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.

Everybody has a Value Problem

(photo by La Capoise Galerie)

At the MTLC Innovation Unconference last week, I proposed the topic: "Does your product provide VALUE? (and how to find out)." This was a variation of sessions I've done in the past. Once again I was impressed at the level of interest. About a dozen individuals sought out a distant conference room during the first session at the World Trade Center to discuss this topic. As before, the hour quickly flew by -- we could have easily spent another hour or two. I felt badly that I didn't really deliver on my promise of sharing some best practices (see below).  First a few observations:

• Everybody has a Value Problem. Value appears to be a universal business problem within the technology space that MTLC members play in. Our session had a diversity of businesses such as: a healthcare enterprise software provider, a direct mail solution provider and a very unique (trust me) game-based micromarketing platform. A mix of both early stage and existing businesses.
  
  
• Communicating Value is a Challenge. A theme that emerged in our group's brief discussion was complications in communicating value. For example:
  - How do you monetize so-called "soft benefits" that seem valuable, but don't directly fall to the bottom line?
  - What do you do when the value you create for users isn't visible for the buyer?
  - How should you translate positive feedback from early adopters into their willingess to pay?
  - How can you use value to uncover new product or customer opportunities?

Undoubtedly there were more value challenges among the group. I invite any of you to comment to this blog post so we may continue this discussion. Now (as promised) here a few best practices we know about value-based pricing and sales.

• Think specific context. The best way to know the value of your product/service is for you to pretend you are a specific customer comparing your product against an alternative solution.
  Key point 1: think specific customer - NOT all customers.
  Key point 2: there is ALWAYS an alternative. Value is a relative concept (A is more valuable than B). An alternative often isn't a direct competitior - in fact most new technology don't have them, instead competing with legacy or manual solutions. So if legacy is the reference point, then focus on that.
  
  
• Get granular. Getting specific about customer and competitor makes it much easier to quantify economic value - provided you focus on all the ways your product/services impacts the customer's organization.
  Key point 1: ALL of the ways. Impacts maybe  subtle and indirect. For example, reducing material costs has a direct impact (saving money on buying materials) but also indirect economic costs such as less money tied up in material inventory, less labor in handling material, less adminstrative time in ordering/paying for material, etc. In high volume customer operations, such seemingly trivial impacts may add up to big bucks.
  
  
• It's OK to estimate soft benefits. There's a misconception that only hard benefits (i.e., immediately verifiable) are acceptable in an economic value estimate. Not true. Keep in mind that measuring economic impacts need not have the same scientific rigor as engineering specifications. Let's take email as an example. Did anyone require a hard dollar business impact study of email versus U.S. Mail and/or fax machines back in the 1990's? Are the direct hard cost savings in stamps, envelopes or fax paper the best estimate of the "real" value of email productivity? Of course not. Mind you, this doesn't grant license for making outlandish claims. Nonetheless if you can make a reasonable argument about improving sales performance, you don't need to stick a voltage meter into a salesperson to prove it.
  
  
• Remember ultimately, it's a sales conversation. Purchasing decisions, even highly fact-based b2b ones are subjective and subject to persuasion. Sales people are highly skilled at making the best possible business case. LeveragePoint's perspective is that having a strong value communication case helps this process.

People were active on Twitter during the event and you can follow the stream using the hashtag #MassTLC.

Ed Arnold
VP Products
LeveragePoint

For a Wider Conversation on Value-Based Product Management, Pricing, Marketing & Sales

LinkedIn is emerging as an excellent place for conversations between professionals. There are good groups for product management, pricing, marketing and sales (and many other topics). Some of the groups that LeveragePoint its advisors and customers participate in are listed below.

LeveragePoint also hosts the Value Management Group on LinkedIn. How is this group different from other groups where people from product management, sales, pricing and marketing congregate? The Value Management Group’s goal is to support the larger conversation about how understanding differentiated value can give the whole organization a common way to talk about how they impact customers. For B2B, the ‘value’ in ‘value management’ refers specifically to the economic value that an offer has to a specific customer relative to a competitor (see the figure below).

