 Exit Conditions – Conditions may occur that render this type agreement unfair to one
party and they should be identified at the outset
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6. Evolution of Pricing
Why Performance Pricing is Difficult to Replicate…
Common Obstacles
 Difficult to measure or baseline
 Account Executives aren’t skilled at estimating work
 Integrity of the client or at settlement Client forgets the spirit of the
agreement
 Firm not comfortable with true risk
 Misunderstandings
 Inappropriate upside (payouts or risk profiles)
 Client doesn’t agree with price --- Agency must sell value before
Alternate Fee can succeed
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7. Evolution of Pricing
Cornerstone of any performance fee structure is making sure the
client understands and believes the value
 Define the value
– Don’t let client think a “just as good for less” offering exists
– Align the value of the service with the price
 Re-think basis of pricing: Cost (billable hours) vs. results
 When using Gain-Sharing:
- Recognize it’s not a way to “lower” prices
- Offer must be fair to both parties
- Be proactive (with the offer)
 Compete on value not on price
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8. Evolution of Pricing
Recent research suggests selling on value how companies survive
in the long term
The Three Rules:
How Exceptional Companies Think
By Michael Raynor & Mumtaz Ahmed
1 Prioritize better value over cheaper prices
Prioritize revenue over cost side of profitability
2
equation
3 The only rules are 1 & 2
Source: “The Three Rules: How Exceptional Companies Think” by Michael Raynor and Mumtaz Ahmed; Available May 30th, 2013
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9. Fundamentals of Pricing
Whether it is performance or fixed pricing, it is important to hit the
fundamentals
SOME PRICING FUNDAMENTALS
 Understand the drivers of economic profitability at the transaction level
 Use reliable data that are relevant to the economic profitability (not
allocation of accounting burdens)
 Identify and control the variance in your current pricing execution
 Define, document, measure and manage the sales and pricing process to
promote profitable behavior
 Build profit accountability into your organization and processes
 Guard against policies and procedures that have unintended consequences
or loopholes that promote misaligned incentives
 Clearly define discounting policies, exception processes, and
the chart of authority for approvals
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10. Fundamentals of Pricing
This is a visualization of transactional data
Overall Transactional Database Waterfall
Needs to be built at the customer and transactional level
100
20 Revenue Cost to Allocated Costs
80
10 Elements Serve
10
60 5
100 5
5
40 3
6
2
55 5
20 6
39 4
26
11
0 4
List Invoice Net Pocket Margin
Price Price Price Price
Common Challenges and Obstacles to Data
 Lack of proper Rate Card use  Services delivered, yet not tracked
 Omission of oft-missed discounts  No transactional cost analysis
 Lack of data management and  Use of allocations
pricing processes to improve revenue
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11. Fundamentals of Pricing
This is a price bands visualization of price variability
600% Realized Price by Customer Size
Key Analytics
500% Realized
Target
 Bands can be run by product or
400% Mean customer segment
Price (% to Mean)
300%
 The goal is for the bands to be
tight, or little variability
200%  It is important to differentiate
between mature and new products
100%
0%
0 6
Affiliate
Mega
Large
Small
Medium
Opportunistic
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12. Fundamentals of Pricing
24 Years of Pricing Transformations – Lessons Learned:
 Pricing strategy – Where possible, link pricing to value, and use a rate
structure the client can understand
 Pricing Governance
– Have clarity for pricing and discounting authority
– Have a process that get’s to “no”
 Pricing Execution
– Reward AEs for “quality of revenue” - not just quantity
– Hold your clients accountable
 Have the Data – pricing is an art and a science!
 Selling:
– Never discuss price without discussing value
– Never let yourself be commoditized (& avoid procurement)
Closing Thought: An organization that “never loses on price”
probably does
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13. Questions?
Scott Lippstreu
slippstreu@deloitte.com
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14. Copyright © 2012 Deloitte Development LLC. All rights reserved.
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15. A balanced approach across six core competencies enables the
journey to a value-based pricing strategy
Foundational
Price Execution
Executing defined policies and processes that govern profitable decision making on a daily operational
level
Pricing Strategy Organizational Alignment &
Defines a pricing framework that supports Governance
Competitive Advantage
business objectives by understanding and Effectively managing the people and cultural
capturing the value of an offering relative to dimensions of an organization so that it can
Sustainability
competitive alternatives and customer demands
sustain pricing excellence
Advanced Analytics & Price Pricing Technology & Data
Setting Management
Determining profit-maximizing prices for products Designing and deploying pricing analytics,
and/or services optimization and execution tools to enable effective
pricing decisions and to enhance quality and
consistency of pricing processes
Tax & Regulatory Effectiveness
Proactively managing the tax, regulatory compliance and governance issues related to pricing decisions
Profit Retention
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