LeveragePoint Value Management Blog

Getting Business Results With Value-Based Pricing & Value-Based Selling: Two Important New Books

Value-Based Pricing: Drive Sales and Boost Your Bottom Line by Creating, Communicating and Capturing Customer Value by Harry Macdivitt and Mike Wilkinson

Negotiating With Backbone: Eight Strategies To Defend Your Price and Value by Reed K. Holden

Two new books out this spring are worth reading by anyone interested in how to price and sell more effectively. Both of these books are worth a careful read, and both call out the importance of applying the value-based approach to sales and the B2B sales negotiation.

In their new book Value Based Pricing, two of Europe's top pricing and sales effectiveness consultants have followed up their book The Challenge of Value with a deeper dive into value-based pricing and how it connects to value-based selling and pricing strategy. One interesting aspect of their Value-Based Pricing book is their Value Triad that organizes thinking around Value to the Customer around Cost Reduction (OK, everyone tries to cover this), Revenue Gains (often the most important and powerful value drivers, and the most difficult to demonstrate) and Emotional Contribution. At LeveragePoint we generally try to address the subjective factors that Macdivitt and Wikinson cover under 'Emotional Contribution' as Pricing Sensitivity Factors, but as Prospect Theory shows us it is critical to think through cognitive and emotional issues carefully when setting and communicating prices. Using the worksheets in this book will help you to do this. The Value-Based Pricing book is important and useful as it (i) provides a good review of value-based pricing based on deep experience; (ii) links value-based pricing to value-based selling by the means of value propositions (this is the same workflow that is supported by the LeveragePoint platform); and (iii) it provides very practical worksheets that people can use to get started with value-based pricing.

Reed Holden needs no introduction to people in the pricing community. He was the co-author with Tom Nagle on the second edition of The Strategy and Tactics of Pricing and has made many contributions to pricing best practices. His previous book, with Mark Burton, Pricing With Confidence, is the best introduction to pricing for the general business reader. At the heart of his new book are eight scenarios that are frequently encountered in B2B sales. Holden makes it easy for sales people to identify each scenario and provides clear advice on how to handle them. In most cases a clear understanding of differentiated economic value is needed for effective negotiation. The eight scenarios covered are

Price Buyers
1. The Penny Pincher
2. The Scout

Relationship Buyers
3. In the Pack
4. The Patient Outsider

Value Buyers 
5. The Player
6. The Crafty Outsider

Poker Players
7. The Advantaged Player
8. The Rabbit

Sound intriguing? It is! And understanding each of these buying scenarios and how to negotiate on price will do a lot to improve price capture.

It is good to see a growing interest in and appreciation for value-based pricing and its application to product management, marketing and sales. As recent research has shown, the ability to combine value-based pricing with great price capture practices is the key to winning in B2B.

For more information on Harry Macdivitt and Mike Wilkinson's work see Axia Value Solutions.

For more information on Reed Holden see Holden Advisors.

From White Flag to the Pricing Power Zone - A New Paper by Andreas Hinterhuber & Stephan Liozu

Warren Buffet has identified "pricing power" as the most important factor is evaluating investment, but what does "pricing power" really mean, who has it, and how does it impact business performance?

Pricing thought leaders Andreas Hinterhuber and Stephan Liozu published an important article in the MIT Sloan Management Review "Is It Time to Rethink Your Pricing Strategy." (You will need to register with MIT Sloan to read the article but there is no charge for access.) The article is based on extensive research carried out over the past 18 months with CEOs and other senior executives on pricing practices at B2B companies.

In the article the authors introduce the Pricing Capability Grid.

 

Where does your company fall in this grid? The two key capabilities needed to achieve Pricing Power are Price Setting and Price Getting. To get the full benefit of pricing expertise, companies need to link the two together - Price Setting needs to be done in a way that makes sense for sales, who in turn have to be able to convey the value to the customer that underlies the price. Contact us at [email protected] to find out how the LeveragePoint cloud collaboration platform can help you get to the Pricing Power Zone.

How do you currently answer the two most pressing questions from customers?

A recent IBM study cites that getting closer to customers is a top priority for 88% of business leaders.  Everyone gets it: to be successful organizations must understand customers, meet their needs, and do it in a in a way that builds trust. To understand customer needs, companies are now spending huge amounts of money on “big data” analytics. The goal is to use data to manage and predict customer needs. I don’t disagree that analyzing large volumes of data can yield some powerful insights, but I would argue that most B2B organizations do not systematically collect and capture the data they really need to become better at understanding and meeting customer needs.

