LeveragePoint Value Management Blog

LeveragePoint Brings Mobility to the Professional Pricing Society Spring Conference

In our April webinar we showed how the sales people can use mobile applications on the Apple iPad and other such tablets to engage in more focused pricing discussions with customers. You can view the webinar here.

The conversations that sales has with customers that link price to value are at the heart of any scalable value-based pricing strategy. In B2B prices are negotiated as part of the sales process and it us during these conversations that the best data on the impact of your solution on your customer can be collected. It is also a key opportunity to test value messages and to get insight into the next best competitive alternative.

This week, May 5 & 6, LeveragePoint will be at the Professional Pricing Society Spring Conference in Chicago. We will be demonstrating how Value Communication for Sales can be used on an iPad to shift customer conversations to a discussion of your differentiated value and why that value justifies a premium price and a faster buying decision. Data collected in these conversations is automatically sent back to pricing and marketing to help hone value messages and to keep value models in tune with changing market realities.

Come by our booth at the conference and you may even win your own iPad!

The Professional Pricing Society is the world's leading organization for pricing experts. It also runs an excellent discussion group on LinkedIn where experts and practitioners have frank conversations on pricing-related topics.

LeveragePoint - the only scalable solution for value-based pricing.

Webinar Value-Based Pricing in Marketing & Sales Communication

February 23, 2011 - Watch Now

In our February 2011 webinar, Jay Manson and Ed Arnold discuss how to communicate bottom-line value to your customers. They illustrate why it's essential to quantify the two or three things that allow you to beat your competition in the sale and to win the pricing negotiation.

Pricing is the most powerful lever that companies have to improve margins, it is a lever much more powerful that cost reductions. For a typical Fortune 500 industrial company, a 5% increase in price realization leads to a 50% increase in the bottom line (See Figure 1).

Value-based pricing is about a lot more than just setting a price. It covers the full value creation, communication and capture cycle. With value-based pricing, product development is focused on creating differentiated value; marketing identifies the segments and competitors that get the most differentiated value from the offer; pricing is able to connect the price to the value; and sales is able to negotiate a price based on value in the sales negotiation. (See Figure 2). LeveragePoint provides modules for the full value-based pricing process: Value Modeling, Price Setting, Value Communication, Sales.

During the webinar, participants weighed in on two polling questions. When is price introduced during the sales process? (Figure 3) How does marketing communicate the customer-specific value proposition? (Figure 4) To hear the commentary, view the webinar now.

 

 

Are Software as a Service Vendors Innovating on Pricing Metrics?

Pricing metrics are the unit that something is priced in – we buy bread by the loaf, hamburger meat by the pound, frozen hamburgers by the patty. Choice of a pricing metric is one of the most subtle yet powerful decisions that a company can make, and those companies that successfully introduce a new pricing metric can transform an industry. Pay-per-Click advertising, originally introduced by Goto.com in 1998 but popularized by Google in 1999, has disrupted advertising across many media. When GE introduced its innovative GE90 jet engine in 1990 there were questions about the cost of maintenance. Instead of compromising by offering a lower price to compensate for the perceived risk, GE effectively rented aircraft engine for a fee per hour flown (it shifted the metric from ‘engines,’ what it makes, to ‘hours flown,’ what matters to its customers). Without the uncertainty of maintenance cost, GE90 engines quickly became popular even with the price premium (see Strategy and Tactics of Pricing pg. 60).

SaaS vendors have a big opportunity to innovate around how they price services. SaaS solutions are easier to meter (measure the many different types of use), configure and integrate than is conventional software. This makes it possible for SaaS vendors to offer new pricing metrics to their customers.

In The Strategy and Tactics of Pricing, Tom Nagle and John Hogan propose a framework for choosing pricing metrics, see Figure 1. How are SaaS vendors doing when it comes to finding new pricing metrics?

 Most SaaS companies have moved away from the traditional enterprise software model of licenses + maintenance fees+ services + license upgrades. Buyers have been pushing back against this model for years as it does not map well to how they get value from software and it locks them into long-term commitments on terms not to their advantage. SaaS vendors are providing different options. In general, SaaS vendors sell some form of subscription in which the buyer always has access to the most current version of the system, and systems are typically updated more quickly than the 18-plus month cycles common with enterprise software (for SaaS customers upgrades are part of the subscription and are a positive, for installed systems upgrades are sometimes seen as a way to extort additional upgrade fees). Best of breed SaaS companies have figured out how to maintain configurations and integrations with other software across these upgrades.