Why does this matter?

Sales and Customers want to quantify the unique advantages of competitive offers.

Sales “With this I can beat the competition and win the sales negotiation.”

                Customers “With this I can make the best decision for my business.”

Product Development  wants to builds the products that have clear economic value for customers.

Marketing wants to segment markets and develop value propositions that are specific enough for sales to use effectively with specific customers.

Pricing wants to provide not just pricing rules and guidance, but also the rationale that sales needs to persuade customers to accept prices.

By communicating with each other using a collaboration platform like LeveragePoint, companies can align around their differentiated value to customers.

We would like the Value Management Group to be a place where people from product management, sales, pricing and marketing can come together so that companies can deliver differentiated value, because it is differentiation and not commoditization that drives innovation and growth.

Other Great Groups in LinkedIn

(Please add your recommendations to the comments)

Pricing

Pricing B2B

Network of Pricing Champions 

Professional Pricing Society 

Marketing

Corporate Planning & Global Industry Segmentation 

Marketing Executives Group 

Sales

B2B Sales Forum 

Sales 2.0 

Sales Leadership 

Other

Design Thinking 

Integrative Thinking 

Future Trends 

Scenario Future & Strategy Group 

Software as a Services (SaaS) Group 

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

Resources on Value Management for Product Development, Pricing, Marketing and Sales

LeveragePoint is committed to providing the most compelling platform for product development, pricing, marketing and sales to collaborate around value management and to engage in compelling value conversations with customers. We do this with our software platform LeveragePoint for Value Management, by supporting the community through the LinkedIn Value Management Group and by publishing and republishing the best resources and data in the field. Value management is the most effective way for B2B companies to improve margins. If you have a whitepaper, presentation or dataset that you think will contribute to building understanding and adoption of value management please contact us through [email protected].

Resources at LeveragePoint.com.

	A Question of Value by Gerald Smith & Thomas Nagle
	Customer Value-Based Pricing Strategies by Andreas Hinterhuber
	Driving Growth with New Products: Common Pricing Traps to Avoid by John Hogan and Tom Lucke
	How to Manage an Aggressive Competitor by George Cressman, Jr. & Thomas Nagle
	How to Pull It Off - Raising Prices When Others Have Given Their Customer the Power to Set Prices by Thomas Nagle
	Managing Price Competition by Thomas Nagle
	Money-Back Guarantee…and Other Ways You Never Thought to Sell Your Drugs by Thomas Nagle.
	Pricing the Differential by Gerald Smith & Thomas Nagle
	Reaping What You Sow by George Cressman Jr.
	Stop Reacting to Buyers’ Price Expectations; Manage Them by Thomas Nagle, Joseph Zale and John Hogan
	Towards Value-Based Pricing – An Integrative Framework for Decision Making by Andreas Hinterhuber
	What is Strategic Pricing? by John Hogan and Thomas Nagle
	When You’ve Lost the Power to Set Prices by Cameron McClearn

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

More thoughts from Chicago

It's Saturday morning and heading home after a whirlwind week at the Spring PPS Conference. Thursday evening's reception was heavily attended and Friday's morning/early aft sessions were well attended too.  Here are a few nuggets I came away with:

• Joanne Smith of DuPont gave an excellent presentation Thursday afternoon detailing the journey that DuPont made over the past eight years - making the shift from volume to profit. The theme of "be willing to lose share" was a pratical case study of Tom Nagle's talk earlier that day. DuPont was able to record 22 straight quarters of price increases (until the last 2 recession quarters). Bottom line: DuPont lost $2B in earnings because of loss volume, but GAINED $19B in earnings because of effective pricing! The best argument for value-based pricing I've ever heard.
• Early yestreday morning Ted Hartnell of Decision Ready gave an interesting presentation on a topic near and dear to my heart - the microbrew industry. Usng the product life cycle as a backdrop he illustrated various types of differentiation and it's impact on value pricing. Later we discussed this further at the hotel bar - thanks for the beer, Ted!
• Rafe VanDenBerg from Zilliant gave an excellent talk on scientific methods for segmenting based on customer purchasing behavior. Key insight: willingness to pay can vary not only by customer but on a transaction by transaction level. Example: the demand for cold medicine increased dramatically when the customer is suffering the symptoms of a cold. At LeveragePoint, we refer to these as buying triggers. Makes a whole lot of sense and often overlooked.