Let’s put ourselves in the shoes of a customer, who ask two basic questions from their suppliers. 

• How will your products and services impact the bottom-line of our business?
• How is your solution better than that of your competitors? 

Answering these two simple questions not only requires data on how customers run their business but also knowledge of the capabilities of your competitors.

Case Study:  High-Tech Telecom Supplier 

The case below shows how the “right data” can be better than “big data” when it comes to understanding customer needs and making better business decisions.

Your organization has developed a new integrated chip set for telecom equipment makers. Your new chip set not only improves network performance but also eliminates the need for a back-up circuit board because of a breakthrough in design.  Your team wants to analyze data in their brand new BI application to determine what customers to target and set a price, but after analyzing transaction, product, and customer data they realize that they don’t have visibility into how the new design will impact the customer’s bottom-line. They also realize that they don’t have insights into the latest technology offered by their main competitor.  

The reality is that organizations rarely collect and organize data on how their customers operate their business. When was the last time you saw a database that was hooked up to your analytics platform containing the answers to the following questions about customers? 

1. What is the current process for installing a chip set?
2. What is the current process for installing the back-up circuit board? 
3. How long does that process take? 
4. How many people are involved in installing and testing the existing chip set? 
5. What are the labor and handling costs of installing the chip set and backup circuit board?  
6. What are the operating costs of having to run a back-up circuit board?     

Answers to these questions will help you quantify how your new design can impact your customer’s bottom-line by calculating the cost savings of not having to install, test and run a back-up circuit board. Insights into operational characteristics of customers can shape decisions on what customer to target and how much you could charge for your solution. So now we move to question # 2: "How is our chip set any better than the competition?"

Answering this question using “big data” analytics would require active tracking for product features and benefits offered by competitors. This type of competitive data is not often captured in a systematic fashion. When it comes to competitors, organizations can barely capture win/loss data. Using the example above, the questions that we need to be able to answer and therefore capture are:

1. How does the competition’s latest chip set’s impact network performance?
2. Does the new technology offered by the competitor still require an extra back-up circuit board?
3. Are there other features and benefits offered by competitors that you can’t match?    

Realizing the need for capturing data that was not in the BI system, the product marketing team could do some online research into their main competitors. The goal is to determine what that the latest solution from the competition is able to provide.  For example, you can uncover whether competitors provide similar levels of network performance but don't eliminate the need for a back-up circuit board. Once the organization understands what the competitor is able to offer then you are able to quantify the value of their unique differentiation. 

By adopting  LeveragePoint as the platform, the team would be able to capture the product features and benefits offered by the competition. The application also enables them to quantify the bottom-line impact on the customer’s production process that would result from eliminating the need for installing and testing a back-up circuit board. After completing the analysis, the telecom equipment manufacturer could reduce costs by $118 - $132 per unit. Using this insight, marketing teams can create an economic value proposition that Sales team used to engage in a value conversation with customers and support selling at a price premium over the competitive solution.

Business leaders from product management, marketing, pricing and sales can benefit by working under a single sales and marketing platform that systematically captures data on both operational characteristics of customer and capabilities offered by competitors. By collecting analyzing and using the right data the organization was able to successfully attack the market and answer the key questions from customers with confidence. 

What is your organization using today to answer the two most pressing questions from customers?

 

 

How does pricing excellence benefit buyers (and not just sellers)?

Many buyers are concerned when they hear that one of their suppliers has a new focus on pricing excellence and is implementing pricing software, whether this be a value-based platform like LeveragePoint or an analytics and optimization platform from PROS, Vendavo, Zilliant or Vistaar. Pricing is seen as a zero-sum game – if the price goes up the seller wins and the buyer loses. One result of this perception is that companies implementing pricing software or pricing excellence programs are reluctant to talk about it. This slows the spread of pricing excellence through the economy as companies are acting in secret and cannot learn from each other.

