Dollars and Sense: The Pricing Blog

Change the world $27 at a time

2009-10-26T07:10:00.003-05:00

I've never done this before, but today I'm going to plug the Grameen Foundation's "$27 on the 27th" campaign. For those of you who don't know, the Grameen Foundation is a microlending institution that helps poor women in developing countries get loans to fund small businesses. Loans are typically in the range of $20-200. Their founder, Muhammud Yunus, started with the first loan of $27 in 1976. Yunus and the Grameen Bank shared the Nobel Peace Prize in 2006 (no NPP jokes, please). I have been involved with the Grameen Foundation for several years, and seen first-hand how their work is helping people in India. The breadth and depth of poverty there is vast, and top-down development efforts have often failed to help those who need (often while enriching people who don't). The bottom-up approach is not a silver bullet, but it builds small businesses, helping families and communities along the way.

So I encourage you to think about the next 27 discretionary dollars you plan to spend, and consider spending it on microloans to help people build small businesses. Learn more here.

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Pricing at the dollar store

2009-10-21T08:53:00.001-05:00

Pricing humor from Slingblade, courtesy of an alert reader.

Linda Wheatley: Karl, you know what? Melinda here was voted employee of the month at the dollar store last February. Isn't that something?
Karl: Yes ma'am, I reckon.
Melinda: Well, when you like pricing items as much as I do, it's just bound to happen sooner or later, I guess.

Upcoming Event: Professional Pricing Society Fall Conference

2009-10-19T13:29:00.002-05:00

We'll have a booth at the upcoming Professional Pricing Society Fall Conference in Orlando, October 22-23. Come by and see us and learn more about Sales Compass.

Get more information and register here.

Agility Key to Success in Turbulent Times

2009-10-15T14:32:00.001-05:00

The economy's in a bubble! A crash! A recovery? Careful, you might get whiplash. Looking back at the roller coaster ride, a lot of companies lost a lot of money because they could not act, or even react, quickly enough. Strangely, this money rarely showed up as a line item on the corporate P&L, although the losses had a huge impact on share prices. What were these losses, and how can we apply the lessons more profitably now?

Most companies have a hard enough time figuring out "optimal" pricing in relatively static markets. List prices get revised once or twice a year, often through a process that involves more heat that light. Promotional programs and discount plans get a fancy spreadsheet model that never gets revisited to measure effectiveness.

When conditions change rapidly, companies often get caught on their heels. For example, when energy prices rose rapidly, companies like UPS who recognized the importance of energy prices to their bottom line, and their competitors' room to maneuver, implemented fuel surcharges and turned energy costs to their advantage. Most companies do not monitor fuel prices carefully, however, and most of them failed to take advantge of price increase opportunities or even to keep up with inflationary pressures in their supply chains.

By the time many of them had figured out they should have raised prices 6-12 months earlier, the economy had tanked and pricing power evaporated. Even then, some companies had waited long enough to react that they could still push through price increases of 5, 10, and even 12%.

Now companies have retrenched for the recession and are timid about raising prices. How will you know when? And how much? Or if you can raise prices in some industries but you have to be more flexible with discounts in others?

You need, in a word, agility. You need to see what's happening now, not just what happened last quarter. And you need to be able to adjust how you price and discount based on that. You can't wait for your year-end pricing review. You can't wait for a marketing review. You need to tie into your sales team and empower them to be agile. If you don't, your company will likely leave 10% or more of its profit on the table. You may not have to declare it as an expense, but your investors will notice the difference.

What's your plan to close out 2009?

2009-10-06T21:35:00.002-05:00

What's your plan to close out 2009?

For many companies, 2009 has been a tough year. While many people remember the crash of the dot-com bubble, some people seem to have forgotten, and even that crash didn't impact the broader economy the way the housing and credit market implosion did.

So how are you going to close out 2009? (If you're in retail, good luck. I'll write more on this later, time permitting.) Many companies are trying to sell into a buyers' market, with less support from marketing efforts than they enjoyed in the past, fewer reps, but the same pressure to deliver.

Many companies run as hard as they can at the opportunities in their pipeline. They stay up late, fly around the globe, and try to "close" as many of them as possible. Buyers know this, and know how to extract maximum concessions by causing maximum stress.

