Mimiran

As a heavy iPhone user, I was less than thrilled about AT&T’s plan to end “unlimited” data plans. Apparently, I consume over 3GB/month, despite doing most of my heavy lifting through WiFi. This means I will either need to reduce my network consumption, or pay more to AT&T. (I never hit the 5GB limit of the “Unlimited” Plan.)

Despite this inconvenience, it’s about time AT&T realized that a supply problem can be converted into a pricing problem. Also, pricing is much more flexible and flexible than most supply chains, especially those involving massive amounts of cellular infrastructure. So until network capacity is truly an unlimited commodity, too cheap to meter, it makes sense to charge heavy users more. (Note that AT&T also reduced prices on those who consumer relatively little data.) I wasn’t part of the conversation, but I can only assume that after AT&T ran scenarios for data usage, customer churn, and revenue, that the new plans came out ahead of the old plan.

This situation applies to other businesses, as well. Even if you’re not at 100% capacity across the board, bottlenecks in your business indicate areas you can expand, and/or increase prices. Is it hard to get an appointment with your service techs? Maybe they need to charge more. Do you bundle in rush delivery for your customers?  (I’ve seen companies that always express shipped very heavy goods, just because they never made their customers pay a premium for it. In that case, why wouldn’t ask for express delivery?)  Maybe it’s time to unbundle it.

p.s.  Verizon– can you please get the iPhone?

Here’s a discussion with Gerhard Schwandtner, founder of SellingPower and host of the Sales 2.0 Conference. After decades in sales, Gerhard sees how the artificial divisions between sales and pricing functions lead to suboptimal results, and he offers some advice for improving the situation.

How does sales think about pricing?
Pricing is like the passport that gives you access into a foreign country. It’s a very critical issue. It’s 80% of the value that a company is offering. If you don’t have the right price, you don’t have a chance.

If you look at the competitive analysis, why do sales people lose to the competition, there are always two reasons: either the competitive sales rep had a better relationship or a better price, assuming there is a similar fit.

If the product or service doesn’t fit correctly, it’s not a price issue or a sales person issue. It’s a lead qualification issue at the beginning of the funnel.

What is the historical interaction between sales and pricing?
The people who manage the sales and marketing organizations have to play from the same sheet of music. In certain companies, they have a chief revenue office who orchestrates between sales, marketing, and sales support. Complexity comes from the subdivision of certain functions. When you have a situation like that, you need greater integration efforts.

Pricing analytics are even more important than analyzing the sales funnel. [Emphasis added.] In most companies, the price is made up by somebody who looks at the cost side, but a price is a function of 2 factors– what does it cost to produce, and what is the value in the market and how much are people are willing to pay for it?

For example, I deal with a lot of speakers, and I ask what they charge. Some will say “I charge $5,000 per day.” I ask them how they know if this is the best price they can get in the market place and they say that this is because this is how other speakers charge. This is leaving pricing to chance because they are not analyzing their pricing. Have they tried to charge $7500 or $10,000? No. They are going with what is common and getting common results. As a result of these conversations, they charge more and they call me up and say they should have tried this years ago.

The same applies to any product or service. If you never try price testing, if you only go with what others are doing, you are not getting the best return on your investment.

What type of training does sales get in pricing and price negotiation?
That is a very good question. Most sales people do not get any negotiation training. This puts them at a disadvantage because most buyers are trained in negotiation and they know how to extract concessions, and fake walking away. Sales people are who untrained leave a lot of money on the table.

Why are companies not paying more attention to the problem of leaving money on the table?
Companies feel they are doing well enough, and they do not know what they do not know. A lot of sales leaders do not have enough time to explore how they could squeeze more profitability out of their sales organizations.