But is it true that pricing excellence only benefits the buyer? We posed this question on the Professional Pricing Society’s LinkedIn Group back in late April and there has been an interesting discussion over the past month that us well worth joining. Some of the key points made were as follows:

Changing the Price Structure Can Benefit Buyer and Seller

When aggregated across many negotiations buyer feedback can result in making changes to better align the component pricing approach with the buyer’s purchasing needs and value perception. In this way, buyers benefit from greater flexibility and less risk even though this does not have to result in a reduction of the resulting price for the overall purchase.

Pricing Excellence (and Discipline) Results in Fairness for Buyers

Pricing excellence results in fairness for buyers. Companies that succeed in achieving pricing excellence allow buyers to be confident that their own competitors are competing on similar cost structures. Over time, this increases competition on innovation, which benefits all market participants. If price is properly aligned to value, the fairness in the relationship is also transparent to the buyer. They should be willing to pay what the vendor is charging since they are confident that they are getting a fair return on investment.

Buyers also benefit by the inherent fairness that results from proper price segmentation and price optimization. The price sought by the seller represents the market-aligned price and the same treatment that will be given to other similar buyers. 

Another benefit, with consistent pricing the individual buyer gets inherited power from the collective negotiating skills of all buyers in the price segment who came before and have negotiated the sellers target price to a given point, i.e. it's market-aligned point.

Value-Based Pricing Builds Trust

Selling on the basis of value can only happen where a relationship of trust exists between buyer and seller. In such situations there should be a free flow of information between the two so understanding what the buyer’s criteria are should not be an issue. Additionally, it is in the buyer’s interests that the seller knows their criteria, because on that basis they can be reasonably confident that those criteria will be met.

A Focus on Value Can Grow the Pie

From a value-based perspective, the focus is on how to create differentiated value for the customer. Clearly part of that value has to be captured into price, but not all of it. The more companies base their pricing on value the more value they will create for their customers. Some buyers encourage suppliers to adopt value-based pricing as they want their suppliers to be creating differentiated value for them (that they can capture and use to create value for their own customers).

Lack of Pricing Discipline Can Destroy the Long-term Value of a Market

Pricing excellence implies rational, value-based pricing throughout the supply chain. This is essential to well-functioning markets and long-term stability. Short-term pricing strategies can destroy price quality. Typically driven by attempts to grab share or prop up sagging revenues, the end result is market distortion which erodes the relationship between price and value and leads to increased instability. The commodification of products and the destruction of the relationship between price and value can lead to reduction in the number of suppliers or in the quality/variety of products offered or both.

So there are some good reasons that a focus on pricing excellence can benefit buyer and seller. As we noted in a post earlier this year, value-based pricing can drive innovation in the supply chain. And our next webinar, with Tom Lucke on June 4, will focus on Driving Value Upstream into New Product Development. Building pricing excellence is in everyone's interest and will strengthen the economy as a whole!

Five Questions to Ask When Investing in Pricing Software

Companies are becoming more sophisticated in how they set and manage prices. What is the main driver? The upside profit potential of addressing vast price variability across the business. As companies evaluate different technology and tools for the job, there are fundamental questions worth understanding before making a decision on the right pricing software for your organization. 

When we look at this representative diagram plotting sales and price by customer for a single SKU, it is natural to question what is going on.  Some customers pay significantly more than other customers and sales volume does not seem to be a factor despite having volume-based discounting policies in place.

 

As you look at each data point you may naturally see an opportunity to raise prices on those customers that are not paying what other customers are paying. But asking a customer to pay more is much easier said than done, especially if you can’t articulate why you deserve to get paid a higher price.

Question 1: Can your organization articulate the value of your products and services?

From your customers’ perspective the price of your offer is tied to the value you deliver relative to the competition. Customers buy to achieve an economic result and they make purchasing decisions that will deliver the greatest impact. If Sales has a hard time communicating the economic value of your offerings in order to justify the price, then the only way to close the deal is by discounting. As you evaluate pricing software solutions, seek to understand how the pricing software supports your sales team’s ability to effectively communicate the value of your products and services.

Question 2: Does your organization know how to measure value? 

Most companies struggle with the concept of value and how to measure it. It is far easier to set prices based on a margin goal (cost plus) or based on how the scatter diagram “should” look. But if we agree that, for sales teams to be more effective they must articulate value, then the organization must provide Sales with not only a price level but also the ability to engage in a value discussion with customers. Pricing software must simplify the process of:

• understanding customer needs
• collecting relevant data that shows how your offerings deliver economic results
• establishing the ability to quantify value, in economic terms, of what truly differentiates you in the market

Question 3: How committed is your organization to making value, pricing and sales effectiveness a priority?