Four general types of metrics have been adopted by SaaS vendors: Access, Users, Usage, Performance. These can be blended to create many unique solutions.

Access	A company pays for access to the application and data, regardless of how many users there are or how much usage is made. This metric makes sense for applications with a large differentiated value that have relatively few users or intermittent use, and whose value generation depends on relatively unfettered access. A refinement of this is to breakdown pricing by function. Examples:   salesforce.com charges different per user fees for its Group, Professional, and Enterprise licenses. LeveragePoint’s Group, Division, Enterprise pricing.
Users	The number of users that can access the application is a common metric, this can be the absolute number of users or the number of named users (when people need to personalize their data). Per user metrics make sense when the value created by the application is primarily at the individual level or there are operating costs that scale with the number of users. This is the most common pricing metric for SaaS vendors and is used for many services by industry leaders salesforce.com and NetSuite.
Usage	In some cases it is how often the software is used, or how many resources that are consumed, that maps best to value or cost. This approach is especially relevant to commoditized services such as cloud computing. Example: Basecamp has different charges depending on how much storage you need. Doczone, an XML content management system, charges by the page.
Performance	The ultimate pricing metric is to link price to outcomes. Typical examples are a percentage of savings, or a percentage of new sales, or a percentage of margin improvement. These pricing metrics are rare because outcomes usually depend on multiple inputs and it can be very difficult to untangle these. Example: Pay-per-Click in Google’s Adsense is the classic SaaS example.

One start-up has used LeveragePoint for Value Management to uncover an interesting pricing metric. This company provides a service that tracks how messages propagate across social media such as FaceBook, Twitter and LinkedIn. The application is used by marketing companies to track social media campaigns and the pricing metric is per campaign. At some point this company may want to find a performance metric in which they get paid based on the effectiveness of the campaign!

SaaS Pricing is a rapidly evolving topic, here are some other informative posts.

• Linking SaaS Software Pricing to Value
• As SaaS Evolves so will SaaS Pricing
• Some Thoughts on SaaS Pricing
• SaaS Pricing Evolves: Should we be Worried?
  

LeveragePoint Summer Gathering 2010

The Cambridge Boat Club was the perfect setting for LeveragePoint’s First Annual Summer Gathering.  This small private party of a select group of B2B marketers and pricing professionals afforded a great opportunity to get out of the office and visit with colleagues, users and potential users of LeveragePoint for Value Management.

When there is an assemblage of marketers on the cutting edge of value communication, pricing strategists, PhD’s in economics and CEOs from the chemical and high tech industries, there is inevitably going to be some interesting conversations. I’ve tried to capture some of the discussions and themes that surfaced throughout the night.

The Importance of Accessing Institutional Knowledge

One theme that emerged is the importance of the institutionalizing access to, and knowledge about value. (The W.R. Grace case study discusses this topic in detail) How can the knowledge that sales reps glean from daily conversations with customers be extracted from the individual minds and laptops of the salesforce? Then, how can this knowledge be communicated throughout an organization?  The capacity of LeveragePoint’s Platform to enable the centralization of knowledge and experience is exciting to both product managers and marketing executives.  LeveragePoint’s software enables a product manager to access value drivers that another has already quantified. It also helps sales reps learn one format for value information for one product and then leverage that knowledge to access value models for other products.

Communicating Value;  Again and Again and Again

Pricing analysts and consultants who hold positions within corporations and small companies had variations of the story of how, day after day, they must show their customers the value of their offerings from the customer’s perspective, often in context of intense competitive pricing.   Much of the time these conversations centered around individually crafted, time-consuming spreadsheets. We were excited when they saw the possibilities of how LeveragePoint for Value Management could create a compelling presentation to accurately communicate added value to help justify their price.

Successfully Adding Value Into the Cost of New Products

Another theme was the importance of getting an understanding of value, and the price premium that it could support early in the new product development process. For example, a new improved product that costs too much to make or deliver relative to the revenue it can capture in price could possibly result in a competitive disadvantage if not carefully thought through in the early stages of it’s development .  In this increasingly competitive world, the need to add value cost effectively is very important.

Thanks to everyone who helped make this event a success. It was a great opportunity for members of the value-based selling community to get together in an informal setting and share their experiences and insights.  We look forward to many more memorable events.