The economy is forcing everyone to take a harder look at how they run their sales organization. There is a tremendous drive to improve the productivity. How do they get better people? They need more hunters. People are moving a lot of sales functions to inside sales to save costs. They are spending a lot more time analyzing what they need to teach the sales reps, and also harvesting the collective intelligence of the sales organization. They are also looking very closely at sales technology that can deliver predictable ROI in a short period of time. Sales 2.0 is a huge opportunity for everybody, because there are over 1000 sales technology tools that sales leaders can explore. There’s more know how about sales processes and more science available around people, such as tests and behavioral profiles to help managers reconstitute the sales force.

Is there a risk that there is too much choice, too many paths?
We cannot stop learning. There is always the illusion that when we reach the next level, whatever that may be, that we can sit back and relax and enjoy the spoils. That illusion does not lead to progress. The moment we stop by being curious, we are cooked. The law of evolution mandates that we need to learn faster than everyone else if we want to stay ahead. There is no silver bullet that can eliminate the need for vigilance. As a sales leader, you need to be a productivity vigilante.

Is there a risk that desperation for revenue can lead to sales teams bringing in unprofitable business?
Smart sales leaders look at the reality of the market place. In a recession, you need to bring in 30-40% more leads just to stay in place. Pricing really starts with getting the right leads into the sales funnel. This means attracting prospects that have the need and the budget for your solution. Pricing and lead management need to work hand in hand. If you’re not doing a good job with lead management, you will end up with a lot of garbage in the sales funnel. The reps will chase the garbage trucks and come back saying the price is too high. You need a clearly articulated value proposition that lets customers understand the value you bring. If you don’t have one, and your reps can’t articulate it clearly, you have no chance of surviving.

How can sales 2.0 technology help improve the relationship between sales and pricing?
One issue is the mindset around pricing. Pricing is not like a statue. Pricing is more like a river. Pricing as a statue is the old approach. Everyone has one price and if the customer didn’t meet it, you lost the sale. Today you can’t walk away. You need to match price with value. Price is the science. Value is the art. You need to be build an artful value structure around the price, so the customer can say “the price looks a little high, but this really meets my needs.” The pricing people and the sales people need to have periodic reviews to go over the total value proposition with the customer. You may have to make adjustments for certain markets and certain conditions.

There’s a story I like about 3 guys who buy a movie theater. One guy wants to charge $15, redecorate the lobby, and cover the seats with leather. The second guy wants to charge $12 and cover the seats with vinyl. The third guy says “let’s charge $6 and cover the seats with people.”

How is the evolution of sales and the death of transactional selling impacting pricing?
Price explains how the product is made and price justifies the cost. Value justifies the purchase. For the buyer it’s all about the value. The rep should never quote a price before you establish the value. It’s totally self-defeating.

How do you handle buyers who want to know the cost?
We are moving towards a conversation economy. The old model of selling was a symphony orchestra, where everyone says the same thing. Now, it’s more like jazz, where you listen to a riff from the customer, and respond appropriately, and you co-create the sale. Depending on the quality of the conversation, you have a confrontational conversation or a collaborative conversation. As a sales per
son, I don’t want to be in a position to quote a price without having an opportunity to discuss value.

For example, you want to buy a camera with a telephoto lens. You have done some online shopping and found a lens that goes from 70-200mm that goes for about $600. You call a store and ask for a price. The rep can quote the price, but they need to understand what you are using the camera for. If you are trying to capture safari pictures, they can tell you that 200mm is not enough. Consider the 100-300mm lens that is available for $500. They have found a better solution for less money, and they get an instant sale.

If they just want a price, it’s a transaction, not a conversation, and you don’t need a sales person. They can do it online.
——

Thank you, Gerhard for the insight the wonderful musical metaphors. There you have it. Sell value. Coordinate pricing between sales and the rest of the organization with period reviews. If your sales team is just quoting prices, they can be replaced by a website. If you are chasing the wrong leads and can’t sell value because they don’t value what you offer, you’re not going to make it.

Of course, we wholeheartedly agree with the importance of pricing analytics and arming reps to compete in purchasing negotations. If you can’t see what you’re doing or where you’re going, you’re probably not going to get to the right place. Especially in this environment. You can get more information on Mimiran solutions for these areas.

