If you don’t like price objections, you could be accidentally killing your business.  If no one ever objects to your price, many of your customers would probably pay considerably more.

Charging a little more has a disproportionate impact on the bottom line.  For example, raising prices 10% from $150 to $165 per hour will likely raise profit much more than 10%.  Since that extra margin goes straight to the bottom line, you might increase profit 20 or 30%.  That sure beats working 20-30% longer!

In addition, pricing objections give you great insight into what the customer cares about.  They are learning opportunities.  You get to learn about the customer, and you get a chance to test your messaging for why your price premium is a good investment.  No objections, no learning.

When you get an objection, there are 4 possibilities.

1. The customer was never a good fit.  You should suggest they go elsewhere.  These are the “I want a brand new Ferrari and I have a $20,000 budget” customers.  If you currently sell them $20,000 Ferraris, you have a big problem.
2. The customer is a good fit for your company, but has legitimate reasons for wanting a cheaper price.  These are the “I want a really fast car, something like a Ferrari, and I have a $50,000 budget” customers.  Maybe they can get a used Porsche 911.  Maybe you can remove some of the value from your offering and lower your price, and/or give them discounts for upfront payment, flexible scheduling, volume purchases, or other behaviors that create shared value.  (See more on how you can Price for Profit.)
3. The customer is a great fit, but wants to see if they can get a better deal.  These are the “I’d love a Ferrari, what kind of deal can you give me?” customers.  They are asking for a discount because they know it can’t hurt.  Make sure they understand the value message, and charge them the right price.  They can get a discount if they agree to some of the shared value behaviors in step 2, of course.
4. The customer may be a good fit, but they are using price as a mask for deeper issues.  These are they “I’d love to buy a Ferrari, but I can’t spend more than $20,000 (because my wife said I could get a Ferrari if I didn’t spend more than that)” customers.  So you say “let’s say we agreed on your price, are you ready to buy today?”  If they are ready to buy, you can deal with the price objection by putting them in one of the previous 3 categories.  If they start talking about their budget cycle, IT approval, the need to get buy-in from their Tokyo office, etc, then you know that price was just a smoke screen.  They have other issues that they may not feel comfortable airing, but even if you lower your price, those issues remain.

Note that customers put themselves into these categories.  The price objection just helps you figure out how to deal with them.  Don’t assume that everyone is in #2 and will respond to lower prices.  This just becomes a self-fulfilling prophecy and teaches your customers in #3 and #4 to act like they need more discounts.

Now consider what happens when you don’t get a price objection.  Either:

1. You priced the offering at exactly the optimum price for that customer, or
2. You underpriced.

So when was the last time you got a price objection? How did you handle it?

24 ounces of ketchup at $0.07/oz.

Turn that idea on its head.

32 ounces at $0.079/oz.  The price per unit goes up almost 13%.  Not bad for a commodity.

Note that the different sizes make it harder for buyers to know exactly how much more they are paying.  But hey, who doesn’t like upside down ketchup bottles.  You can probably even make the case that you end up wasting less ketchup.

First of all, Netflix is a data-driven company.  They have lots of data and they are constantly trying to use it more effectively.  They sponsored a $1M contest to see if independent teams could improve on Netflix’s algorithms to suggest movies you might like based on what you have already seen.  They know how much money they make on what kinds of subscriptions.  (They even got in trouble a few years ago for “throttling” or slowing down the shipment of “unlimited” DVDs to people who watched a lot.)  So they knew, before they changed prices, what kinds of changes in demand and volume and price would be profitable for them.

Speaking of profit, the goal for Netflix is making money, not shipping DVDs or streaming videos.  Since they pounded Blockbuster, they have emerged as the leading source for movies and TV show reruns.  And you can make a good case that they have been underpricing for some time.  Streaming is the future, so Netflix is not interested in subsidizing the DVD business for $2/month on top of the streaming fee.  If you want DVD’s, you need to pay $8/month at a minimum.  This will allow them to actually make money on the DVD side of the business.  Some people will probably quit and rent from kiosks like RedBox instead, but these are customers at the margins.  Netflix probably has good data to estimate what portion of their subscribers are likely to leave for kiosk services.

What about other alternatives?  Does anyone really want to drive to Blockbuster anymore?  Amazon Prime members get free streaming videos, although their selection is probably even worse than Netflix’s on-demand line up.  Cable companies and Apple offer on demand rentals, usually with a much better selection of new releases, but these videos cost about $5 a pop, on top of your cable subscription, so it’s not exactly a cheap option.

In other words, the value from Netflix for cost and convenience is pretty hard to beat, even at the higher prices.

Netflix has a couple of weak spots, though, related to content.  When they started, they were small, and useful threat for the studios against the dominance of Blockbuster.  (Blockbuster got greedy, which is why we have new release movies for sales for less than $20, but that’s another story.)  Netflix also managed to acquire streaming rights from Starz, which were cheap at the time.  When that agreement expires, Netflix expects to fork over much more money to the studios.  They also need to expand the on demand library, which might enable them to get out of the DVD business altogether.  The amount of content available and the price Netflix will have to pay for it are still up in the air, but Netflix is getting ready for a larger showdown with the studios.

Unless you’re a Netflix customer, none of this may matter to you. But what lessons can you apply to your business?

First, do you know how profitable your customers are?  Most businesses make over 100% of their profits from about 20% of their customers.  They break even on 70% or so, and actually lose money on some customers.  Your pricing plan should encourage those money losing customers to either make you money or take their business elsewhere.