For organizations that embark in the journey to make customer value a strategic part of their business they must recognize the need to align the goals of the organization. Pricing software must provide the platform that breaks down siloes by enabling all the different stakeholders involved in creating, communicating and delivering customer value to work together to achieve shared goals. By providing a consistent process and language across the organization, pricing software supports the ability to set better prices and capture more value when negotiating with customers.   

Question 4: Who owns value?

A: Product Management

B: Marketing

C: Pricing

D: Sales

All of the above! Product managers, marketing teams, pricing teams and ultimately sales teams can work collaboratively to create, communicate and capture value.  Understanding what truly differentiates you in the market means that you now have the ammo to win a price negotiation, shorten sales cycles, and capture wider margins. Seek to understand how pricing solutions support the needs of a diverse group of stakeholders.

 Question 5: How long does it take implement a pricing software solution that addresses my needs?

Traditional approaches for implementing pricing software require heavy IT involvement, painful data clean up, and endless hours devoted to configuration, customization, and integration. It can easily take over a year to start seeing results from this effort. Once you actually start using the software you may realize that market conditions have changed, new requirements pop up, and costly system upgrades are needed to achieve the expected results. To reduce risk, look for pricing solutions that can be deployed quickly and can deliver measurable business impact within weeks.  Recently, many organizations are changing their approach to software by subscribing to the service rather than to buying premise based solutions. With only an internet connection and good training, your organization can start the journey toward understanding and communicating your competitive advantage.

Ask the Expert With Dr. Tom Nagle - Two Questions from a Specialty Chemicals Company

Q. Some of our customers require a price quote before they will have any discussions with us where we can introduce a conversation on differential value. How can we benefit from a value conversation when this is the case?  

Tom: The buyer's demand for a price quote before beginning discussion with a seller is similar to the demand that a company participate in a "blind auction" where only the prices of competitive offers, but not other offer details, are revealed during the bidding. One option is simply to refuse to participate, which often works when you are an incumbent supplier, but may result in your exclusion. A better option, when possible, is to "unbundle" the differentiating product and service characteristics that justify your price premium.  This can require some real creativity to design a "bare bones" offer with a set of conditions: NO rush orders and no changes to order within 60 days of delivery, truckload only quantities, etc. (Note: these would be default order requirements for sourcing from China, so why should you offer them if expected to compete with Chinese suppliers?) You can also cut cut back the length and tighten the conditions of warranties. In some cases, you can  "unbundle" product characteristics as well. At one point, we have helped equipment manufacturers develop  "fighting" models simply by figuring out what they could "turn off" in equipment they were already producing. This is getting easier when more and more product differentiation depends upon software that can simply turn features on and off. To the extent that you can "unbundle", you can submit a "bare bones" offer with a "bare bones" price up front, which opens the door to begin a discussion of the value of optional "add-ons". When the differentiation is in service, it  is possible that all the profit is in the services (the rush order charges, the maintenance contract) rather than in the product that was subject to initially low pricing. For example, the highest quality suppliers of elevators sometimes charge no more than those making lower-quality elevators so long as the buyer commits to a long-term maintenence contract. Since the cost to deliver maintenance is less for a high quality, well-made product, the service is highly profitable. 

Q. Some of our customers are very secretive and will not tell us what product our own product will be used in so we cannot talk to them about differentiated value. Is there anyway to have a value conversation in this case? 

Tom: I would first want to understand why the customer is being secretive.  Is it because they do not want to reveal prematurely that they have an innovation in the works that will give them an  advantage when their competitors are unprepared to respond? That would give you some indication of what they might value--reliability of supply and ability to ramp up to meet increasing demand. Still, quantifying value would seem difficult without more information.  

More often,  the reason for secrecy is that a buyer fears that if the supplier understands how much value its unique product or service characteristics create for that buyer's application, it will raise the price. Many suppliers lose the ability to work collaboratively with their customers because they lack "price integrity". Price integrity, or the belief that the price offered is really the best price available from the supplier, is driven by consistency in pricing among orders requiring similar quantities, features, and service characteristics. Companies that lack proactive pricing policies, but rather come up with prices in reaction to customers' behaviors, create incentives for customers to be defensive and adversarial in negotiations. That really undermines a firm's ability to understand the buyer and to create value cooperatively. Fixing the problem requires replacing reactive, exceptions-based discounting with proactive, policy-based discount policies that are transparent to the customer.  For more on how to do this, see my note "Stop reacting to buyers' price expectations; Mange them".