I'd like to promise you that by reading this blog post, you'll make your numbers and not have any stress, but I can't. However, here are some things to keep in mind that can help improve your close rate, close time, and reduce your concessions.

Note that the concession bit is often the last thing on the minds of your sales teams. It's something that you deal with once you get to the "negotiation" phase of your pipeline. Chances are you're already pushed into a corner at this point. But for every 1% discount you give that don't have to, you're giving up about 10% of your profit. For some companies in this economy, that's going to put you out of business.

Without further ado, here are the tips;

Look at the characteristics of companies that buy quickly and with minimum discounting. Assign reps to focus on accounts with these characteristics. Assign marketing to find more of them. All too often, sales teams beat their heads against the wall with prospects that aren't a great fit. They spend too much time trying to sell vitamins instead of painkillers. This stretches out sales cycles and increases discounts. (In many cases, these discounts put the deal into the red, sometimes on both a gross and contribution margin basis.)
Give your reps information on what your best reps are doing. Sales teams have gotten a lot better at using CRM systems to share best practices on prospecting, meeting, closing, and other important sales activities. But when it comes to deal pricing and negotiation, the buyer tends to enjoy a huge information advantage. Fight back by giving your sales team information on how similar deals were priced out their outcomes. Reps sometimes just need to know that it's possible to sell at a 10% discount rather than a 12% discount (a change that might mean a 20% swing in profit).
Have a Plan. Know what your goals are and what you need to do to hit them. Make sure the entire organization is on board to avoid last minute problems with price exceptions. Know when you're doing to walk away.
Have a Plan B. We've all seen situations at the end of the quarter when the carefully crafted sales plan from the beginning of the quarter gets torn up and the company enters "Wild West Mode." Margins go down, and customers get trained to put you through the same process next quarter. To avoid some of this pain, set up contingency plans so that if certain conditions occur, you can change some of your sales and pricing parameters. For example, having a specific plan for responding to competitive price cuts not only reduces stress, it also reduces destructive price wars.

Best of luck with the rest of the year. Would love to hear how you're implementing these practices, or others.

The exponential benefits of differential value

2009-08-07T12:08:00.002-05:00

I wrote a couple weeks ago about Value, Scarcity and Pricing in the Age of Superabundance. Now there's a timely report about the concentration of profits among cell phone makers from Bernstein Research analyst Toni Sacconaghi. Sacconaghi estimated that while Apple only accounts for 8% of the revenue among handset makers, it gobbles up an astounding 32% of the profit in the industry. (If you exclude losses at Sony Ericsson and Motorola, the number drops to only 25%.)

This is a great example of how diffential value has a huge impact on profit. By creating and sharing a value surplus between buyers and your company, you can dramatically increase profit. The flip side of this is that if you can't differentiate, you end up in the commodity trap and you have a good chance of having negative profit. (Motorola made a ton of money in the cell phone business when a phone that made calls and was really slim was differentiated.) If you're in the commodity business, you have to find a nice in your market where you're actually differentiated.

Value, Scarcity, and Pricing in the Age of Superabundance

2009-07-14T09:41:00.002-05:00

For most people, throughout most of human existence, scarcity was paramount.** Now we live in an age of not just abundance, but superabundance. The agricultural revolution created abundance-- not by today's standards-- in food. The industrial revolution created abundance in manufactured goods. The information revolution not only created an abundance of communication and information, it also dramatically increased our ability to move production to cheaper locations and manage the complex supply chains that resulted.

Buyers--both individuals and businesses- benefited from a huge increase in supply, selection, and a huge decrease in price. We also ended up with a superabundance of credit, which helped fuel appetites for the endless array of cheap goods.

For sellers, however, the situation was often disastrous. Many local businesses succumbed to larger competitors with lower unit costs and lower prices. Even large, successful businesses found themselves on a treadmill, running faster and faster but never getting a sustainable competitive advantage. You might have just moved manufacturing to China, only to find a competitor had achieved lower costs in Vietnam. This is before we even get to the internet, where prices are literally going to zero in many cases.

So what can we do about this?

We need to rediscover scarcity. In many cases, we'll have to create it. This is not as simple as producing "limited editions." This won't work for everybody. (If anyone has any information on how Nomenus Quarterly is doing, please let me know. The trendy magazine made the New York Times after cutting production from 50 to 10 and raising prices from $2500 to to $6500 per issue.) Rental car companies have had success raising prices after trimming their fleets. It may be easy to make a car cheaply, but having one available at the airport when you need it is a different story.

