LeveragePoint Value Management Blog

Our June Webinar - What Sales Needs to Close Deals: Collaboration

June 1, 2011 - Watch Now

This is a tough time to be selling to business customers.  Sales must create urgency to motivate customers to take action, but each customer has a unique set of challenges.  Sales depends on marketing to provide them with the 3 or 4 critical value messages to create urgency with their customers, but how does marketing do this when each customer and every sales situation is unique?  It is only through collaboration that sales and marketing can work together and create a unique economic value proposition for each customer.  By establishing a two-way communication channel, marketing and sales can quickly seize customer opportunities and move customers to closure.

In this 30-minute webinar, see how accessing our collaborative SaaS platform makes it easy for sales and marketing to create unique value propositions that motivate customers to take action. 

 

Notes from Dreamforce - Collabor-8

Last week I attended the Salesforce.com annual Dreamforce gathering in San Francisco (their 8th, my 2nd). Once again it was a most impressive turnout in terms of size (15,000) as well as in celebrity (Bill Clinton, Stevie Wonder, will.i.am). Marc Benioff and his team certainly know how to put on a show.

There were many excellent sessions to choose from, but I was out of luck a couple times because attendance was overflowing and I didn't reserve a seat. Reflecting on my two days there I came away with the following themes:

Clouds, Clouds, Clouds - Dreamforce keynotes tend to have a religious revival vibe to them. The religion of course is cloud computing and it goes way, way, beyond a web-based CRM.  The newest dimension I learned about is the service cloud. Salesforce and its hundreds of ISV offer a comprehensive enterprise cloud-based solution. Chances are, if you have a viable SaaS application, salesforce wants you in their cloud

p2p is the new b2b/b2c - Social media has erased the distinction between b2b and b2, meaning that b2b employees are adopting consumer-like social media styles in their work habits: person-to-person (p2p). Accordingly, Salesforce recently introduced Chatter, a face-book like application where cross-functional enterprise employees can quickly collaborate on customer issues. So as an example, a group of employees can follow a customer account; so when a saleperson on the team needs an urgent answer to a customer problem, customer service followers get notified and can respond immediately.

Can't we all get along? - One session, "Bridging the Gap: VP Sales and VP Marketing" was particularly interesting for me because it highlights a hot-button issue that LeveragePoint frequently encounters in working with our clients. The best line from that session was, "the role of sales communications is to translate marketing theoretical arguments into practical messages." Amen to that!

For more background on this issue, see this HBS Review blog.

Ed Arnold
LeveragePoint

Selecting a Pricing Software Solution

(a LeveragePoint White Paper)

From the white paper ...

The pricing strategy domain has matured since 1980 when the first edition of the classic, The Strategy and Tactics of Pricing was published. Today, B2B companies aspiring to improve profitability through pricing can seek expertise from one of several consultancies as well as more than a half-dozen software solutions. Or, they may decide to build in-house capability by hiring certified pricing professionals from the Professional Pricing Society.

In October, LeveragePoint hosted a webinar talk titled, “Selecting a Pricing Software Solution,” facilitated by Jay Manson and Ed Arnold. Jay is currently LeveragePoint’s Vice President of Sales and had previously held senior positions at Vendavo and the Strategic Pricing Group. Ed is currently Vice President of Products and has worked in various consultancies including the Monitor Group and Diamond.

Question: Gartner estimates the price management software market to be $180 million. That pales in comparison with the $2.1 billion procurement software market. Why is there such a huge discrepancy?

In comparison, the price management software space is still in an early phase. There are relatively fewer, smaller players and most solutions focus on just one part of the price waterfall, managing prices and discounts. It’s interesting to note that in the current recession, these software vendors’ growth has stalled. Why? Because many companies are just focused on surviving the economic downturn and the current price management solutions are expensive and difficult to implement. Our view is that the price management software space will expand significantly once there are broader solutions available. That’s the opportunity we see for LeveragePoint.“Our view is that the price management software space will expand significantly once there are broader solutions available. That’s the opportunity we see for LeveragePoint.”Q: Gartner estimates the price management software market to be $180 million. That pales in comparison with the $2.1 billion procurement software market. Why is there such a huge discrepancy?

