LeveragePoint Value Management Blog

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, 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!

 

Selling Value in B2B

Value Selling is a term to describe what high performing Sales professionals do day in and day out. At its core, Value Selling is about effectively communicating to customers how your solutions are better than the competition and articulating how much that is worth from a dollar and cents perspective. Value selling in B2B markets works because purchases are essentially economic transactions, where buyers are trying to make rational tradeoffs on how to best allocate limited resources. In this context, buyers want to know how your solutions are better than the competitive alternatives and how you can impact their bottom line.

Every year Sales managers seek to bottle up the skills needed to sell on value and disperse it in large doses to everyone on the Sales team through training programs and performance plans. Sales managers then expect their Sales teams to hit the ground running by applying critical Value Selling principles on every deal. Unfortunately, very few organizations are able to implement a sustainable and system process to support value selling objectives.

To achieve value selling mastery, Sales teams need to do the following:

1) Marketing Support: Marketing teams must provide the ammo needed for Sales teams to communicate value more effectively by laying out the groundwork for understanding what customers across specific segments truly care about. Every time the Sales team meets with a customer they must have access to segment-specific value propositions that allow them to start the process of putting together an economic picture of how your solution delivers better results than the competition.

2) Value communication tools: Despite selling into complex markets, most marketing and sales collateral is made up of one size fits all messages that really provide limited visibility into how your solutions stack up against the competition and, most importantly, how your solutions drive bottom-line results for customers. To sell on value Sales teams require dynamic tools that can incorporate the unique operations characteristics of customers to get a more accurate reading on how your solutions impact their business.

3) A well-defined value selling process: The sales process must support the ability to reach the right stakeholders while streamlining data discovery efforts. Every interaction with customers must fulfill specific goals designed to capture key inputs needed to deliver the most compelling value proposition for customers. Because the goal is to uncover and gain a better understanding of value, every customer interaction is meaningful for both sellers and prospects.

Below is a real-world scenario of how the Sales team is transitioning to Value Selling using our LeveragePoint application to communicate customer value more effectively.

        1) Marketing teams develop segment level Value Propositions that outline the key differentiators of the solution and sets up the algorithims for quantifying value. This is often a collaborative process that encourages discussions between Products, Ops, Marketing, Pricing, and Sales teams.

        2) Once marketing has developed the initial segment level Value Props, Sales teams can begin to use them with customers.

        3) Sales teams start discussions with prospect using a Value Prop that focuses on the 3-5 things that make your solution better than the competition. 

        4) As Sales teams present the value of the solution they are able to qualify the level of interest from the prospect and lays out a plan for building a unique value proposition based on the needs of a prospect.

        5) On subsequent interactions with the prospect, Sales teams work on uncovering the unique operational characteristics of the prospect to determine the value being delivered. Through this process Sales teams are able to build credibility and establish relationships with key folks involved in the purchasing decision.

        6) As the process unfolds, prospects gain better understanding of the financial impact of your solution as Sales teams finalize a customer-specific Value Prop and share the output with the prospect.

        7) With the right insights and level of detail, prospects can discuss the advantages of the solution internally. Propsects even have the ammo they need to go to their own procurement orgization to approve the purchase.

By being able to objectively quantify value your Sales teams will have the confidence to close deals faster and at higher margins. To scale Value Selling across the organization your Sales team needs to work with the right tools, process and organizational support to successfully sell on value.

Even in RFP scenarios, an economics-driven Value Proposition that captures some of the operating nuances of customers while highlighting how your unique differentiation will drive better bottom-line results can be the difference maker in getting selected and inking the deal. 

 

 

LeveragePoint Here and There in the Year of the Dragon

The Year of the Dragon has gotten off to a good start for LeveragePoint. We have added three customers already this month and our first release for the year went out ahead of schedule last Sunday (we use an agile software development process with monthly releases). Today we have our first webinar of the year, with pricing industry thought leader George Cressman, who will be talking about "The Right Path to Pricing Maturity" (a recording of the webinar will be posted on the resources section of our website next week if you miss it.

LeveragePoint's Director of Professional Services, Roberto Rivera, has an article in the Professional Pricing Society's The Pricing Advisor "Linking Price and Value to Expand Share and Capture Profits." Roberto has great insight into how our customers are driving value from our software. 