And that is the key to rediscovering scarcity. You have to understand what the customer needs that's hard to deliver. At one point, just making something was enough. Now, whatever you can make, chances are someone else can make and offer more cheaply. In pricing, after all, you're only as smart as your dumbest competitor, and chances are some new MBA is looking to make a name for himself by getting 25% of your market, even though it's a dumb move for everyone. (We'll talk about the latest round of Google v Microsoft in another post.)

In an age when a device as mind-boggling complex as a supercomputer's worth of processing power is a commodity, the silicon itself has little value. But the ability to turn it into a data center takes some skill. The ability to do it tomorrow, in a certain location, with training, monitoring, and reliability guarantees is actually really valuable.

Whatever it is you're selling, think about how your customers use it, and how there are situations when the overall experience creates scarcity bottlenecks. This could be the fact that while Southwest flies 10 cheaper flights a day, if you actually want a seat at the last minute, you'll be forking over $1000 to Delta. Or if your customers require extremely high reliability or precision. Or if your customers order commodities from you, but require logistical and service support to deliver them to the right people, at the right time, and perhaps even set them up. Note that this does not mean you can charge all potential customers high prices all the time. It means that certain segments place a value on your offering, at least some of the time. Understand this, deliver what they need, and price appropriately.

A lot of this comes back to the one thing that is getting less and less abundant as everything else becomes superabundant: time. If you can save your customers time, you can make money. If you can save them more time than alternative solutions, you can make a lot of money. If you're stuck on how to create scarcity, start with the customer's time, which is already scarce.

** This goes all the way to our genes. Before Quik-E-Marts, our craving for sugar and fat helped keep us alive. Now it gives us heart disease. For more on this somewhat-related topic, check out the New Yorker article XXXL: Why are we so fat?

In addition to the genetic arguments, the article notes that the price of food, especially calorie-rich, nutrient poor sodas and other processed food, has fallen sharply. (This is partly due to increased efficiencies in farming and industrial food processing, and also partly due to subsidies that encourage production of food that we probably shouldn't be eating. The cheapest, simplest, least-likely-to-happen step we could take to improve our healthcare situation would be to end subsidies for corn.)

Getting the Most from Your Discounts

2009-06-09T16:47:00.001-05:00

Join us for a webinar on June 16, 2009, 12:00 Noon EDT

For many companies, discounts represent the largest spending category-- but they're not even in the budget. This strange omission leads to inefficient and ineffective use of discounting money. Fortunately, this leaves many companies with a lot of low-hanging fruit that can yield valuable returns, especially in a tough economy. By using discounts more effectively, companies can:

Increase profits
Improve cash flow
Shorten sales cycles

The hidden story from Apple's WWDC

2009-06-09T13:13:00.002-05:00

Unless you've been assiduously avoiding the news lately, you probably heard that Apple announced a new iPhone model yesterday at their World Wide Developer Conference (WWDC), along with updated laptops and various software updates. Most of the news coverage focused on these items, but the real story was buried.

For the first time in years, Apple shifted their laptop price points. Unlike most PC makers who manage configurations, and adjust prices over time to track the inevitable decline in the value of silicon, Apple manages price points, and updates the components over time to maintain perceived value. Apple's entry-level Macbook Pro notebook has started at $1999 since it was introduced in 2006. Apple dropped $300 to $1699 yesterday (along with some component changes). The mid-level and high-end 15" MBP's dropped $500 to $1999 and $2299, respectively. The 17" MBP dropped $300 to occupy the $2499 slot. 13" Macbooks were rebranded with the "Pro" moniker (and received some component upgrades), while dropping $100 in price.

This indicates that while Apple is weathering the recession well, they are adjusting to changing value equations in the market. Apple hates dropping price points. (One could also argue that there aren't enough compelling upgrades to justify keeping the prior price points.) However, these adjustments will boost sales significantly and dropping component costs mean that Apple won't take a margin hit.

Pricing agility is underrated

2009-06-03T09:07:00.001-05:00

Pricing is a process, not an event. This mantra is important for companies who think pricing is something they do annually, when they update price books, or in special circumstances when they add a fuel surcharge. But pricing is happening all the time, whether or not you are participating in it, because pricing is the monetization of value, and your value changes with the market.