Read more about Selecting a Pricing Software Solution

Read more about the LeveragePoint solution for value-based product development, marketing, pricing and sales.

Radiology in the Cloud - What is the Differentiated Value?

Remember the old X-Ray room, with doctors standing before a light board peering at black and white images with frowns on their faces? This is still what happens in many hospitals around the world. It is sort of like reading your news on paper. It works well in the moment, but it is not the best way to share opinions or to look things up in the archives.

Medical device makers have done a lot of work over the last few years to improve the situation, first by introducing digital imaging systems that preserve and manage digital records, and more recently by moving the entire solution onto remotely hosted services that they manage for X-Ray users. These solutions are often referred to as being 'in the cloud,' because the location of the servers is not relevant to the user. it is off in the cloud somewhere. They are a type of Software as a Service (SaaS), so called because the functionality is provided as a subscription and the users do not need to pay large amounts upfront to purchase or license the software.

These radiology in the cloud style solutions have a number of special features that provide real benefits for users. One of the most interesting of these, and one that is much more likely to be found in SaaS solutions, is a "Metrics Package that Compares Your Hospital's Performance with Similar Organizations." Another feature that drives important benefits include "Records Kept Offsite on Secure Server" which supports the benefits "No Limits on Image Storage" and "Complies with New Image Storage Regulations."   See Figure 1: Features & Benefits of Radiology in the Cloud.

 Benefits are good, but do they justify the cost of changing from existing systems? In mapping the benefits to actual value drivers we found three critical ways in which radiology in the cloud provided differentiated value when compared to analog systems (value is always defined for a specific customer relative to the next best competitive alternative). See Figure 2: Value Model for Radiology in the Cloud. (Figure 1 and Figure 2 were both built in LeveragePoint's collaboration platform for value-based pricing and value-based sales.)

Six positive value drivers were identified for radiology in the cloud. For this specific customer the three most important were as follows:

• Reduction in Infrastructure Costs - a $750,000 benefit for this customer
• Reduced Insurance Costs - a $1,000,000 benefit for this customer
• Reduced Legal Damages & Fines - a $750,000 benefit for this customer

The reduction in insurance costs and legal damages and fines is traced back to "Complies with New Image Storage Regulations." Of course the benchmarking against other similar organizations, a feature that is often provided with SaaS solutions, should also lead to improved performance and fewer law suits.

When using this value model with customers, the sales person would go in and select the most compelling value drivers for the specific customer and customize the data to generate a custom sales package for that customer. This data then flows back to the pricing and marketing organization so that they can get real-time market intelligence and improve their value models and communications packages.

Aaron Vidas & Steven Forth

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?
  

March 9th Tom Nagle Webinar for Professional Pricing Society

On March 9th, I'll have the pleasure of co-hosting a webinar with Dr. Tom Nagle for the Professional Pricing Society.  The title is "Getting Your Organization Aligned Around Value." Tom will discuss the importance of embedding a value capability and mindset deep into an organization.  So important in fact that a company's pricing strategy and competitive positioning rests on this.

As for myself, I have observed and worked with multiple companies who have attempted to embed value management capability using traditonal approaches: training, consulting, and by adding pricing professionals to their staff.  Although such initiatives are fruitful, the real organizational impact is often short-lived or too narrowly focused.  The best solutions are those that can cut across organizational boundaries - product development, market management, marketing communications and sales - and support an on-going collaboration in the context of real work.   To accomplish that, companies need a true plaform.  Which is why I'll be making the case for a SaaS solution such as LeveragePoint for Value Management.

Note: This webinar is a "Members Only" event.  Registration is: http://members.pricingsociety.com/webinar_details.asp?WID=238

For non-PPS members, we will post a link to a recording as soon as it is available.

