If you haven’t already, check out Gerhard Gschwandtner interviewing Ron Hubsher from the Sales Optimization Group on the sales negotiation process. Ron looks at the sales process with the same philosophy I do– namely, selling value instead of price, and using that profit increase to build a much more valuable company. However, he approaches the problem from a sales training perspective, a nice complement to the analytical approach we use.
Check it out:
I’m a big fan of analytics. And sports (although I no longer have time to keep up with them). So I’ve always been puzzled that with so much money and pride on the line, teams have done so little analyze data to help them win. Sounds a bit like pricing, right?
There’s no shortage of stats in sports, just as there’s no shortage of KPIs in business. While these numbers are interesting and sometimes even useful, they often provide little insight into true performance, and may even distort performance in a way that reduces overall effectiveness. For example, some baseball statisticians think On Base Percentage is more important than batting average, but everyone focuses on batting average. In business, there is a huge focus on revenue at the expense of profit.
The reason for this mismatch is not that teams hate winning or business don’t want to be profitable– it’s just that it’s easier to measure some things than others. It’s easy to measure revenue or points scored. It’s harder to measure profit, because cost is such a tricky subject. And no one records whether those points came off a double screen or were set up by a teammate’s cut that drew away defenders. (Still, we have it easy. A friend in Africa fighting AIDS described how one of the big challenges was even measuring the scope of the crisis so they would know how to allocate resources and whether those resources were effective.)
Now some researchers at Queen Mary University in London have done some graph-theory analysis of World Cup matches, developing a way to visualize the balance of a team’s attack, and the “centrality” of each player. Check out the graph for Holland v Spain. I’d love to see them go a step further, and put a goal at the end of the pitch, and weight each edge of the graph by the chance of successful completion. For example, a number of short passes may have a 90% completion rate, while a long ball might have a 50% chance of success, but may be more likely to lead to a goal.
Similarly, in the corporate world, a lot of effort gets expended on deals that make $0 profit (or even negative profit). If you know where your profit comes from and know how to price those deals appropriately, you can have a huge return not just on investment, but on effort.
Join us for a webinar on B2B sales optimization. We’ll look at how manual negotiation processes cost time, sales, stress, and 10% or more of profit.
Why does this happen? What have companies tried to do about it? And what kind of results have those efforts yielded. Do you have to choose between selling faster and more being more profitable?
February 24, 2010, 11AM CST. Register Now.
This summer, Steve Silberman over at Wired wrote a great article called “Placebos Are Getting More Effective. Drugmakers Are Desperate to Know Why.” While the implications for pricing in the pharmaceutical industry are obvious, there are also important analogies to pricing activities in a much broader range of companies.
The article discusses how big pharma saw controlling the central nervous system as a path to a whole new class of profitable drugs. What they found was that the mind had a huge impact over the body, but not necessarily because of the active ingredients in drugs. Patients who thought they were taking drugs often showed improvement even without taking actual drugs (placebo). This has been documented for some time. More interestingly, patients who received placebos from doctors who actively engaged with them and suggested the patient would get better had better results than patients whose doctors were strictly clinical and aloof. (They did as well as patients on the leading drugs– not that I want to veer into a discussion of health care reform.)
Placebo effects (or “responses”, as some experts prefer to call them) can also work the other way. Patients told of a drug’s potential negative side effects are more likely to report those side effects.
In short, our minds form expectations that end up shaping how we interact with the world and become self-fulfilling, or at least self-reinforcing prophecies.
So when you focus your conversations with customers on price, cost, discounts and other aspects of the pricing calculation, pricing takes the fore and you find out that customers “only care about price.” If you express your relationship with the customer in terms of the customer’s benefits, what other similar customers have achieved, and other aspects on the value side of the ledger, you generally find lower price sensitivity.
Don Hammalian, Senior Vice President at Alexander Proudfoot, a business process improvement consulting firm with a large sales process practice notes:
Salespeople tend to credit their competition with strengths and abilities that go far beyond reality, especially around competitive pricing. I’ve been with client salespeople who, on their way to close a sale, succeeded in convincing themselves in the car that they had to reduce pricing, even though the customer had not made it an issue. In some cases, they cut prices by 10-15% based on their own self induced fears. Rather than selling the value proposition, service and dependability of their organizations they focused on assumptive prices they could not match and missed their positions of strength. In nearly all cases, these concessions are made without a complete understanding of the impact on margin and market positioning. This is a formula for failure … they failed.