We get a lot of queries from companies who say “our product/service/gizmo is so much better than the competition’s, but our customers don’t perceive it. How do we get them to see the value?”

It’s a great question. The “envelope” of possible prices stretches between your cost and the perceived differential value of your offering. (That’s almost always true; we won’t go into loss leaders here.) A lot of companies think they have great value, and they work very hard to create it, only to be told that by customers that it’s irrelevant.

One example is gasoline. Despite millions of dollars of advertising, no one really cares if Chevron comes with Techron while some other gasoline doesn’t. Part of the reason is that customers never see the gasoline, let alone any additives that may or may not improve performance or engine wear.

So the first step in getting customers to understand value is to show them whatever it is you want them to value. Intel did a great job creating a brand and a hefty price premium for something that had previously been a commodity– microprocessors inside computers. Corporate and home buyers saw the computers, but had no idea what was on the inside until Intel spent hundreds of millions of dollars convincing people that the CPU was the most important piece and putting little “Intel Inside” stickers on the outside of the case.

Nike offers another good example. When they introduced “Air” cushioning (it’s not actually air but a much denser gas with a higher molecular weight that is easier to contain under pressure for long periods) in the early 80s, it was a revolutionary concept. When they made the “Air” visible in 1987 by cutting little windows into the midsole to reveal the cushioning unit, everyone could see that this was great technology. Nike did a lot of other clever things, too, but this helped convince people that they should spend $100 on a running shoe.

Have a fancy sports car? You don’t want people to think you have regular non-sportscar breaks, do you? That’s why companies like Porsche make bright yellow and red break calipers.

(From FleetRates.com)

They are reinforcing via a simple color choice that this is a premium product.

Of course, some things are more amenable to being made visible than others. What do you do with materials that are, by definition, embedded in walls? Dupont puts their trademark Tyvek in giant letters on their housewrap. You can’t see it when the house is done, but during construction, everyone knows that the house or office building uses Tyvek.

The iPhone pretty much does what a Blackberry does, but it’s got a slicker, more intuitive interface. Apple makes sure you know this by airing TV commercials showing people doing things with a few flicks of a finger that would require more complex menu navigation on a Blackberry. Sure Apple has a great hype machine, but they also make sure potential buyers understand the advantages that justify premium prices. (Full disclosure: your author is a former anti-Mac person who loves his iPhone and whose next computer will be a Mac.)

What happens when you have a visible differentiator and you take it away? Starbucks did just that, using high technology to churn out coffee faster, but removing the aroma of ground beans. As Starbucks CEO Howard Shultz noted in a now-famous leaked memo, that this caused the coffee giant to “lose its soul.” Is it a coincidence that Starbucks is now closing stores? (Also possibly caused by other reasons– we’ll have a separate post on this issue soon.)

How can you help customers see the value? Anyone have any tough cases they’d like to take on in the comments? (Remember, the value has to exist!)

Next week I’ll be the guest speaker as part of an interesting webinar on accelerating SaaS (Software as a Service) revenue. Customer segmentation and pricing are critical components to doing this successfully.

Register, or read on for more information.

4 Ways to Accelerate SaaS Revenue

July 30, 2008, 2:00PM EDT

Software as a service (SaaS) is a brave new world. While offering customers reduced cost of ownership and less hassle, revenues grow more slowly than in traditional software markets, putting huge pressure on cash flow. In this webinar hosted by ZDNet’s Phil Wainewright with guest speaker Mimiran president Reuben Swartz you’ll learn why the traditional 3 ways to accelerate SaaS Revenue don’t work, and the 4th way that does.

To grow SaaS revenue, you have 3 options:

1. Raise prices. Unfortunately, this is next to impossible in the current climate.
2. Acquire more new customers. This is a key metric for software sales, but growing this number requires commensurate increases in sales and marketing expenditures that often don’t yield positive cash flow for some time.
3. Improve customer retention. This sounds great, but how can you know when a customer will leave before they leave?