Decades ago, many companies could get away with treating pricing as an event, but the acceleration and globalization of business has destroyed that paradigm. Within the past 12 months, market volatility has further emphasized the importance of pricing agility as an ongoing business process. Inflation, especially in energy and commodities last year, left many companies flat-footed. Then, just as they were getting around to their price increases, the economy tanked and pricing power diminished or vanished. Now many of these companies are just getting around to unbundling offerings, being more creative with financing, or just being more generous with discounts.

Unfortunately, inflation is likely to be back soon, and these companies will again find themselves at odds with the market, with lower and revenue and much lower profit than more agile companies who can ride the market waves.

We'll talk about how to ride the market successfully in an upcoming post.

Webinars Today and Tomorrow

2009-05-12T08:38:00.002-05:00

For people interested in the interaction of pricing, sales, and business performance, we have 2 webinars that you won't want to miss.

Today at noon EDT we'll be hosting a discussion with the Professional Pricing Society called Beyond Sales Prevention: Pricing as a Key Ally for Sales.

Tomorrow at 12:30 EDT we'll be doing a short, half-hour webinar/demo on how you can sell faster and Leave Less Money on the Table by combining your salesforce.com CRM solution with Mimiran Deal Manager.

Microsoft's Pricing Dilemma (Part 2)

2009-04-19T22:25:00.000-05:00

We mentioned in a previous post that Microsoft is in the grips of a pricing dilemma. Changing paradigms have weakened Microsoft's dominant position in operating systems and office productivity programs. Businesses and affluent consumers no longer upgrade regularly. What they have now is good enough. Developing markets that don't need to maintain backwards compatibility with Microsoft Office file formats are turning to free (!!!) software alternatives.

So what can Microsoft do? They can't simply drop prices or give away software without further depressing their share price. Their efforts to gain online revenue through advertising have been disappointing. Vista, even more disappointing.

Microsoft's efforts to offer a stripped down version of Windows for developing markets and netbooks is a step in the right direction. They are cannibalizing their own profits, but that's better than having someone else cannibalize them.

But this is an incremental step. Microsoft "won" as much through clever pricing as through clever technology. They licensed their operating system cheaply (at the time) but made sure that computer makers paid them royalties regardless of whether they actually installed the system. They realized early on that they could create a whole new market for software if they could make it more affordable. Rather than charge $500 for a word processor, $500 for a spreadsheet, and $1000 for a database, they gave buyers the whole bundle for $500. How could you say no?

This helped them kill the competition and for a while, they added enough features to subsequent releases to get consumers and businesses to upgrade regularly.

The problem is that they were so good at killing the competition that they forgot how to innovate. The incremental value of each release got smaller, while even contemplating a switch let users think about using alternative applications like Google Docs, that suffice for many users. Using Windows and using Office hasn't changed much in the past decade.

In addition to making desktop computing prettier, they need to make it faster. In theory, it should be. In reality, I stopped using Outlook when I realized that it faster to use the Google browser application directly, even with Xobni installed in Outlook. When is it faster to search the web than to search my own computer? Desktop computing should be instantaneous. It should provide a noticeably snappier experience than the web. (If this required a major rewrite that would break backwards compatibility, they could always run a virtual Windows XP or Vista instance. This works amazingly well on my Mac.)

Next, desktop computing and productivity work should look good. The templates in Office 2007 are actually a lot nicer than the ones in previous versions of Office, but they still look pretty lousy. (You can pick a template in Apple's iWork, which has only been around for a few years, and get much better looking results.) Microsoft should spend the money to get or create some really nice looking templates. And everything on the desktop should be "HD". PowerPoint should look nice, not grainy with clunky animations. Speaking of HD, desktop video editing is the killer app for operating systems-- one of the few things it's currently really hard to do in the Cloud. Windows Movie Maker is a joke. Build or buy a really good, easy video editing program. At this point, the DoJ won't care if you bundle it with Windows. Make PowerPoint output to this HD format, but make it interactive, so you can give a really high quality presentation. And because the average business user won't know how to create professional animations, have a huge gallery available for instant download. This is stuff that Linux can't do well, and even Apple users need a fair bit of expertise (and possibly expensive extra software) to create.

