A value-based strategy

In our business, where service is a bigger part than the material itself, we do not use cost as the basis for price. We use value as the base for price. The value is practically what the customer is willing to pay. The product and the service is value to the customer so that is why we call it value-based pricing and not cost-based pricing. It does not mean that we don’t understand costs, we do, but the base of the price is not the costs of production. We do value-based pricing, which is another type of sophistication, more complex and less automatic than cost-based pricing where you can make a very nice model for calculating the price.

As we do the pricing, it is based on the understanding of the customer and judging what is the value of our product and service to the cus-tomer. For this type of pricing, the most important thing is that we have to make ourselves different from our competitors. (General man-ager, Beta)

Beta’s business strategy and pricing policy differ from the normal vol-ume oriented and cost-based method of most SCAP units in middle Europe. The general manager terms Beta’s approach value-based

pric-ing. According to the general manager, the choice between value and cost-based pricing can be seen as being dependent on whether the seller is serving high volume customers with more or less comparable prod-ucts that carry a lower value-added or if the seller is serving customers that demand smaller runs and a higher level of service. Value-based pricing is seen as connected to less comparable products or services, while cost-based pricing is seen as an appropriate approach when pric-ing high-volume and low value-added products. Accordpric-ing to this line of reasoning, Beta choice between value or cost-based pricing is to some extent contingent on the type of customer segments (i.e. electronics and contract manufacturers) that are present in Beta’s local market.

An important issue brought up by the general manager is the benefits of not turning the pricing decision into an automated activity. When strictly applying cost-based pricing, the pricing decision becomes a function of the production costs, which can be automatically extracted from the costing system. This basically means that anyone with access to the costing system can make the pricing decision. A consequence of this is that both the cost and price structures of the seller becomes un-derstandable to the buyer, which weakens the seller’s position in price negotiations. One important element of Beta’s pricing approach is to keep the pricing decision unstructured, emphasizing the idiosyncratic element of both the customer offer and the pricing decision. Beta’s ap-proach to pricing emphasizes the entrepreneurial aspects of pricing by analyzing the context and commercial side of each order and deciding on an added value which is believed to match the willingness-to-pay of the customer. Using added value instead of costs to arrive at a price is according to the sales and marketing manager an important factor in Beta’s pricing.

The management team at Beta is convinced that the value-based pric-ing is the best method for pricpric-ing in their type of business environment.

However, the current approach to pricing employed by Beta was not a result of a free choice between cost-plus profit pricing and the current more market oriented method, rather, limitations and reliability issues in production technology and costing software originally excluded cost-based pricing as an alternative, thus forcing Beta towards the current strategy and pricing model.

One possible danger in using a relatively unstructured or entrepreneu-rial approach to pricing that lack systemization or formal routines is that individual pricing decisions will move in different directions, creat-ing an inconsistent price structure that might be suboptimal on the overall level. The lack of price structure is however not seen as a risk by the general manager. According to the general manager, the individual customer should always be charged the maximum amount that he is willing to pay. This requires that the pricing process is not tied to any fixed parameters (such as costs) or systems that might limit the seller pricing discretion.

For Beta, using a non-systematized or unstructured approach to pricing is a way of avoiding being treated as a commodity supplier because it makes it more difficult for the customer to evaluate different prices or compare with competitors. Having a less mechanical process, forces the organization to evaluate each pricing situation individually based on all available information, and not just the information the system requires (for example, costs). This enables the identification of business oppor-tunities that otherwise might have been lost. The term “opportunity price” is used to describe this situation where a customer can be charged a relatively higher price based on an assessment of the individual situa-tion. In contrast, using a structured approach is seen as limiting the en-trepreneurial aspects of the process.

The specific type of demand generated by the electronics segment has played an important role in the development of Beta’s strategy and pricing policy. Beta’s strategy of bundling together different parts of the packaging solution (corrugated, other materials, services, etc.) into one offer with one price is practically adopted to fit the requirements of the electronics industry. According to the general manager, the ties to the electronics segment were established as a result of two external contin-gencies. The first was Beta’s poor financial performance in the middle and late nineties which was caused by lack of scale and machine effi-ciency relative to established competitors and the dominant customer segment (FMCG) at that time. The second was the fact that large con-tract manufactures in the electronics industry were moving operations to Beta’s local market and demanding a different set of product attrib-utes related more to responsiveness, customization and service, than efficiency and scale, which had been important factors for serving the

FMCG segment. Hence, the fact that Beta lacked efficiency and ability to take on large orders from the FMCG segment made investments di-rected specifically towards the electronic segment more attractive for Beta than for competing firms. In this way, a fit was created between the demands of the electronic segment and the capabilities of the unit.