Can you model the impact of price, cost and volume changes?  If you know your customer profitability looking backwards, that’s helpful.  But what you really want to do is figure out what it will look like in the future, based on certain assumptions, like changes in price, volume, and costs.  Businesses have an almost inherent fear of “losing customers”, even though losing customers can increase profits, especially if price increases are involved.  Unless you have a model to help you understand the bottom line impact of price, volume, and cost changes, it’s hard to make good decisions, and you’re likely to underprice out of fear.

How dependent are you on key suppliers?  Netflix is a distributor.  They deal with much larger studios (and cable providers, whose pipes are necessary to bring online content).  The studios are afraid of Netflix turning into an online Blockbuster, which could then control the industry.  They are well connected politically, and despite being strategic idiots, they have good lawyers who know how to extract the most value from a given transaction.  If you are beholden to key suppliers, your cost structure and pricing structure are also beholden to those suppliers.

By the way, I don’t think we’ve helped anyone push through a 60% price increase this year, but we’ve a couple of companies increase prices more than 30%, with minimal impact on sales and a huge impact on profit.

However, when you automate, you want to know what your trusty little helpers are doing.  When you hand over your car keys to your teenager, you know that eventually, your teen will come home for gas, food, money, or sleep.  When you hand over your pricing to your automated apprentice, you are giving your car keys to someone who never gets tired, runs out of gas, or needs food, and who may not know how to drive once they get out of the neighborhood.

Recently, just such a setup produced a book that listed for over $20 million on Amazon, as 2 automated pricing bots kept raising prices until finally somebody noticed.  (Thanks to the many alert readers who sent me a link.)

While amusing, this situation didn’t really cause anyone any harm.  (I’m going out on a limb here and assuming no one actually bought the book for $23M.)  However, automated systems can cause real havoc, especially when they go outside the “reasonable” bounds for which they were designed.  You can then up with heavily discounted items that the seller didn’t intend to discount.  In one case, a manufacturer’s pricing system returned a price of -$1 to mean “no price found.”  The idea was a good one.  Put in something so blatantly wrong that someone would have to investigate it and correct it.  The execution was flawed, however, as the approval process team (and code) was not aware of this potential situation.  It happened once on a huge quote, so the people glancing at the totals never noticed.  But the company was quite upset when the customer insisted that they honor the price instead of the $100,000+ it should have cost.

If you’re truly in a commodity market, you are in fact at the mercy of the market.  Either focus on your cost, or differentiate to decommoditize.

Few businesses are in true commodity markets.  And for a lot of these businesses, especially at the SMB level, the first barrier to improved pricing is the one the business owner can control most directly: themselves.  Many business owners look at their costs, tack on a “fair” profit, and call it a day.  Or they look at the competition and price a bit below them.  Even when costs go up, they often have trouble raising prices.

Your pricing is ultimately limited by the perceived differential value of your offering.  I’ll go into more detail on the value side in a later post, but for now let’s think about the amount of value you can capture.  You work really hard to create value for your customers.  You work proactively to make them successful.  Don’t sit back passively when it comes to capturing your share of that value.  Pricing is the monetization of value, and you should be just as proactive about that as value creation.

So don’t be the limiting factor on your pricing.  If you think you should be achieving higher prices but you haven’t asked because it makes you uncomfortable, you need to fix that.  If you are used to giving big discounts when you get nervous in sales cycles even though the value is there for the customer, you need to fix that.

Here are some exercises to help you think about this:

• The Series of Increasingly Outlandish Prices.  From Steve Blank, author of 4 Steps to the Epiphany.  When the customer asks for the price, keep getting more and more outlandish until the customers pushes back.  For example:  “It’s $1M dollars.  Per month.  Plus $2M for setup.  Plus 20% maintenance.”  The point is to help discover the price for a new offering, but it’s also useful to force you to think beyond “I think it should be about $99.”
• Double Your Price.  Someone bursts into your office and holds a gun to your head.  They tell you that you have to double your prices in a month.  (Maybe it’s your accountant.)  What would you have to change about the way you sell, your products, your services, your customers, to achieve this?  While you may not be able to actually double your prices, you can make dramatic improvements.  We used this method to double consulting prices, although it took us 2 years, not a month, to actually do it.
• Visit a Porsche Dealer.  Test drive the fastest convertible on the lot.  When it comes to negotiating the price, keep insisting that you are deciding between this car and a Hyundai Sonata that seats 5.  Keep asking the sales manager to come back with a better price.  After they get done laughing and throwing you out, compare the reaction of the car salesreps to your reaction when customers try to chisel you down on price.
• Say It to the Mirror.  It may sound silly, but if you have trouble asking for the price you think you should get, practice saying it to the mirror.  Not just the price, but why this is a great deal for the customer.  Make sure there is no hint of apology in your voice or your body language.

Check it out.

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.

Get early bird pricing through December 21, and save an additional $100 with the code MIMIRAN100.

One of the sessions is: Maximizing SaaS Revenue through Sales and Pricing Discipline, presented by Reuben Swartz of Mimiran.

Maximizing SaaS Revenue through Sales and Pricing Discipline

SaaS companies often act as if they have no incremental costs, leading to lax discounting practices. As a result, margins fall and companies struggle to reach or maintain profitability. Through careful analysis and disciplined execution, companies can close deals faster and leave less money on the table. For small software companies, the results can be the difference between life and death (a company with 10% margins that can leave 2% less money on the table raises its profit by 20%).

In this session you will learn to analyze and evaluate the effectiveness of your revenue and pricing strategies, how to discount more effectively (and less), and examine how other companies have implemented these techniques.

Hope to see you in Dallas.