In the unconsolidated wind energy industry, manufacturers compete to increase market shares and implement optimization strategies aiming cutting costs to achieve turnaround. A market leader for installed capacity is facing rising costs and negative margins due to overproduction and high stock growth.
One of its Sales Business Units responsible for selling, installing and servicing the products through sales and service departments, records low capture rate, price and margin erosion for their service level agreements (SLA). SLA portfolio includes 4 different agreements, (Basic, Advanced, Performance and Premium), guaranteeing increasing levels of scheduled, unscheduled maintenance and availability guarantee. Within the Service department, Customer Relationship Managers (CRM) are accountable for supporting Equipment Sales Managers (ESM) in selling SLAs bundled with new turbine sales (NTS), renewing and upgrading service contracts for the installed based.
Despite successful cost-cutting programs across the organization, positive effects are offset by steady price decrease due to industry competitive pressure and the habit developed over the years from the ESM to price SLA by a cost plus method: as a result, all gains realized from cost optimization are reverted directly to customers. CRM team, mainly fulfilling customer care activities is performing at an annual renewal rate of 24% for expiring contracts and upgrade rate to the Premium of 0%.
To achieve turnaround, a new Departmental Strategy is designed including organizational transformation from customer care reactive cost-plus pricing to proactive value based pricing selling. Re-design of the new department comprises new job descriptions, accountabilities, processes and targets, among which, maximizing the renewal rate and upgrading 75% of potential SLAs into Premium. To secure targets achievement a pricing project is deployed based on 3 pillars: research, strategy definition and implementation.
Pricing does not happen in a vacuum. Effective research method need to include and analyze internal and external forces shaping business to build a holistic understanding aiming to position the service in the market at the right price level to support strategy achievement. To harvest, cross-check and consolidate research coming from company, customer and competition, the “3 Cs’ Triangulation Method” was implemented.
3 Cs’ Triangulation Method
This approach delivers outstanding benefits from both the quantitative side, by allowing cross-checking of data resulting from Customers, Competitors and Company research, and qualitative, increasing flawless buy-in of internal stakeholders.
Results, coming from pricing research techniques, proactively reduce traditional long-lasting resistance of internal departments to change, particularly sales, which find themselves in a weaker position to contrast research findings by advocating long-term market knowledge, customer expertise and being the unique ‘oracle’ of the right price to give. In general, departments tend to provide more reliable and less subject to bias data as organizational awareness of the method raised and tend to provide more close-to-reality inputs. Last, competitive research relate external offering with the internal one and allow an “apple to apple” comparison through the creation of a service/price competitive matrix.
Once the decision to change an organization is taken, it is central to understand how the daily business is carried on need to be evaluated from both the official side - company written rules, official policies, processes and procedures, as well as from the informal one - a set of organizational misbehaviors resulting from the business habits develop running the business.
With the goal to acquire employees’ knowledge, perception about competitors and customers, and suggestions about optimizations and improvements areas, experts’ group interviews, one to one interviews and surveys were implemented. Survey design included questions in 4 areas: Customer, Competitors, Pricing, and internal Processes.
Customers’ opinion remain at the center of gravity to grasp your and the service offered by competitors is perceived in the market and the ideal trade-off between perceived set of benefits received and the sacrificed price. In the voice of the customer survey (VOC), respondents were asked to choose and rate between a list of preferred SLA attributes, including price, and score them against competitors. Results were used to fill in the perceptual value maps which also allowed segmenting them. To assess customers’ willingness to pay, four additional questions were asked in the VOC to know at what price level they would have perceived the SLA too cheap, cheap, expensive and too expensive.
Last, a market research to an external service provider was commissioned to assess pricing and service level offered from competitors and compared with data obtained from company and customer research.
The Van Westendorp direct questioning method was central to understand customers expected price. By assessing the ‘real’ willingness-to-pay, which is close to what respondents consider to be an expensive price, it provided results that had been used to calculate a ‘normal’ and a ‘penetration’ price.
Economic Value Estimation
Aggregated five years of internal cost data provided a clear picture of customers’ average cost per year by service attributes which were then grouped under 5 main areas as shown below. The differential between this total “pay-as-you-go” and the price set for the premium SLA would have been used in the implementation phase as a part of value selling trainings to propose customers a saving opportunity.
Economic Value Estimation
The Sales’ Pricing Habit
Historically, about 90% of SLA sold together new wind turbines were priced by NTS with little or no business sense but rather according personal relations developed with customers over time or gut feeling. As their KPIs’ targets were based only on equipment sales, they used often the SLA to discount the wind turbine keeping its price artificially high and guaranteeing the achievement of their KPIs with target set purely on NTS. Beyond pricing discounting, margins were also eroded, among other things, by amending legal clauses of standard contracts, and not including indexation to adjust SLA’s fees to the fluctuations of inflationary pressures. In overall, most of customers’ risks related to operating a wind turbine were shifted to the service provider. From the CRMs side, they supported ESM selling SLAs for NTS by fulfilling administrative tasks, and tend to renew SLAs at similar conditions.