Ed Arnold
Director of Products, LeveragePoint

Economic Value Estimation and Return On Investment

How do models of economic value such as Economic Value Estimation (EVE) compare with financial measures such as return on investment (ROI)? Some people think of them as being interchangeable, three letter acronyms that are some kind of economic or financial measure. In fact they are distinct and serve different purposes. Used together, they complement each other and can help buyers and sellers make better decisions.

Corporate finance departments use various measures of return on investment to ensure that the organization’s financial resources are being used wisely. There are always many things one could spend money on – marketing wants to invest in a new lead generation campaign, sales wants to provide a discount to bump quarterly figures (a discount can be seen as a kind of investment), production needs a new waste disposal system to meet environmental goals, HR wants to train in new capabilities. Demands on capital are endless and companies need some way to reduce all of these competing needs to a common figure so that they can be compared and the most worthy investments (those with the highest return) made first. ROI is best used when comparing things that are so different that no direct comparison is meaningful. And when used to make a decision about the future, these are at best guesses – there is no guarantee that the hoped for return will be realized.

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Homogenizing measures such as ROI are less useful when choosing between alternative solutions. They do not reveal how value is created or show what the alternatives are. And as they are estimates they are easily subject to false precision (as one of our customers says, “one can spend a lot of time being precisely wrong when it is more important to be directionally right.” This is where economic value models such as those introduced by Tom Nagle come in.  These are described more fully in his book, with John Hogan, The Strategy and Tactics of Pricing (a new edition will be coming out in March of this year). An economic value estimation (EVE not EVA) differs from an ROI calculation in that (i) it is relative to an alternative and (ii) the value of a specific solution is composed of an undifferentiated value (the components of value where the two alternatives offer the same functional benefits) and differentiated value. The differentiated value is broken out into components called value drivers, each of which is a specific, quantified impact on the user’s business model. There are value drivers for revenue, costs, capital investment and operating capital. Value drivers can be positive, when the solution being modeled has differentiated functional benefits that the alternative lacks, or negative, where the alternative has advantages. In Figure 1 a typical value model, created using LeveragePoint for Value Management is shown, with its components called out.

 

Trying to use ROI to choose between similar alternatives is a mistake. Homogenizing measures are not precise enough to make meaningful discriminations about future outcomes. Differentiating measures that help one to compare alternatives in terms of specific functional benefits and their economic impact are much more powerful because they help one to understand exactly how the return is going to be achieved. This does not mean that ROI has no place in purchasing decisions. An ROI should be estimated in order to see if any investment at all should be made. Most companies have ‘hurdle rates’ for any major expenditure, an estimated ROI that needs to be achieved before investment is made. And a value model is an important tool in preparing to calculate an ROI. The value model shows where the return will come from and helps the buyer to compare alternatives. Without this understanding, the ROI is just a shot in the dark.

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Steven Forth

CEO 

Paddling Up the Value Waterfall

The pricing waterfall is a classic and widely used framework for understanding and managing transaction pricing. It illustrates the drop (like a waterfall) between an official list price and the final "pocket" price that the seller sees. Usually it's not a straight Niagara-like plunge, but rather a flume with a series of multiple drops. These drops are caused by various discounts and related pricing practices. For companies with complex product lines and pricing policies this is quite challenging and has given rise to a number of pricing transaction software companies such as Vendavo, Pros and Zilliant.

Certainly companies can and do benefit from more effectively managing their transactional pricing waterfalls. We would argue that companies must also look further "up-stream" and manage their value waterfalls too. In other words, companies need to be able to create differentiated economic value and list prices should be based on the economic value that offering provides to the customers. As readers of this blog know, we advocate using value models based on Economic Value Estimation for this task. Better aligning price with value will enable higher pocket prices because there is less customer demand for special discounts. The chart below shows how the value management waterfall flows into the price (transaction) management watefall.