Next, think about how users want to work with documents. For a software company that tries to reuse code, Microsoft makes it pretty inefficient to work with documents. Many business documents have various sections-- headers, footers, standard terms and conditions, snippets copied and pasted from other documents, and some original content. But it's hard to keep the snippets up to date. If the company changes a logo or a business address, you have to update all the documents individually. If standard legal terms change, you have to update them all individually. If a 10 page section of a proposal template changes, you have to copy and paste that into individual proposals. Office should allow users to "link" to other documents or snippets and update automatically when those links change. This would dramatically enhance productivity in many cases. (Office has made strides in this direction, but they're clunky and they may require you to set up server software on your network, rather than allowing you to login to a virtual network.)

Finally, the internet has moved beyond the ability to insert hyperlinks and save as HTML. (Even that doesn't always work well, as my recent attempts to view a PowerPoint presentation saved as web document demonstrated.) "Track Changes" is an awesome feature, but you still have to email around documents or set up a server. Apple beat Microsoft to the punch with its iWork.com concept, which allows users to collaborate online. Microsoft should provide a similar service, which would also include an easy way to manage the snippets I mentioned above. People with the appropriate permissions could update the snippets and apply the changes to sets of documents. This virtual space could support the automated backup of important files of any type, but with additional capabilities for Microsoft file formats or other file formats if their vendors created the right plugins. Make it easy for businesses and consumers to upload files to YouTube, Picassa, and other sites.

Now you have an operating system and a set of productivity applications that actually make people more productive. You can be better than Apple not just at the individual applications, but in the way they work together to help users perform tasks.

When it comes to pricing, you now have a lot more room, because you have created more value. For the people who don't care about all the bells and whistles, offer the simple version of Windows with an online version of Office with basic capabilities. (Having a 3 application limit in the basic version isn't as much of a restriction now that so many apps run in browsers-- make sure users are at least running your apps.) The "standard" version should include HD authoring tools and should cost about what Windows Home costs now. The "advanced" version should encrypt users' data, and come with a login to your company's Windows Live intranet.

There's a lot of talk that Microsoft should pursue subscription pricing. However, past efforts to do this raised customers' ire when expected upgrades did not arrive during the subscription period. Until Microsoft demonstrates that it can release meaningful, compelling upgrades regularly, they should stick to licenses. (They can always offer financing to defray the upfront cost.)

What about all these extra goodies? What are they worth? They are worth spurring an upgrade cycle. They should be bundled into Windows and Office. Down the line, Microsoft can charge for them (think about moving SharePoint into the Cloud). More than falling behind the times in the pricing game, Microsoft has stood still while the value game has changed. Fixing the pricing problem and the sagging stock price start with fixing the value problem.

Microsoft's Pricing Dilemma

2009-04-13T22:34:00.004-05:00

Microsoft is between a rock and hard place. The Redmond software giant made an enviable $17.6B in profit last year (see MSFT for more details) but the stock is down from its bubbly peak and has been stagnant for almost a decade. Competitors that once cowered in the corner are now nipping at the company's flanks. Perhaps most threatening of all, Microsoft has become what it once overpowered-- a vast, internally focused bureaucracy, more like the IBM of old than the Microsoft of old. Windows Vista was a debacle. Rather than rushing to purchase the latest and greatest, customers demanded access to older software, specifically to avoid the latest and greatest.

Despite these problems, Microsoft's earnings have continued to climb, driven in part by savvy segmentation and pricing, which meant that almost alone among companies supplying computer "parts", whether physical or virtual, Microsoft has been able to maintain and even raise unit prices.

However, Apple has eaten a chunk of the high end personal computer business. Linux made its deepest inroads in the "netbook" segment of cheap laptops, while Google and others threaten to move computing off the desktop and into the cloud (finally fulfilling Netscape wunderkind Marc Andresson's arrogant if prescient quip that the browser would reduce Windows to a "poorly debugged set of device drivers").

Microsoft has seen threats before, from IBM's OS/2, AOL, Netscape, Sun, and others. But Microsoft's response to the latest onslaught has been weak. Now, Microsoft is going on the offensive again, with a line of ads attacking Macs as too expensive, and a new pricing attack against Linux that has reversed market share losses in the netbook segment (see How Microsoft is fighting back (finally) at Business Week).