The Sales Process
Procedure to sell SLAs from CRMs and ESM was similar and standardized over time. CRMs, contacted by customer toward the expiration of the SLA, or after it was expired, tend to grant same conditions. ESM process included several customer meeting’s rounds to negotiate SLA, before the meetings the SLA was forwarded to and reviewed by customer, during meetings customers communicated sales which clauses wanted amended, after the meeting sales made the amendments within their authority and pushed the other to the desk of top management usually justifying the submission with the treat that “if agreement was not granted customer would refuse to buy the equipment”. As a result, 95% of amendments were granted.
Within an industry where customer profitability is directly related to the amount of Kilowatt-hours produced from the wind turbine, SLAs were priced with a fix fees model (a fix € amount per year) in case the wind turbines were installed in a location with high annual estimated production, and with a low minimum fee and low variable fee model (minimum fees paid at the start of the year plus variable fees multiplied for the amount of KWh produced at the end of the year), in case wind turbines were installed in a site with low annual estimated production.
Pricing Models for Low and High Wind Sites' Production
Risk Sharing: The New Pricing Model
Cross-checked data from research findings provided 3 inputs to price the new Premium SLA. The new pricing model for renewals and upgrades included a minimum fee to be paid at the start of the contract, an end of year variable fee, resulting from the total KWh produced from the wind turbine times a certain € amount, an impact of total SLA’s annual fees of on customer revenues between 10-14%. For SLA’s bundled with the sales of new Wind Turbine a certain % reduction was established based on penetration price resulting from price sensitiveness research.
As a result, the Risk Sharing Pricing Model, Exhibit 4, was defined for a SLA length up to the 20th year of wind turbine lifetime and implemented based on the ground that as wind years are not the same, thus also KWh harvested from customers differ, the company was willing to make its revenues proportional to the amount of customers revenues: “in bad wind years we earn less but in the good one more” was the motto.
The Risk Sharing Pricing Model
To successfully implement the new strategy and shift the organization mentality from reactive customer care cost plus to proactive selling value 3 initiatives were launched. Following the split of sales department, a new service sales organization, independent from equipment sales was deployed. The new departmental blueprint incorporated an Executive with P&L responsibility supported by a core team and Team Leaders accountable for the management of regional sales whose job content, accountabilities and targets were re-designed. In fact, whereas cost-plus selling requires a short negotiation time in which mainly the price is discussed and discounted (selling by price), to sell value requires a totally different approach and skillset (selling the price). The negotiation method differs in time -the cycle has different and lengthy steps-, knowledge - customers need to be educated, different attributes of the service have to be explained as they satisfy economic, technical and emotional needs in comparison with those offered by competitors-, and language -sales need to be able to explain how attributes will: help to, reduce your, improve your, save your, allow you to, and so on-. To match the need of new requirements with the existing pool of CRMs, all of them were interviewed to evaluate motivation, willingness, and attitude to change, their CVs and abilities analyzed and finally all openings filled mainly with internal people.
Belonging to the core team, Pricing was organized following a “center-driven” structure in which know-how was centralized and daily operations delegated to regional sales –Exhibit 5-. To decentralized operations, pricing authority within established corridors and accountability for tactical pricing was assigned. In case further discount was requested, competitive info and, or, a meaningful business motivation need to be included. In this way, center pricing would grow deep knowledge about regions, their customers and competitors. The center responsibilities included pricing research, strategic pricing, pricing management and educational pricing including monthly and quarterly analysis and reports. New pricing tools, pricing policy and processes were designed and implemented to ensure sales discipline and equip them with easy to use and everywhere available instruments to take independently and within their authorities a value based pricing decision.
The Center Driven Pricing Organizational Model.
To preserve the new organization’s durability, a second initiative, a Change Management program, was launched based on the Prosci © method. It comprehends 3 phases: preparing for change -where change management strategy was defined, change team was prepared and sponsored on a project management basis-, managing the change –where the change plan was developed and actions implemented-, and reinforce the change –where feedback was collected and analyzed, resistance was managed and corrective actions implemented.
Last, to allow and sustain performance, Sales and Pricing Master Class tour aiming to train junior, senior and top management was launched. The program, deployed in all regional sales offices was sponsored and supported by top management which also gave a speech at the opening day. The agenda covered three main areas, Exhibit6, one each day for SLA, applied Value Based Pricing, and After Market Pricing. The idea underpinning the program was not to put people together in a room for three days and deliver only theoretic knowledge, as this has the advantage to deliver higher quantity of information and the disadvantage that people memorize and remember 20-30% of given inputs. On the contrary, there was the need to design an educational program allowing trainers to suite the program to the audience needs, their cultural, educational and working background and abilities, and allow people going back to work and implement the course daily. To do so, each day had 3 main parts, theory, workshops and role-plays. The latter, resulted pivotal to put methods in practice as trainees had to take both the sales and customer role simulating the sales process. All sessions were recorded and files available in a database including pictures of material created in flip charts.
After one year from implementation, the new department delivered outstanding results. Beyond achieving turnaround, revenues increased 14%, renewals registered a +234%, upgrades total value over the SLA duration accounted 60% of annual departmental revenues whereas previous year was equal to 0%. Employees’ satisfaction, motivation and loyalty increased 16%. In overall, the department was seen as a benchmark with the company.