Dr. Tom Nagle is the author of The Strategy and Tactics of Pricing and a member of the LeveragePoint Advisory Board. 

Do you have a pricing question for Tom Nagle? Send it to[email protected].

 

Change - Value - Cloud Were Key Themes at the Professional Pricing Society's Chicago Annual Spring Conference

The Professional Pricing Society, the leading organization supporting the development of pricing excellence and pricing professionals around the world, held its 2012 Spring Conference last week in Chicago. We observed three main themes after speaking with many visitors at our booth and in the main conference sessions: Pricing as a Catalyst of Culture Change, Value-Based Pricing and Sales, and the emergence of Cloud Solutions for pricing and the pricing/sales interface.

Pricing as a Catalyst of Culture Change

• Laura Preslan, GM of Strategic Practices at Microsoft, focused on the need for engaged leadership during her dynamic presentation on "How to Manage/Organize your Pricing Department". In particular, it is critical to ensure that pricing teams communicate well with sales, and are responsive to critical sales needs while still maintaining discipline. 

• Dr. Klaus Hileke, CEO of Simon-Kucher Partners, gave a compelling talk on the role of profits in building strong companies.

• Stephan Liozu, CEO of Ardex Americas, shared some of his research on the transformation to value-based pricing and organizational change. He showed how the C4 Zone (a zone of convergence, collaboration, conversation, and consensus) works in action. Read more about this topic in his recent guest blog post. To support these changes, Ardex Americas is implementing LeveragePoint's collaboration platform for product development, pricing, marketing and sales.

The Power of Value-Based Pricing

There were many conference sessions and several workshops that focused on the topic of value-based pricing. Pricing experts have long known that value-based pricing is the key to successful B2B pricing, thanks in large part to the work Dr. Tom Nagle and his colleagues have done developing methods and best practices for value-based pricing over several decades.

• Harry Macdivitt and Mike Wilkinson gave a one-day workshop on how to implement value-based pricing in the organization. They demonstrated how to apply the material covered in their new book, Value-Based Pricing: Drive Sales and Boost Your Bottom Line by Creating, Communicating and Capturing Customer Value.

• Madhavan Ramanjuman from Simon-Kucher Partners focused on the critical importance of getting pricing right for new product launches. (Several major companies rely on the LeveragePoint platform to get their new product development launch efforts aligned on how value is created for customers and how to communicate that value so that it can be captured in price.)

• Rich Eagles and Oliver Griebl of Deloitte made the key connection between Value Pricing and Value Selling in their one day workshop. Pricing excellence only really matters if sales can deliver.

There were many other great workshops, including excellent sessions led by experts such as Frank Luby, Dr. Kent Monroe, Bob Sherlock and Tim Smith.

The Move to the Cloud

Cloud-based software solutions already dominate many sectors, including Customer Relationship Management (salesforce.com), Human Resources (SuccessFactors, now part of SAP), and Marketing Automation (Eloqua, Marketo, Pardot and many others) because they provide exceptional economic value that on-premise solutions find it hard to match. John Norkus of Deloitte delivered a presentation on why pricing software must also move to the cloud.

• Ease of Deployment: Cloud software can be made available in minutes, not days, weeks, or even months. There are no IT costs and cloud applications are generally less expensive to manage.

• Global Access: Workforces (especially sales) are mobile and need to access value selling and pricing support wherever they are, especially in a world of BYOD (bring your own device) sales.

• Speed of Innovation: Cloud companies innovate faster and get their innovations to their customers right away. Customers get the value of a new innovation in weeks, rather than waiting for their vendor to make a product release, and IT to perform the necessary upgrade.

• Better security: Cloud companies invest more in security and have more advanced security than any one corporation, even a large corporation, can afford. Look for SOC-2 certification from your cloud vendor (or your internal IT department).

• Integration: Cloud applications are designed to integrate data from across the web. Pricing excellence depends on data about customers, competitors and market conditions. Cloud applications are designed to search for and integrate this data.