 

LeveragePoint Team. Cambridge, MA.

New Functionality: Create, Copy, Reuse and Share Value Drivers in LeveragePoint for Value Management

 

The LeveragePoint for Value Management Solution recently made a major advance as a collaboration platform for value-based selling (i.e., quantifying the differentiation value of a product).  A number of our clients wanted the ability to create their own value drivers and formulas. Our July release now provides this capability, as well as the ability to easily copy, edit, and share value drivers across their organization. Once again, LeveragePoint has made it possible for any user to do what once only experts and outside consultants did.

Our solution still features the General Value Driver Library, which contains 80 value drivers based on 20+ years of experience from the Strategic Pricing Group. This all-purpose library is more than adequate in most cases. But suppose you wanted to take one of these general value drivers, say "reduce labor costs" and make it more specific to your customer's situation, like "reduce waterproofing contractor labor costs." The screen shot below shows how you can add and change variables to create any type of formula, from simple to complex.

 
 

With this release, not only can you build custom, personal, private value driver libraries, you can choose to share it with any or all of the users in your organization working with LeveragePoint for Value Management. Conversely, the value drivers others create are available to you if they choose to share them. This is true collaboration that results in a very rich library of information that gets richer over time.

Needless to say, we are excited about our latest release but we're even more excited about the next one (in late August) which is all about DATA. We've seen that once users begin to create more and more value models, they desire the customer and competitive data needed to quantify their formulas. Our new data module will provide a powerful capability to search for data from both internal and external sources.  Which will make value models even easier to build and to use in capturing more value for our customers.  Stay tuned!

Michael English
Marketing Director

The Marketer's Dilemma

Where should a marketer put his or her effort? Top-line revenue or bottom-line profit? How can you do both? Michael Krauss of Market Strategy Group wrote an excellent column in this month's Marketing News that nicely summarizes Tom Nagle's keynote at the Professional Pricing Society Conference in May. Download pdf of article here.

The gist of the answer is to balance top-line growth with bottom-line cost cutting in ways that drive revenues up while bringing costs down. As examples, Dr. Nagle cited a number of well known success stories such as Walmart and Southwest Airlines and shared in detail a lesser known, but fascinating case study of Quad/Graphics. It's the story of a charismatic owner named Harry Quadracci who established a set of rules that balanced operational efficiencies with customer needs. Customers didn't get everything they wanted whenever they wanted it. They got lower prices in return for handing scheduling control, paper choice and other variables over to Quad/Graphics. These rules reduced costs for the printer and for certain customer segments, who were not as time sensitive, did not impact business outcomes. Quad/Graphics also helped its customers streamline their own production in ways that reduced costs on both sides. This built tremendous customer loyalty, and helped Quad/Graphics grow into a billion dollar printing empire. 

In a word, the key ingredient to success is: collaboration.  Collaboration between the internal operations and the external customer-facing parts of the business. Clearly, Harry Quadracci broke down the silos inside his own company. At the same time, he created a collaboration platform with his customers.

Today, LeveragePoint helps B2B companies communicate across the silos of product development, pricing, marketing, and sales with its LeveragePoint for Value Management collaboration platform. Using this platform, companies can create compelling value propositions and arm sales people with the best data and tools to negotiate with customers.

Ed Arnold
[email protected]

W.R. Grace Product Launch Success Story: Understanding & Communicating Value Can Accelerate Commercialization of Innovation

Creating a new product in a new category can be a wildly successful endeavor. Google’s introduction of Adwords to the relatively new world of search marketing in 2000 is a good example of how a unique product offering propelled a company into one of the greatest money making machines in history. It took years and many false starts before Google came up with its brilliant implementation of the pay-per-click auction model.    (The evolution of Google and Adwords is nicely chronicled in John Battelle’s “The Search”.)  

Executive leadership and marketing ranks in many organizations realize innovation can lead to profitable sustainable growth, but they are equally aware that many innovations fail or take a long time to find a market.  How can companies accelerate the process of deciding which business opportunities to pursue, what offerings represent the greatest value creation for their customers and the greatest return on their investment for their resources?  Maybe more importantly, how can different parts of an organization (executive, product development, marketing and sales) agree on what the value of their product or offering is, and communicate it consistently?  