What if you could implement a 4th method that combined the other 3 methods, gave you better results than any of them individually, and was actually easier to do? How would this impact your ability to meet and even exceed your revenue targets?

Join us for this exclusive webinar with guest speaker Reuben Swartz, President of Mimiran to learn how you can use this method to increase your new customer acquisition, improve retention, and raise prices.

eVapt is the sponsor of this webinar as part of their continuing educational series on optimizing SaaS Revenue. eVapt VP of Sales Joe Tinnerello, an expert in software sales and SaaS business models, will chair the webinar. Mr. Tinnerello is also a contributor to the eVapt Blog.

Your webinar’s host Phil Wainewright is an influential commentator and strategist on emerging software industry trends, covering the SaaS space for 10 years (back then it was called “Application Service Provider”) and writes the prominent SaaS blog for ZDNet.

Guest speaker Reuben Swartz is president and founder of Mimiran, a leader in pricing strategy, process, and analytics. Reuben is the author of Dollars and Sense: The Pricing Blog.

Register online.

Following up on an earlier post, here’s another method of helping customers segment themselves.

(Thanks to TripTouch.)

Gives new meaning to “capitalism.”

While we don’t recommend this kind of segmentation, we do like the notion of letting customers self-select into the offerings that are right for them. This happens all the time, often without us realizing it. Restaurant menus offer not just a range of foods, but a range of prices. Movie theaters offer matinees with reduced prices, and a full range of quite expensive to extremely expensive foods. (See this article on why this type of segmentation is good for moviegoers.) Have you ever had an experience that you didn’t realize was clever customer segmentation until after you had made your purchase?

There’s a short, insightful article by John Quelch at the Harvard Business School newsletter about commoditization. Quelch writes:

…even when a raw material has no value added and quality standards are set by law or the industry, there is still plenty of opportunity for differentiation around availability, delivery, shipment quantities, payment terms, and all the other services that accompany the core product. Marketers must use their imagination. As the saying goes: “There are no mature products, only mature managers.

Quelch recommends innovating, bundling, and segmenting your way out of the commodity trap, and notes that account-level profitability data is essential to intelligently managing these situations. This is the kind of information we provide to our clients via our MimiranM3 analytics software, which often leads to some eye-popping revelations about who is actually driving profits, and helps companies set pricing to maximize bottom-line return, rather than top-line revenue.

It’s almost the end of the year, which means many companies are putting the final touches on their 2008 price lists, and a lot of people are getting ready to have uncomfortable conversations with customers about why their prices are increasing.

Here are 7 tips for raising prices. As you consider them, think not only about how you should relate price increases to your customers, but how you would like your suppliers to inform you.

1. Prepare your customers in advance. Yes, this takes planning, and it isn’t always possible, but for annual price increases, you can start communicating well ahead of time. Some people aren’t in a position to do this, because they haven’t thought about their pricing yet. Others don’t want to encourage customers to order large quantities at lower prices and time-shift demand (while some companies are hoping they can stuff the channel). Here’s a great example from Freebirds, a quirky chain of burrito shops in Texas, which illustrates points 1 & 2:

2. Provide a reason that the customer can understand. In many industries, the surging price of fuel (and/or the related increase in the price of corn, transportation, heating, and anything (“everything”) related to the price of oil) drives surcharges or simply price increases. In other cases, it’s the price of cheese. (This is probably also driven by the price of oil, which has driven demand, either market-based or legislative, for ethanol, which has caused the price of corn to sky-rocket, which means it’s much more expensive to feed cows. Not that cows are actually supposed to eat corn, but that’s another story.)

3. Increase the price, but reduce the cost. This sounds counterintuitive, but in some cases improvements in your product (or service) may allow the customer to derive the same or better value with less of your product. Compact florescent bulbs, which cost several times as much as conventional filament bulbs are a good example. The unit cost is greater, but the total cost of ownership is lower, because they consume less electricity and require less frequent replacement. Service automation can also deliver improved value for less money, even at a higher dollar-per-hour rate.