We have also been contributing posts to other blogs. On Monday we had an invited contribution on Gerhard Gschwandtner's hugely popular Selling Power blog. This is important to us as we believe that linking pricing to sales is a key to a successful value-based pricing program (the other key is to build value-based pricing into product and service development). Gerhard titled our post "Pricing Optimization in a B2B World: Value-Based Pricing Come of Age for Sales."

Then on Tuesday we had a guest post on the Pricing Leadership blog hosted by Pros, a leading maker of pricing management systems (many of our largest clients complement our value-based pricing platform with a pricing management system). In this post "Can Pricing Excellence Contribute to Revitalizing the Economy" we asked 'What is pricing excellence?" and 'If it were more widespread how would it impact the economy?'.

Meanwhile, Predrag 'PJ' Jakovljevic at TEC Center has continued his coverage of the pricing software sector with a post on LeveragePoint "LeveragePoint Adds Value to B2B Pricing - Part 1". PJ followed this up with "Two Vendor Execs Discuss the Current B2B Pricing Market (and its Future)" an interview with Pros Pricing CMO Tim Girgenti and LeveragePoint CEO Steven Forth (this link may require registration with TEC Center).

Celebrating the Chinese New Year, LeveragePoint wishes everyone a great Year of the Dragon!

LinkedIn Poll - Where does pricing have the most impact in the sales funnel?

It is generally agreed that in most B2B transactions the price is negotiated as part of the overall deal. Price plays an important role in the sales process, but pricing experts and sales often struggle to work together. In the most dysfuctional cases, sales refers to pricing as "the revenue prevention department."

This needs to change for pricing strategy and execution to have the most positive impact on businesses. Pricing has to fit into best practices in sales and marketing. It has to play a strong supporting role in the sales funnel. To stimulate thinking around this, LeveragePoint published a simple LinkedIn Poll earlier in September. Before reading on, please take the poll here. And even if you have taken the poll, you may want to click through and read the latest comments!

Of course this poll is too simple to do much more than stimulate conversation. It used a very simple version of the funnel: Awareness - Understanding - Consideration - Trial - Negotiation. Some commenters wanted to call out other stages in the funnel, such as Interest (one can be aware of and understand an offer and still have no interest, or have interest but not yet be ready to consider it) and Expansion (one can have bought on a very limited basis, and pricing may determine how additional sales scale). These are good points, and are worth considering as you apply pricing expertise to the sales funnel.

In the early going, responses were about equally divided between Consideration and Negotiation as the two critical sales funnel steps where pricing discussions have the most impact. But then, about five days into the poll, the dial turned to Consideration.

 

This is an important result for those who take the value-based pricing approach. In value-based pricing the price is presented in the context of differentiated value. Most buyers will only begin to consider a solution if they understand its value, what it will do for them and not just what it does. For pricing to have a meaningful impact at the Consideration stage it has to be presented in the context of value. And as buyers at the consideration stage are often considering alternative solutions it is important to get to differentiated value quickly.

LeveragePoint helps you to do this. Our platform uses value-based pricing to establish a value proposition that can be used by sale in customer negotiations to capture price. To learn more see the LeveragePoint solution or contact us through [email protected].

Webinar - How to Develop a Value Proposition That SELLS with Jim Geisman

Our fall webinar series kicks off on Wednesday Sept. 21 at 3:00 PM EDT with Jim Geisman of Software Pricing Partners. Register here.

Everyone "knows" that B2B customers buy products when you show them the economic advantages of buying your offering. Often, you can develop a strong economic argument without collecting massive amounts of data, installing enterprise software systems or spending a ton of money. In this webinar, Jim shares his extensive experience working with companies to sharpen their value propositions. Jim will provide practical advice and tips that have helped B2B marketing and sales professionals in companies ranging in size from global companies to start-ups. Attend this webinar to learn how to improve and communicate your value proposition.

LeveragePoint's solution is built around the proposition that in B2B the price is negotiated as part of the deal. Companies that connect their price to their value proposition come out on top.

LinkedIn Poll - Who is responsible for margin?

Our second summer poll asked "Who is responsible for margin?" OK, we understand that this is a complex question, and the answer will depend on the interplay of corporate strategy and organization. But our goal is to provoke some disucssion of important issues in the price management,  value-based pricing and value-based sales space and just maybe to uncover something new. And this question seems to have struck a nerve. As of Monday August 8 there were already more than 100 votes and 35 comments, some of which put forward a strong point of view.

If you have not already voted in the poll, and would like to do so before reading further, you can vote and comment here. And even if you have already voted, you may want to go back and read the most recent comments and check the trend!