Selling on value is covered in Sales 101 and Pricing 101. The particulars of any given sales situation make it much more complex to implement, of course. Some organizations and individuals will try it, and most will see some kind of success. But it’s often anecdotal (despite the views of professor Jenny McCarthy, this does not make it valid). A couple of setbacks, and companies stop trying.
The goal is not remove price sensitivity, or win every deal at full price. This would be absurd. The idea is that overall, you can create a small but meaningful shift in pricing results, simply by positioning price appropriately. And if your margins are 10%, a 1% improvement just added 10% to your bottom line.
How can you use this effect to your advantage with your customers and sales team?
Part of it is a mindset shift.
We saw one company whose new executive team knew that it had to increase margins. They explicitly focused on value and improving price yield rather than just whether the deal is signed. They moved price exception approval from an administrative function to an executive function. They used our software to get details of open opportunities and how they compared to similar opportunities with the same customer or related customers. They even rejected a few deals that might previously have been considered acceptable. Within a month, the sales team had adjusted to the new regime and stopped asking for massive discounts. Sales and close rates did not change.
This effect is also why companies spend a lot of money on the customer experience outside the core “product.” Fancy restaurants have fancy decor and nice plates, setting your expectations for the food (and the bill). A Lexus showroom is very different from a used car lot. An Apple retail store looks different from Fry’s. Businesses communicate expectations about price and value, deliberately or not. Better to be deliberate, and aligned with your value proposition.
So if you feel you have a premium offering, act like it. This will help set customers’ expectations for price. If you want to communicate that you’re a low-price offering, don’t try to be as fancy as the more expensive competitor. Just don’t fall into the trap of saying you’re the premium offering and acting like you’re the discounter– you’ll incur the expenses of developing the premium product, but fail to achieve premium margins.
Twas the night before Christmas, when all the through the house
Not a hard drive was stirring, not even a mouse.
The pipeline reports were tallied with care
In hopes that the revenue soon would be there.
The sales teams were in hotel rooms, snug in their beds
While visions of commissions danced in their heads
The CFO had his latte, and I had my cap[puccino],
because after working all night we really wanted a nap.
When in the conference room arose such a clatter,
That meant we wouldn’t make numbers– that was the matter.
To my dashboards I flew like a flash,
I knew I had found a great source of cash.
Sales Compass showed our profit on each deal in flow
Which ones were met target, and which were below.
And then what to my wondering eyes should appear
But deal approval alerts and analytics so clear.
That I didn’t need Excel, I could be nimble and quick
And I knew which deals needed which kind of trick.
More rapid than eagles the deals they came
And I whistled and shouted and called them by name.
“Now Upsell! Now Cross-sell! Now Big Deal and such!
On this one and that one there’s no need to discount so much!
If we drop the price here our profit will fall!
And we’ll give away all our hard work after all!”
As dry leaves that before the wild hurricane fly,
When they meet with an obstacle, mount to the sky,
So up to the Target Price the deals they flew,
With price optimization and simple comparisons, too.
And then, in a twinkling, I heard on the phone
The happy laughter of successful sales reps back home.
As I drew in my hand, and was turning around,
Across the wi-fi St. Benioff came with a bound.
He was dressed in a Hawaiian shirt, true to form
Because the North Pole is cold but The Cloud is quite warm.
A bundle of toys he had on the AppExchange,
Some expensive, some cheap, some just a bit of change.
Under his breath he was singing about “The Cloud”
And I’m not sure he knew he was singing out loud.
The stump of a cigar he held tight in his teeth
And the smoke it encircled his head like a wreath.
He was long haired and bearded, a bit tall for an elf,
And I laughed when I saw him, in spite of myself;
With the click of a mouse and a twist of his head,
He gave me great insight to move some deals out of the red.
He spoke many words, and went straight to work
And filled my page layouts with Apex and Visual Force,
And swiping a finger across his iPhone,
He approved several deals, including one of my own;
He sprang to his sleigh, to his team gave a whistle,
While data sync’d in the cloud, gently as the down of a thistle.
But I heard him exclaim, ere he drove out of sight,
Happy Christmas to all, and to all a good night.
Are you leaving 10% of your profit on the table? Do you know where? Salesforce.com customers can get their free report with just a couple minutes of setup of Sales Compass Free Edition– which is automatically upgraded to personal edition through 12/31/2009. (See the setup instructions.)