4. Reduce the price with a new offering. This post is about price increases, right? So why are we talking about reducing the price? In some cases, you may find it advantageous to split an offering into 2 or more offerings, one of which has “premium” characteristics that command a higher price point, and one of which strips out some value but also significant cost drivers, allowing you to improve profits even at a lower price. Customers can then self-select the premium or value offering, depending on their needs. For example, a small printer included “free” rush service as a competitive advantage against bigger firms. So everyone ordered rush delivery, regardless of when they needed their print jobs. Without a price increase per se, the printer offered a discount for longer lead times, saving the firm and its customers money.

5. Be up front about it. A lot of people find this conversation uncomfortable. We risk alienating a customer, which can be an emotional and financial stumbling block. If we don’t actually believe in our value proposition, we often signal to the customer that there is some wiggle room. Instead of saying “the price is going from $2,000 to $2,200″, we say things like “we’re planning a 10% list price increase, and we can discuss how that will affect you.”

6. If you’re in a business where the sales reps negotiate with your customers on price, create a SPIF for reps who achieve the full price increase. Then your reps will be coming to you demanding appropriate training on the rationale and justification for the price increase. Note that you’ll get better results if you involve the sales force first, instead of pushing a price increase from “on high.” Most companies that do broad price increases in a heavy-handed manner end up with very mixed results.

7. Increase the perception value. At the end of the day, price is determined by value, so making sure your customers understand the value you provide is essential. Even if your offering hasn’t changed, your ability to find the right audience and give them the right message can improve.

Hopefully you have already set your pricing for 2008, and will file this away for 2009.

We don’t usually (OK, ever) link to LitKicks, a site that discusses literature, but they have a recent post on the pricing strategy for literary fiction which is quite interesting. The rise of mass-market retailers has created pressure to issue books in paper back, rather than starting in higher-margin hardcover, then going to paperback. Publishers and authors feel the squeeze. Some authors have gone to electronic publishing, which lowers prices, but can improve margins. This currently represents a small part of the market, but as it becomes more common (I’ve bought a couple of electronic books this year), and as increasing display resolutions offer a more pleasing reading experience. However, Richard Nash also notes that their is room to grow at the high end, and indeed, spread out the prices for a book:

Now, I happen to think that it would be rather good if we could engage in a far more sophisticated level of price discrimination, much like the airlines do. Signed limited edition for one price ($100), regular hardcover at another (maybe as a subscription), high-end trade paperback (maybe with flaps) at another ($16, $17?), cheap borderline mass market on 35 lb. paper at another ($9, $10), and electronic at yet another ($5, or also as a subscription). There are so many levels at which a given person might be willing to commit to a book, I feel it behooves us to try to get more of the the dollars that lie below that Economics 101 price elasticity curve. That would sound crass in a business where we’re minting money, but that’s hardly the case in publishing! Plus, it gets more readers.

This is some creative thinking, especially for the stodgy publishing industry, and it offers a good example of spreading out the price curve for what is essentially a “single product.”

Here’s an interesting article from the Harvard Business School newsletter on some relatively simple ways to incorporate time into Activity-Based Consting (ABC) estimates. ABC is great in theory, but getting reasonably accurate data and then keeping them up to date is a big challenge. If you can use good heuristic estimates, you can incorporate useful cost information into your pricing models. This is powerful stuff, since the better you know your costs, the better you can optimize profit, which happens at a different price than the price that maximizes revenue.

For example, in financial services, customers who use a lot of support time may be much less profitable than customers with smaller balances who rarely require assistance. Understanding how these factors contribute to overall profitability guides the appropriate pricing to attract the right customers at the right price points.

In other industries, complex orders or special shipping requirements may dramatically alter the actual profitability of orders that appear to have the same gross margin in the ERP system.

There’s a good series of posts on pricing segmentation in the retail sector over at B2B Blog.

See

• Part 1 of 4
• Part 2 of 4
• Part 3 of 4
• Part 4 coming later…