Laurie Andriate, Vice President and General Manager of Grace Davision Materials &  Packaging Technologies – Americas, was tasked with driving a company performance mandate to accelerate growth through new products.  Bondera is an innovative tiling system that allows homeowners to tackle complex tile jobs. A major big-box retailer was excited by this offering.  “What we lacked was a consistent, structured framework for developing marketing plans across all lines of business. Understanding value from the customer’s perspective was probably the single greatest failure mode with innovation at Grace.”

Andriate explained, “We used LeveragePoint to investigate the value of time savings, the ability to complete a tile job in one day and not having to hire a contractor.  LeveragePoint provided a way for us to archive the thinking around this type of value creation so that, as we iterated through this we were able to go out in the marketplace and test the hypothesis, and then refine the calculation further.”  LeveragePoint’s value management collaboration platform enabled Grace to develop more compelling value communications in less time than traditional approaches. Grace did a test launch with 34 stores. Even with thin resources, they quickly moved from a few stores to their nationwide network, in large part due to greater efficiency in their marketing processes. (Read full case study)

Genuine innovation – that aha moment – is what creates real value. But that’s just the beginning. To extract profitable sustainable growth from innovative ideas requires institutional infrastructure, communication and discipline.

Michael English

Marketing Manager

A Value Model for Johnson & Johnson Coronary Stents

Pricing healthcare has to be one of the most challenging tasks in the profession. Rising healthcare costs and debate over how best to manage and pay for them is a hot-button issue. Treacherous waters indeed for sales and marketing professionals in this industry.

Now suppose you are medical device company with an innovative product that delivers tremendous value. How do create a compelling value proposition that enables you to command an acceptable price that doesn’t earn the wrath of critics in the health profession, not to mention the public? Johnson & Johnson offers an encouraging case study with their drug-coated coronary stents. This example comes to us from the latest edition of the Strategy and Tactics of Pricing by T. Nagle, J. Hogan and J. Zale (see pages 79-81).

Illustrated here is J&J’s value model for these new stents. When compared to conventional uncoated stents, J&J’s stents provide a tremendous amount of differentiation value - estimated at $4,500 because they reclog less thereby reducing the need for an expensive repeat procedure.

Most people would expect and accept that such an innovation should deserve a premium above the $1,400 price for conventional stents. But how much more? 10% more? 100% more?

Answering that question requires looking at the interests of the specific stakeholders who are involved in the purchase and use of the product.  Illustrated here is a map showing how three stakeholders: surgeon, payer, and patient react to this value driver. Although they are all favorable, they have their own unique reasons.

For example, the Payer (i.e., insurance company) is primarily motivated by holding down overall claim costs.  The value message for this stakeholder is therefore: our drug-coated coronary stents will reduce the amount of insurance claims due to repeat procedures by a signficant amount (in this case 15%) and since such procedures are expensive ($30,000) the economic value is worth $4,500 (15% x $30,000).

In contrast, the patient naturally is motivated by his/her health, quality of life, and comfort – reasons which are more psychological than economic. However, it is also true that a patient may have economic reasons too; for example, lost income (at least for those patients who don’t have the benefit of paid sick leave).

The point is that both psychological as well as economic factors come into play when establishing a price. Illustrated here is a price sensitivity analysis. The pink bar indicates a Custom Price of $3,500, which is the price that J&J initially chose for its new product. This is a 250% increase over the uncoated stents. Fair to say this price would be impossible to justify without showing the huge amount of differentiation value, which is exactly what J&J did.

It’s interesting to note that this analysis also includes a Calculated Price of $3,650 (yellow bar). This is the mid-point of the Differentiation Value area (blue background). Below the chart is a Sensitivity Factor table. Experts have identified a number of factors that either have an upward or downward influence on a customer’s willingness to pay. So for example, End-Benefit Expectation is a phenomenon where customers are positively influenced by other non-economic factors, e.g., psychology.  In considering the impact of this factor on the patient stakeholder with regards to the drug-coated stents, we may want to rate this higher on the scale, which in the second illustration below would suggest the possibility of an even higher price – up to $4,775!

Therefore, intelligent value management requires understanding the economic and psychological impacts on stakeholders. Companies that take a sophisticated approach to communicating value like this avoid leaving money on the table. In these tough economic times, sales and marketers need to work hard to capture every dollar.

Note: this is another in a series of value models to illustrate current business topics using the LeveragePoint for Value Management solution.