Transaction (or price management) software is very good at analyzing massive amounts of internal sales data. This data is used to provide dashboards that show the leakages of various pricing policies and the controls that manage them. Where does value management data come from?  Since we are typically asked this question when implementing LeveragePoint for Value Management here are some answers:

• Internal Common Wisdom - Value models often begin with a few well-thought hypotheses that are shared within the marketing team.  Just by making explicit individual's often implicit assumptions and then aligning them among a small team can be immensely productive.
• Wiring in Sales - Since sales interact with customers every day, they are well positioned to get the latest field data about the state of customers' business models and inights as to the relative impact of their offerings versus competitors. Tapping into this data stream closes the loop between sales and marketing.
• Customer Research - We've seen this done in a variety of ways.  A marketer at one of our clients plans to use LeveragePoint to collect data in her field marketing tests. Other companies commission third-party customer research studies which can be used to build models in LeveragePoint for Value Management that are then tested with customers by sales.
• Web Data Sources - Business intelligence sources like Dow Jones and Thomson-Reuter provide timely data on companies and industries.  We are particularly excited about WoframAlpha which provides powerful new ways to find and work with quantitative data.

Like other SaaS solutions, LeveragePoint for Value Management is designed to easily facilitate accessing and integrating these data sources. Providing powerful data search and integration services for specific industries will be an important part of LeveragePoint's own value proposition.

Ed Arnold

Director of Products

Freemium – How to Price Your Product for Free

Can you believe that there is a wrong way to price a free product?  That premise sounds a bit counter-intuitive.  Giving it away should be the easiest pricing strategy to implement.  Actually, it isn’t. 

Recently, a group of executives shared their insights about so-called freemiums at the annual MassTLC unconference. By the way, the term “freemium” as defined by Wikipedia refers to the marketing strategy of using a free offer to build a base of users who can be converted into paying customers (free + premium = freemium).  Freemium is often used in the context of web 2.0, but when you think about it, the general concept has been around for ages.  We've all seen those “try if free – cancel (or send it back) at anytime” type offers.   Like many, I tend to be suspicious of such deals, particularly the ones that credit cards companies have tried to hard-sell me.

Web 2.0 freemiums have evolved from aggressive promotional tactic into a legitimate business strategy.  Provide users with a taste of real functionality in order to establish credibility, build trust and then let it blossom into a customer relationship.  For SaaS companies especially, freemium is an essential part of a pricing strategy. At the unConference, we identified two freemium models that trade-off functionality versus volume.

ConstantContact, a leading email marketing firm, has had success by providing full functionality, but limits volume to 100 email addresses.  Beyond that threshold, charges kick-in.

SurveyMonkey, an online survey tool, allows users to create any number of surveys and participants, but limits the functionality – number of questions, types of questions, branching, etc.   More sophisticated surveys require an upgrade.

Both models are viable because they cleverly take into account the user’s economics.  That’s the key take-away: to establish a reasonable threshold where a free customer is willing to pay a little more to get more.  

And what about “freeloaders”, those users who will never cross the paid threshold?  They can turn out to be an important referral base to other paying customers. Speaking from my own experience, this has certainly been true for ConstantContact and SurveyMonkey.

I’d welcome other great examples of freemium.    Feel “free” to comment!!

Ed Arnold
Director of Products
LeveragePoint Innovations

Leveraging a SaaS Value Story

Software-as-a-Service (SaaS) and more generally cloud computing are now widely accepted as a perfectly viable IT strategy for large and small enterprises alike. There are even services companies focused on accelerating the adoption of cloud computing, such as Appirio. The implicit assumption is that SaaS delivers a compelling value proposition. In this post, we illustrate a value model for a particular SaaS solution, LeveragePoint for Value Management. Self-serving perhaps, yet a demonstration of the importance of drinking one’s own champagne -- or eating one’s dog food. 

First we need to set context. Our customer is a B2B (business-to-business) manufacturing business unit with $300 million in annual revenue. It has 5 major product lines and has a direct sales force of 100. The company uses a typical approach to value management, which is to say a combination of in-house training and custom-built, sales tools in the form of a spreadsheet-based value models. In this case we’ll assume there are minimal direct costs for this existing solution -- a $5,000 budget set aside for sales training. Obviously there are indirect (i.e., opportunity) costs for the time required to build, deploy and manage the sales tools, but this is likely not a big concern for the leadership team. Rather, the lead marketing and sales executives are most concerned about revenue growth and profitability. Rightly, they expect value management techniques to maintain pricing levels in a tough purchasing and competitive environment. Clearly, they cannot afford to hire a top-tier consulting team to undertake a 6-to-7 figure project.