This free report provides analysis on your business to help you maximize sales and profit for 2009, including:
Following the nice mention on Inc.com last week (see Free Pricing Analytics for SMBs), salesforce.com highlighted Sales Compass Free Edition in the “Latest Listings” section of it’s November AppExchange newsletter. If you use salesforce.com (Unlimited, Enterprise, or Professional Edition with Products) get the Free Edition now on the AppExchange. If you’re not a salesforce.com administrator, you can sign up for a free account on the Mimiran website.
The economy’s in a bubble! A crash! A recovery? Careful, you might get whiplash. Looking back at the roller coaster ride, a lot of companies lost a lot of money because they could not act, or even react, quickly enough. Strangely, this money rarely showed up as a line item on the corporate P&L, although the losses had a huge impact on share prices. What were these losses, and how can we apply the lessons more profitably now?
Most companies have a hard enough time figuring out “optimal” pricing in relatively static markets. List prices get revised once or twice a year, often through a process that involves more heat that light. Promotional programs and discount plans get a fancy spreadsheet model that never gets revisited to measure effectiveness.
When conditions change rapidly, companies often get caught on their heels. For example, when energy prices rose rapidly, companies like UPS who recognized the importance of energy prices to their bottom line, and their competitors’ room to maneuver, implemented fuel surcharges and turned energy costs to their advantage. Most companies do not monitor fuel prices carefully, however, and most of them failed to take advantge of price increase opportunities or even to keep up with inflationary pressures in their supply chains.
By the time many of them had figured out they should have raised prices 6-12 months earlier, the economy had tanked and pricing power evaporated. Even then, some companies had waited long enough to react that they could still push through price increases of 5, 10, and even 12%.
Now companies have retrenched for the recession and are timid about raising prices. How will you know when? And how much? Or if you can raise prices in some industries but you have to be more flexible with discounts in others?
You need, in a word, agility. You need to see what’s happening now, not just what happened last quarter. And you need to be able to adjust how you price and discount based on that. You can’t wait for your year-end pricing review. You can’t wait for a marketing review. You need to tie into your sales team and empower them to be agile. If you don’t, your company will likely leave 10% or more of its profit on the table. You may not have to declare it as an expense, but your investors will notice the difference.
What’s your plan to close out 2009?
For many companies, 2009 has been a tough year. While many people remember the crash of the dot-com bubble, some people seem to have forgotten, and even that crash didn’t impact the broader economy the way the housing and credit market implosion did.
So how are you going to close out 2009? (If you’re in retail, good luck. I’ll write more on this later, time permitting.) Many companies are trying to sell into a buyers’ market, with less support from marketing efforts than they enjoyed in the past, fewer reps, but the same pressure to deliver.
Many companies run as hard as they can at the opportunities in their pipeline. They stay up late, fly around the globe, and try to “close” as many of them as possible. Buyers know this, and know how to extract maximum concessions by causing maximum stress.
I’d like to promise you that by reading this blog post, you’ll make your numbers and not have any stress, but I can’t. However, here are some things to keep in mind that can help improve your close rate, close time, and reduce your concessions.
Note that the concession bit is often the last thing on the minds of your sales teams. It’s something that you deal with once you get to the “negotiation” phase of your pipeline. Chances are you’re already pushed into a corner at this point. But for every 1% discount you give that don’t have to, you’re giving up about 10% of your profit. For some companies in this economy, that’s going to put you out of business.
Without further ado, here are the tips;
Best of luck with the rest of the year. Would love to hear how you’re implementing these practices, or others.
Pricing is a process, not an event. This mantra is important for companies who think pricing is something they do annually, when they update price books, or in special circumstances when they add a fuel surcharge. But pricing is happening all the time, whether or not you are participating in it, because pricing is the monetization of value, and your value changes with the market.
Decades ago, many companies could get away with treating pricing as an event, but the acceleration and globalization of business has destroyed that paradigm. Within the past 12 months, market volatility has further emphasized the importance of pricing agility as an ongoing business process. Inflation, especially in energy and commodities last year, left many companies flat-footed. Then, just as they were getting around to their price increases, the economy tanked and pricing power diminished or vanished. Now many of these companies are just getting around to unbundling offerings, being more creative with financing, or just being more generous with discounts.
Unfortunately, inflation is likely to be back soon, and these companies will again find themselves at odds with the market, with lower and revenue and much lower profit than more agile companies who can ride the market waves.
We’ll talk about how to ride the market successfully in an upcoming post.
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