Pricing

Strategy for
Biz Markets
Case Analysis – Price Like a Retailer, Not a Widget Market
Presented by
Victor Lee, Grace Lee, Nelson Leong Kin Yit, Sophia Lian

01
 01
introduction
 Parker Hannifin Corporation (NYSE: PH) -
manufacturer of motion and control technologies.
 Founded in 1918; publicly traded on the NYSE
since December 9, 1964.
 One of the largest companies in the world in motion
control technology and employs around 39,873
people.
 As of 2010, Company ranked 230 in the
Fortune 500.
Parker - divided into EIGHT
technology groups.

① Fluid Connectors
② Instrumentation
③ Filtration
④ Hydraulics
⑤ Automation
⑥ Climate & Industrial Controls
⑦ Sealing and Shielding
⑧ Aerospace
 Manufacturer of motion control products,
including fluid power systems,
electromechanical controls and related
components.
 It makes components used in everything from
the space shuttle to a mechanism that helped
tilt a faux steamship for the movie "Titanic."
 02
question one

describe the process in performing an audit of

the firm’s product line to identify the best and
worst products for profit-margin expansion.
Profit Margin Expansion
In long-term reference, a measure of a
company's net profit margin in the
latest reported quarter divided by
profit margin in the fiscal year
PARKER’S STRATEGY
 “We can't price them just
off the cost. We have to
price them off of the value
to the customer and
competitive levels on the
Donald E. Washkewicz marketplace”
Know the Price-Setting Decision Process
:
Set Strategic Pricing Objectives

Estimate Demand and the Price Elasticity of Demand

Determine Costs and their Relationship to Volume

Examine Competitors’ Prices and Strategies

Set the Price Level

Set Strategic Pricing Objectives

• Achieve market share from 14 % to

20%
• Price product at the best value.
• No. 1 motion control company
everywhere in the world
Estimate Demand and Price
Elasticity of Demand
•How do organizational buyers
value the product?
•Economic value
– Cost saving/revenue gain
•Commodity value
– Value that customer assign to
product feature
•Differentiation value
– Unique from competitors
 Product Category Explanation
1.  Core products Commodity-type products in a highly
competitive market

2.  Partially differentiated group A Some differentiation adds value for

customer

3.  Partially differentiated group B Niche products with no exact

competitive matches

4.  Differentiated products or systems Highly engineered solutions

5.  Specials and classics Custom-designed products or one-of-a-

kinds
Costs & their Relationship to Vol.

•Cost implications:
– Proportion of product cost
– Variation of cost at different level
– Economies of scale
Problem
• $3 billion a year on materials
and services but no one tries to
add up and order from one
person.
Solution
• Strategic purchasing program
• Reduced number of suppliers,
and collaborates more closely
with them on product
development to save money
• ABC approach
 Examine Competitor’s Prices
and Strategies & Set Price
Level
• Price can make a differential
advantage over competitors.
• Hypercompetitive rivalries:
– Parker has competitors in each
product category
– Crane, Eaton, Honeywell
International, IMI, Invensys,
Kaydon and Watts Water
Technologies
Product Category Explanation Price Adjustment
1.  Core products Commodity-type products Aligned prices with
in a highly competitive market. Changes were -3%
market to +5%.

2.  Partially differentiated Some differentiation adds Increased prices up to 5%

group A value for customer

3.  Partially differentiated Niche products with no Increased prices up to 5%

group B exact competitive matches

4.  Differentiated products Highly engineered Increased up to 25%

or systems solutions

5.  Specials and classics Custom-designed products Increased over 25%

or one-of-a-kinds
 03
Question two

• Provide a set of specific pricing guidelines that

managers should apply as the traditional cost-
plus approach is phased out and a value-based
approach to pricing is implemented.
 Cost-plus Pricing

 This type of pricing includes the variable

costs associated with the goods, as well
as a portion of the fixed costs of operating
the business.
 (average variable cost + % allocation of
fixed costs)×(1+ mark up%).
 Value-based Pricing

 It sets selling prices on the perceived

value to the customer, rather than on the
actual cost of the product, the market
price, competitors prices, or the historical
price.
 The goal of value-based pricing is to align
price with value delivered. Price for any
individual customer can be customized to
reflect the specific value delivered.
 Cost-plus vs Value-based
Cost plus
• suited to businesses that
deal with large
volumes/which operate in
markets dominated by
competition on price.
• ignores your image and
market positioning. And
hidden costs are easily
forgotten, so your true profit
per sale is often lower than
you realise.
Value-based
• focuses on the price
customers are willing to pay,
based on the benefits your
business offers them.
• depends on the strength of
the benefits you can provide
to customers.
• charge according to the value
you offer customers.
• it can alienate potential
customers who are driven only
by price and can also draw in
new competitors.
 Value-Based Approach
Isolate the most
Quantify the impact of your
Define the key
significant
Isolate drivers
theparticularly
product/service, most for
Quantify the impact of your
of
Define the
value
market key
those features
segments
significant
product/service,
that are unique and
in customers’
drivers for
particularly of
different from competitors’ offering
business
those features
value that are unique and
in customers’
market segments
different from competitors’ offering
business

D
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pr
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a
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Step1
• Parker Hannifin Corporation market segment
- original equipment manufacturers (OEMs)
- replacement markets in various manufacturing and process
industries

Step2
• Customer interview
• - identify and measure value  

Value driver (power generation technology)

• Cost drivers
- create value by economic savings
• Revenue drivers
• - add incremental value by facilitating revenue or margin
expansion.
Step 3
• Impact
- Quantify the impact of the product or service on each value
driver in customers’ business
(e.g. Lower installed and life-cycle costs for water injection)

Step 4
• Comparison
- estimate the incremental value
- isolate features that are unique and different from competitors
(e.g. parker store perform fittings, pumps and walk-up repairs)
• When a new CEO took over Parker Hannifin Corp.,
- 1/3 of Parker's parts offering unique customer value were
priced on a cost-plus basis
- parts that are custom-engineered for their customers which
should have commanded premium prices.

• Introduction of value-based pricing resulted in

- invested capital from 7% in 2002 to 21% in 2006
- per share value by 88% compared with a 25% gain in the S&P
500.

• Value-based pricing certainly means that prices of items with

unique features should go up to match customer value, but it
also may mean that prices of less competitive items should go
down to maintain or expand market shares.
 THE END
Thank you for listening