The Professional Pricing Society has a very active LinkedIn Group where conversations continue between conferences. If you are interested in value, pricing and the critical interface between pricing and sales, I encourage you to join and participate in the discussion!

Pricing Myths: Alive and Kicking!

Guest Post by Stephan Liozu

For the past ten years, practitioner’s published literature have highlighted the existence of numerous pricing myths. Many of them have disappeared with the modernization and professionalization of the pricing function in firms. Pricing has come a long way with the emergence of pricing software, modern pricing strategies and many excellent pricing books. Marketers and pricers learn and apply these new tools and concepts and myths slowly disappear. However new myths pop up in conversations and pricing practice and we thought it might a good topic of a discussion on the Professional Pricing Society Linked In group. Here are ten of the latest and most pernicious pricing myths representing the voice of some pricing professionals.

“Myth: premium pricing is value-based pricing. Many firms based their pricing at competition+% estimating that they can get a premium for their value. They claim to be doing value-based pricing. Premium pricing is not value-based. It is a competition-based pricing strategy that does not measure and fully capture customer value.” CEO of mid-sized manufacturing company.

“Myth: the pricing team is the "sales prevention dept". The reality is: pricers try to help capture sales opportunities, as well as maximize profits!” Pricing Practitioner with a Long Career in Pricing Management and Consulting.

“Myth: pricing optimization and value-based pricing depend on heavy involvement with consultants. Most companies can implement SaaS pricing software using their own people with minimal support from external parties. One needs to leverage and organize the knowledge you already have at product development, marketing, operations, finance and especially sales.” CEO of a Value-based Pricing Software Firm.

“Myth: I have to fix my price-delivery processes before I can improve my price-point quality. This is like saying, "I have to fix my plumbing leaks before I remove the lead in the water...". Nonsense -- bad prices are toxic to your business and can/should be resolved right away. The profit lifts that come from fixing your price-point quality are a great source of funding for that eventual price-delivery project, by the way.” Director of Pricing Excellence at a Pricing Optimization Software Firm.

“Myth: price elasticity and demand curves can be easily applied to B2B markets. Fact: buying process is sufficiently complex, customer experience/ user sophistication levels with B2B products can vary greatly and downstream customer derived demand exists such that applying these concepts is problematic.” Vice President of Pricing & Analytics at a SaaS Clinical Development Solution.

“Myth: customer willingness to pay (WTP) should drive pricing. Customers don't know what's the right price is. Rather the focus should be on how to make customer believe (or willing to pay) the price you are demanding.” Pricing Thought Leader.

“Myth: what I am doing with spreadsheets and pricing databases is good enough. Most companies are not motivated to do anything because they think they already have their markets figured out as well as they can...concepts like value-based pricing, pricing optimization or improving price execution escape them. How many of us have spent hours convincing our prospects, customers, or internal teams that we can do pricing better than it is being done right now?” Marketing Executive in a Pricing Software Optimization Firm.

“Myth: in pricing, you need copious amounts of "good" data. This is not the case! With small amounts of data and value based approaches any company can get started today. The hardest part for them is the leap of faith into a pricing initiative”. CEO and Founder Pricing Consultancy.

“Myth: “the market became a commodity market. The customer tells us the price. We can not increase our price". Have you never heard these sentences? Of course, few customers wake up wanting to pay a higher price but most do seek value. It's the firm's responsibility to frame and deliver the value proposition and the pricing mechanism to capture this value.” – Financial Controller in Charge of Pricing for a Large European Service Firm.

“Myth: pricing and conditions should be complex. Pricing is all about making the complex simple. If your prices are not fair, transparent and easy to communicate, you don't have a pricing strategy. Pricing research must allow you to reduce complexity and gain in understanding of common behaviors.” Pricing Expert and Marketing Professor.

These represent a snapshot of all entries that were posted on the Professional Pricing Society Linked In group. We received over fifty entries. Many of them highlighted myths that were well known to the pricing profession and reported many times in pricing publications. We decided to select ten of them that were related to technology, data and modern pricing approaches. Pricing is evolving rapidly with an increase use of software and the emergence of pricing analytics from “big” data. We hope that by publicizing these myths, we can generate conversation at the profession level. Join the conversation!

Stephan Liozu is President & CEO of Ardex America Inc (www.ardexamericas.com), an innovative and high-performance building-materials company located in Pittsburgh, PA. He is also a PhD candidate in Management at Case Western Reserve University and can be reached at [email protected].