Most people would agree that margin is an important thing to manage as Margin x Revenue = Profit and companies are generally valued on their profit, or more specifically, their earnings per share. This is even more true in a stressed economy (Anyone feeling any stress about the US and European economies?). It is going to be increasingly  difficult for some companies to grow revenues over the next few years. The combination of financial uncertainty and the need by many governments, companies and individuals to deleverage (i.e. to pay back debt) will limit revenue growth. Under such circumstances, the best way to support stock prices is to increase margins. So the question "Who is responsible for margins?" will remain an important one.

There were some surprises in the answers.

It is no surprise that most people think the CEO is the person responsible. Winning margin depends on getting all parts of the company aligned. Product and service development must bring to market the right mix of offers to take advantage of market opportunities. Pricing has to set prices and develop pricing and communication strategies that communicate differentiated value and capture it in higher prices. Sales has to resist pressure to focus on the top-line and erode margin by inappropriate use of discounts (see our previous LinkedIn Poll - Discounting is common in B2B sales becuase ...). And the CFO is responsible for financial discipline and overall financial goals. Given this, it is not surprising that most people pointed to the CEO as the one person who can pull all of this together. But if that is the case, one has to wonder how many CEOs have pricing and margin on their priorities.

What is surprising to us is that so few people pointed to the CFO. Margin is a financial measure, and in conversations we have been having with pricing and sales thought leaders this summer many people have pointed to the growing role for the CFO in both pricing and sales. So why the low response in this poll? It could be sampling error of course, not many people who are CFOs responded to the poll. Or it could be that people in sales and pricing are not really aware of CFO priorities at this time. This is something to probe.

It is interesting that the second most popular answer is that the "Head of Products or Services" is responsible for margin. Looking more carefully though, the Comments suggest that this is really two different answers. Some interpreted this to mean that "the business unit manager with P&L responsibility is responsible for margin." Others interpreted this to mean that "product and service development, who create and deliver the product or service, should be responsible for making sure that it is profitable." These are both legitimate points of view, but they are not really the same answer (LinkedIn polls are really only useful for very simple surveys or for starting up conversations).

As of Monday August 8, the same number of people felt that pricing and sales are responsible for margin. Regardless of whether they are responsible or not, they certainly have a big impact on margin, and in the real world of B2B they need to work together to realize this impact. The LeveragePoint platform provides a way for sales and pricing to collaborate to make sure that B2B companies are winning the margins they need.

LinkedIn Poll - Discounting is common in B2B sales because ...

"Discounting" is always a popular, and contentious topic, and is the theme of our summer poll on LinkedIn. If you are interested in taking the poll before you read on, click here.

We choose the four possible answers for the poll with some thought.

• List prices are intentionally set high
  . 
• Upper management pressure for revenue
  .
• Sales defaults to price cuts
  .
• Companies not organized to sell on value
  .

Of course several people said "Hey, where is the 'All of the Above'" button. We also wanted to put in our own answers:

• Because companies need a platform to provide sales people with the messages and data that they need to sell on value and most have not done this
  .
  or
  .
•  Because many companies are internally focused on costs, and not externally focused on the value they provide their customers or what their competitors are doing, left without support, sales uses the tools it has available, one of which is discounting

But to include these answers would not have provoked the vigorous discussion that we wanted, and indeed, that we got. And one might say that they are just elaborations on "Companies not organized to sell on value."

The chart below shows the data as of the afternoon of July 14, 2011. Click over to the survey to get the current result.

Not surprisingly, most people selected "Companies not organized to sell on value." But digging into the comments, there are some very good cases made for the other answers.

List prices are set intentionally high

In many industries, the list price is set high to establish a reference value and leave room for discounts. This is standard pricing psychology and it can also be a good value-based pricing practice. One can set the list price high and then provide discounts to bring price and value in line.

Sales default to price cuts

Here most comments turned on the truism that sales people are coin operated and they behave as they are paid to behave. Most sales people are compensated on revenue, not margin, so what did you expect!

The other interesting set of comments was around Procurement and the power of the procurement function inside B2B. Procurement staff are well trained, have good negotiating skills, and frequently have more data available than the poor sales person. The sales person is motivated to get a sale, the procurement person is motivated to get a discount, the result is --- discounts. The only way to deal with this is to better prepare the sales force with targeted (not general) value messages and with data. Sales needs 'unique value propositions' that it can use in the sales negotiation.

And this of course is the LeveragePoint solution.

 

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.