No doubt, I missed many other great insights since I didn't attend several presentations but hoping others can fill the gaps here.

Ed Arnold 
VP Products
LeveragePoint

Advantage-Based Marketing Critical to Corporate Strategy

There are signals that China—whose artificially deflated currency and price supports have driven its economy for years—may soon allow the Yuan to appreciate. If it does, China will have to focus selectively on markets and market segments where it can meet its competition on value rather than price. And that will send an important signal throughout the world that Value Management is a strategic imperative that goes beyond the marketing department.  

According to Dr. Tom Nagle, author of the just-released fifth edition of the Strategy and Tactics of Pricing, many of the most profitable companies, even those in some slow-growth, low-profit industries, are those that target growth opportunities carefully to leverage and reinforce pre-existing competitive advantages and the value they provide to their customers. Nagle maintains that particularly now, given predictions of relatively slower growth in the west over the next decade, the ability to find and create the optimal circumstances for competitive advantage based on value are critical. “The fight for market share will remain intense,” says Nagle. “Those that win will be those that can better leverage advantages to grow, or at least hold, market share without sacrificing profits.”

How to do this? Conventional wisdom is that marketing and sales drives top-line growth, while cost cutting drives margin growth. Marketing identifies sales opportunities; operations pursues efficiency. Not surprisingly, the past year has been a difficult one for marketers as companies struggle to maintain cash flow by cutting costs—including those for organic growth initiatives.

“The tragedy in this,” Nagle says, “is that marketing can drive sustainable margin growth as well as sales growth, even in markets that are highly competitive.”  The answer lies in what Nagle describes as  “Advantage-Based” Marketing for Profit, Not Just Sales, the title of his keynote address at the Annual Spring Conference of the Professional Pricing Society (PPS) in Chicago next month. Advantage-based marketing is about finding, or making, the circumstances to win profitably.  For marketers, the tactical implications are quite different from those required for a “customer-driven” approach of adapting to the markets as you find them.

The focus, increasingly, is on selective advantage; the ability to find and if necessary construct the ideal markets in which your company has a natural competitive advantage. In the words of George Bernard Shaw, “People are always blaming their circumstances for what they are. I don't believe in circumstances. The people who get on in this world are the people who get up and look for the circumstances they want, and if they can't find them, make them."

We hope that you enjoy Tom’s prescient comments at PPS and that you will visit the LeveragePoint booth on the expo floor, where we can show you how our suite of Value Management tools can help you to create the advantage he describes,  communicate it clearly to your clients and capture the margin that your competitors leave on the table.

Jonathon Levy
President and CSO
LeveragePoint Innovations

Tom Nagle Webinar Recording Now Available

Here is a link to the recent webinar, Getting Your Organization Aligned Around Value. Unlike the live webinar, you can watch this even if you are not a member of the Professional Pricing Society (PPS).

Last week we wrote about the various solutions that organization deploy for value management. It was no surprise to us that spreadsheet-based models came up on top. Here is another factoid that came from polling our webinar participants.

What immediately jumps out is that it appears that responsibility for value management is dispersed among multiple functions. One-third of participants say its owned by "brand or segment marketing". One-quarter say "sales."

One hypothesis I have is that practically speaking, this is a shared responsibility amongst all these various functions. Further, that coordination between groups is a major challenge in many organizations. We already know that the communication gap between marketing and sales is the biggest barrier to value communication.

Here's another insight from this poll.  We know that many companies have established a specialized pricing function, usually staffed (appropriately enough) by PPS members. Clearly such professionals bring valuable pricing expertise to their jobs.  How can companies leverage that expertise and embed it deeper into the marketing, sales and other functions?  My pov is that spreadsheets aren't really up to this challenge.

What do you think?

Ed Arnold
Director of Products