A Value Model for BP

Kenneth Brill's recent commentary in Forbes, The Real Cause of BP's Oil Spill, frames an interesting economic trade-off of "mostly working" solutions versus "never failing" solutions. The gist of his argument as I understand it is: a) often the cost of "never failing" solution are not economically justifiable; and b) although BP came to this conclusion with its Deepwater Horizon oil rig, they in fact made a horribly wrong decision because they overlooked the true potential costs.

Had BP the benefit of building a value model, it may have avoided its ugly fate. Here is what the value model would have looked like. 

It's based on the cost impacts of dealing with the aftermath of the explosion as reported in the news media and includes the efforts to stop the leak, clean-up, liability and fines.  We've also included other costs relevant to BP’s business model such as the lost market capitalization and lost oil revenue.

Within the value chart, the large green bars demonstrate that "never failing" solutions provide a tremendous amount of value by avoiding billions of dollars of cost. The small blue sliver at the bottom shows the estimated cost of BP's Current Spill System, i.e., the "mostly working" blow-out preventer (estimated at $500,000 from what was gleaned from the news).  Some experts claim that an additional investment of $500,000 for a remote control shut-off valve would have prevented the initial explosion, but BP declined because of its cost justification criteria.

I cannot judge whether the remote control device can be considered "never failing" or even what the full cost of a "never failing" solution really is. Regardless, this value model clearly indicates nearly $32 billion worth of value to be had in considering such a solution.  Makers of remote control shut-off valves and other oil rig safety equipment should definitely take note of this.

Value models are therefore useful to frame these types of strategic decisions. Of course, one can challenge the specific cost calculations. Yet directionally, the value model supports an obvious conclusion that none can deny - BP's decision making has cost them dearly. Too bad for them (and many others) that they didn’t see it before.

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Note: this is the first of a series of value models to illustrate current business topics using the LeveragePoint for Value Management solution. For more information, visit us at:  www.leveragepoint.com

Bridging the Silos of Marketing, Pricing & Sales

In the field of Value Management, a vast wealth of untapped knowledge lies trapped within the minds of sales professionals, pricing experts and marketing strategists. All too often, that’s where it stays, with no connections made between the silos.

 

Brian Carroll, author of Lead Generation for the Complex Sale, claims there is a dramatic breakdown in communication between sales and marketing in over 90% of companies. That breakdown leaves a lot of money on the table.

 

All too often, the sales team knows what’s really happening in the trenches, while pricing has the tools to create offers that maximize profit margin. But pricing does not share its tools with the sales force, it simply delivers prices. When these meet buyer resistance sales assumes that pricing doesn’t really understand the market and pricing assumes that sales are too focused on meeting targets and winning commissions to do the extra work needed to win the price. Meanwhile, sales and pricing both think that marketing is off in some world of its own, establishing messages and positioning that don’t help establish prices or win sales.

 

In fact, there is important expertise in all three business functions. This expertise tends to come in two forms: one is professional expertise, gained from years of formal and informal learning and adoption of best practices; the other is direct experience with customers and competitors. Both forms of knowledge are essential to creating targeted value messages that incorporate real customer and competitor data. Given disparate organizational cultures, the question is how to do that?

 

At LeveragePoint we tackle this problem in three ways. We build expertise and best practices into on-line solutions that are shared across the organization. Data is collected and organized with these tools, making it reusable and actionable. Then, as people use the tools, the ways in which they modify and adapt them, and the results in the market are tracked and used to drive constant improvement.

 

Pricing analysts build value models using the Economic Value Estimation ™ methodology and work with marketing to translate these models into value communication packages. Sales gets value communications packages that blend together the pricing logic and data (and not just the price) with targeted and tested marketing messages. They use these packages while selling, modifying them as necessary to reflect more precise information about the customer and competitors and rating the effectiveness of specific messages. These changes are fed back to pricing and marketing and get woven into modified value models, messages and pricing strategies.

 

LeveragePoint’s online solution helps professionals in all three functions move beyond what they know to what is known. Information flows back and forth in the background as people do their day-to-day work. Sales people don’t actually have to talk to marketing people; the software does that for them. But they both gain the value of “the conversation that never took place.” The truly successful companies of this decade are likely to be those that have discovered the difference between simply having great processes and data, and actually learning how to use them.

Jonathon Levy
CSO