The chain of events is described as follows by the general manager.

At that time in the mid and late nineties a lot of manufacturing com-panies moved operations or acquired comcom-panies here. SCAP was very strong in the FMCG segment in Western Europe. So we wanted to grow with FMCG companies like Nestle, Kraft, and Philip Morris.

Without having a name, the capacity, without all the equipment, they immediately wanted us to give the same price as competitors, or even lower. We made losses and we had to establish a new strategy based on the concept that we are a small company in this business. The only way to grow was to take share from the business coming into our market.

The incoming business that needed packaging material was the elec-tronics business. In that period in the second half of the nineties, con-tract manufactures established huge operations here; Flextronics, Sa-mina, SCI, JB, Solectron, big, mostly American companies that moved their production. Flextronics moved operations from Sweden, from Scotland… Working for the OEMs like Philips, HP, IBM, Cisco, etc.

we realized that we had to focus on this industry. We tried to under-stand; “what is the need of this segment”. We realized that the need of this segment was service, small runs, and not huge runs and cost effi-ciency, selling material or commodity. They appreciate the service, the responsiveness, high speed in design, high speed in taking over a pro-ject from Western Europe. That was what we learned; we did not know it from the beginning. This was where we could differentiate ourselves from our competitors. If we follow them then we jump into a competi-tion. If we differentiate ourselves from them we could do our own business.[…] In addition to that we said that we are not collecting or-ders to our existing machines, because we can not compete with the ef-ficiency of our competitors, but we buy and sell what the customer wants. If the customer said; “I want something from you that you can-not produce”, we could can-not at that time produce more than three col-our print, we could not produce a lot of things, we bought it from other SCAP factories in Europe and second sub suppliers and we put together the portfolio that the customer requested. That was the way to what we call “total packaging”, that we are ready to deliver not only what we can produce, but that we are ready to do everything that the customer needs. This was a revolutionary concept in that way. That was the way to make the roundabout, and in 2000 we made the first positive year after four years of making losses and that was also the year

of building up the confidence of the European management because now they understood the market and they followed this confidence with investments. (General manager, Beta)⁴⁶

The key element of Beta’s business strategy is, according to a key ac-count manager, to be as close to the customer as possible with the high-est possible level of service. Beta’s business model, with high level of service, a total packaging solution, and integration of own paper pack-aging parts and externally sourced parts (paper, plastic, foam, etc.), is the first step in enabling what is called value-based pricing possible.

The value-based pricing takes advantage of the fact that Beta is able to offer non-comparable products, service and solutions to the customer.

The intention is to set a price that is more or less independent of pro-duction costs and in line with the individual customer’s willingness-to-pay.

The implementation of business strategy is, of course, dependent on the type of customers being served. An important factor influencing Beta’s possibilities in differentiating themselves with services are the many transfer projects from Western European countries and the level of ser-vice that these firms are accustomed to. The demands of the electronics firms that have been transferring their production to Beta’s local market seem to have presented quite a unique opportunity and played an im-portant role in the development of the present strategy and pricing pol-icy.

Although the individualized approach to pricing has the potential of capturing a large part of each individual customer’s willingness to pay, to some extent it forfeits the possibility of using price as a managerial instrument to position Beta on the market or manipulate volume to-wards optimal levels. According to the general manager, this is done to a limited extent in the budget process where Beta works with different price and volume scenarios, but as indicated above, this practice has limited effect on how individual projects or orders are priced. The way of working described above emphasizes the importance of the individ-ual business opportunity over using price as a tool in the long term planning of the business. One reason for this business approach is,

46Words that disclose the identity of the case have been removed from the quota-tion.

cording to the sales and marketing manager, the characteristics of the local market. The market is, as opposed to many other more mature European markets, dynamic and growing, which is seen as a reason not to give practices too tight a structure.

The implementation of Beta’s pricing policy starts in the budgeting process. When targets have been established (for example a certain in-crease in total added-value), the management team together with opera-tional units and the key account managers lay out a strategy for how these targets should be accomplished. According to the general man-ager, the implementation is then delegated to a working group of key account managers. The implementation process for a certain pricing policy is of a somewhat ad hoc nature. The key focus is on the individ-ual business opportunity and the interaction with the individindivid-ual cus-tomer. Hence, Beta’s philosophy is to manage each project more or less as its own business, which means maximizing the added value on each individual project. The level of overall analysis of prices is limited to keeping the average added-value in the product portfolio stable or in-creasing.