 

Ask the Expert, Follow-Up on April Webinar, Part II - Pricing Negotiation

In our April webinar, Jim Geisman, Founder and Principal of Software Pricing Partners, talked with us about how the nuances of complex sales negotiations and ideas that can save you valuable time, money and aggravation. Click here to watch the recording or to download a copy of the slide deck and here to read part 1.

This is part two in a two-part series in which we review some of the questions which came from the audience. In the first installment, we focused on the general negotiation tips. Now, Jim addresses questions related to the negotiation of price.

 

Q: I often find myself competing on price when the competition offers a similar service for 1/2 the price. This is very difficult to negotiate against, and when the ultimate decision comes down to price, I often lose the deal.

Jim: I think the key is how your service really compares to the competition. If you often lose, look at the times you win and see if there is a pattern. There may be certain customers that appreciate your differences relative to your competition. Otherwise, if your service is similar but not identical, you might be able to emphasize the value of the dissimilarities or you may be able to strip things out to make your service more similar and charge a lower price.

 

Q: I understand you don't want to begin the negotiation too early. But how do you delay the price discussion early in the dialogue so that it allows you to differentiate?

Jim: Price levels are important at two stages of a sale: first, getting a ballpark figure to qualify a vendor; and then at the end, when the field has been narrowed to a couple of qualified vendors. When the prospect asks for a price early on, give them a range and tell them what determines the spread. If your offering is in the ballpark and the prospect continues the discussion, you then have an opening to differentiate your offering.

 

Q: We have not lost a sale against a direct competitor that we have submitted a formal quote to. Does this mean we charge too little, although we are far more expensive (1.5-2x that of our competitors)?

Jim: This is strange... Winning every deal despite a premium of 50-100%. First I would make sure that your knowledge of the competition is accurate. If so, I would figure out why customers are willing to pay the premium. You may be more reliable, produce more or higher quality results but you ought to find out what is going on. You may uncover reasons as part of a post-deal customer satisfaction survey or as part of a broader research effort of which pricing is just a part. This is really suspicious and I suggest finding out why this happens – carefully.

Q: How does one determine price when the value to the customer (based on risk) is anything from $1K to $100M?

Jim: Given the wide range of value, it sounds like you may have a segmentation issue. The wide range is often caused by a "spray and pray" sales and marketing effort. If you do serve a wide range of customer needs, consider re-packaging the offering so a lower price point is available to the folks that get lower value from your offering. It sounds like this is a time when one price does not fit all, a pretty common problem.

Value is the most powerful pricing optimization lever!

Companies invest in pricing software for many reasons, but one of the most common is the desire to optimize prices at a granular level, and charging the “right price” for each customer. But what is the right price, and how can one know one has firstly set that price, and then actually captured it in the sales negotiation?

At LeveragePoint we tackle this critical business challenge using value-based pricing and sales. We say “pricing and sales” because in most B2B transactions the actual price is negotiated by sales with the customer. Value-based pricing uses insight into the economic value of your offer for a specific customer (or segment) relative to the next best competitive alternative. Each of these components are critical and without each of them you cannot do value-based pricing.

• Economic Value: How does you solution give your customer an economic benefit, measured in dollars, relative to the alternative. B2B sales are economic sales.
• Specific Customer: Your customer cares about its own business, and you have to be able to create Unique Value Propositions that the customer finds relevant and credible
• Relative to Alternative: Your customer always has a choice, and the market sets the price of this alternative. You cannot ignore the market just because you are focused on the customer.

Some pricing software tries to estimate Willingness to Pay from transactional data and use this as a proxy for value. Understanding WTP can be a useful diagnostic. If you have apparently similar customers that are paying different prices it is important to know this and to understand why. But it is NOT a proxy for value. It is quite possible that similar customers are charged different prices because they receive different value. No transactional pricing system contains the data to answer this question for you. You have to use a value model to do that.

And once you have identified customers that should be paying more, because they are receiving differentiated value and they are paying less than other similar companies, you need to support your sales force in winning this higher price. Just telling them that your pricing software has found that this customer should have a higher “willingness to pay” does not help your sales people or give them the tools they need to negotiate a higher price. But value-based pricing does. It provides sales with the three or four critical value messages that explain how your solution is superior, in dollar terms, to your competitor. That is something sales people can use!