Given this situation, what value does a SaaS solution offer – particularly one that will involve more direct cost versus the current solution? Here are three key value messages for LeveragePoint for Value Management for this B2B company.

1.    Marketers can understand the value that their solutions create for their customers better, faster and at a much larger scale. Many marketers don’t have the time or inclination to create value models for every product/market combination. It can take at least one or more man-weeks to build a single value model. That’s the reason why a typical B2B marketing group only has a few hand-crafted models used by a minority of marketers. This can result in value opportunities being overlooked.

LeveragePoint enables any marketer to create a viable value model for their solution/customer in less than an hour. The tool makes the process easy and is fully supported by help and learning. So marketers can quickly create their own library of value models. And because this is SaaS-based, the marketer never has to worry about the myriad of troubling issues associated with sharing spreadsheets like consistency, iteration, collaboration, version-control, security, etc. So with LeveragePoint, marketers can design more effective solutions and supporting programs that offer higher value to their customers.

What’s this worth? Assuming a 1% improvement in revenue growth because this capability at a 20% contribution margin would represent $600,000 of additional value. The improvement in revenue comes a combination of the higher price realization that value selling can drive and the greater efficiency of a properly supported sales force. One can tweak these numbers, but by understanding how a solution drives the business model one gets a real sense of business impact, and hence value.

2.    Sales people can communicate unique value messages about your solutions more credibly to your customers. It follows that given the scarcity of value models in a typical B2B company (as described above) that sales people would therefore lack effective value selling tools. Our experience tells us that sales people tend to avoid home-grown models anyway because these complicate the communication process. Instead, value selling is often left to a small set of highly skilled sales veterans who’ve developed their own techniques to effectively position and communicate value.  Sadly, there is never enough of this expertise to go around. So, less skilled/experienced sales people generally miss many value selling opportunities because they are not confident enough to engage in meaningful value discussions, focusing instead on features, deals and relationships. A wry quote we once heard captures this sentiment: "A salesman always wins a deal because of his strong relationships and always loses a deal because of price." 

LeveragePoint provides sales people with an online catalog where they can find customer- friendly versions of value models published by the marketers, called value packages.  Sales people can use value packages to prepare for an upcoming appointment or print out as a cheat sheet or even as an interactive tool with the customer. Value packages are in an easy-to-read, summarized format that facilitates crisp and knowledgeable discussions. Sales people can customize them for individual accounts, add notes, and provide feedback/intelligence to marketing. The SaaS platform lends itself well to live web-based briefings. So with LeveragePoint, even new sales people can engage in effective value-based sales conversations with their customers. One important dimension of the value packages is the value footprint, which helps the sales person target value messages to specific buyers and influencers.

What’s this worth? Assuming a 0.5% improvement in revenue growth because this capability at a 20% contribution margin would represent $300,000 of additional value.

3.    Marketers can create just-in-time, customized sales collateral for sales people.  Most B2B marketing communication tends to emphasize overall features and performance characteristics because production costs and lead-times discourage customized collateral for individual accounts. Having a SaaS application like LeveragePoint enables marketers and sales to quickly design and deploy consistent, high-quality value-selling content that can be integrated into presentations or proposals. 

What’s this worth?  If the company was spending $50,000 to produce custom collateral for strategic accounts, this entire cost could be eliminated thereby creating $50,000 of additional value.

Collectively, these value messages associated with the SaaS solutions can be worth over $900,000 of additional value annually for this B2B company.  Of course, one can (and should) debate the quantifications and even the messages.  This is welcomed since it is the whole point of a value discussion.

If you want to see this value package in more detail, or see how your offer would look in LeveragePoint for Value Management, please email me.

Ed Arnold

Director of Products, LeveragePoint Innovations

[email protected]