The problem is that Microsoft can only complain so loudly that Apple is too expensive before the obvious comparisons between Microsoft and open source solutions like Linux and Open Office make Microsoft appear over-priced. For most consumers, Linux netbooks are perfectly adequate from a software perspective (personally, I need a fullsize keyboard a decent screen-- even the Macbook Air doesn't qualify for the screen).

Allowing OEMs to ship Windows 7 at $15 per copy for the most basic version will help head off Linux, at the cost of the tremendous margins Microsoft has typically enjoyed. However, it's better to cannibalize yourself than let someone else do it for you. Without a way to actually grow profits, though, Microsoft stock will continue to languish, talented and ambitious employees will leave, and Microsoft will lose its place as the industry's dominant player and join IBM as another powerful behemoth.

Is the company that changed the computer industry, partly by audacious bundling (I'm talking about practically giving away Office productivity applications by 1980s standards, not the later bundling of programs with Windows), doomed to irrelevance? In a follow-up post, I'll talk about what they could be do to regain their mojo.

Defying Economic Gravity on Home Prices

2009-03-31T23:36:00.004-05:00

I've been trying hard not to get into politics, but let's take a quick detour there and try to hurry back before we cause too much of a ruckus.

For a short synopsis on the financial crises, see Scott Adams here.

Once house prices started rising, too many people were hooked on the drug. This means not just the banks and the speculators, but also government, desperate to shore up a struggling economy with a mountain of debt (they kept rates low, helping to inflate the bubble), home owners using rising equity to finance more debt and the broader economy that benefited from the consumer spending that drives the American economy.

That a bubble was coming was obvious to anyone who cared to pay attention. But once various sectors of the economy were hooked, they didn't want to get off the gravy train.

How did we know a bubble was coming? Putting on our pricing hats (which should also mean our value hats), it's not enough to show that prices are rising. They were rising faster than other sectors of the economy that should be tied to the value of homes, such as incomes and, even more critically, rental prices. A Value Price Waterfall comparing purchasing a residence to renting one would show some differences in taxation, maintenance, convenience, and other attributes, but they should be pretty similar. When purchase prices greatly exceed rental prices, you have a speculative bubble, betting on rising values making the asset more valuable than it should be. For a country that just went through the dot.com bubble, where company values outstripped any reasonable valuation, simply on the expectation that the valuations would keep going up, we have a very short memory. (Plenty of other people could write more insightfully about that.)

What's worse than the run-up in house prices are the financial derivatives based on those house prices that Warren Buffet called "financial weapons of mass destruction" and that Adams calls "diseased livestock." Now the politicians and bankers are trying to cover their losses and put a voter-friendly face on it by trying to prop up housing prices. The problem is that they are too high. You can try various ways to subsidize them, but it's going to be expensive and the people who are politically well-connected will benefit more than the average homeowner.

The fact is that housing prices have to fall, and this is going to cause a lot of pain. It was a big party, and the whole global economy has a hangover, whether or not that's fair. While some form of government intervention is probably desirable, trying to prop up home prices brings back memories of Soros' famous and very profitable bet against Great Britain trying to prop up the value of the pound.

Imagine that instead of houses, there had a been a speculative run-up in the price of iPhones. Apple, Wall Street, and others drive the price up to $5000. When the bubble bursts, the government tries to keep the prices close to $5000 and asks taxpayers to foot the bill. Sounds absurd, right?

A Conversation with Gerhard Gschwandtner of SellingPower

2009-03-19T15:10:00.004-05:00

Here's a discussion with Gerhard Schwandtner, founder of SellingPower and host of the Sales 2.0 Conference. After decades in sales, Gerhard sees how the artificial divisions between sales and pricing functions lead to suboptimal results, and he offers some advice for improving the situation.

How does sales think about pricing?
Pricing is like the passport that gives you access into a foreign country. It's a very critical issue. It's 80% of the value that a company is offering. If you don't have the right price, you don't have a chance.

If you look at the competitive analysis, why do sales people lose to the competition, there are always two reasons: either the competitive sales rep had a better relationship or a better price, assuming there is a similar fit.

If the product or service doesn't fit correctly, it's not a price issue or a sales person issue. It's a lead qualification issue at the beginning of the funnel.

What is the historical interaction between sales and pricing?
The people who manage the sales and marketing organizations have to play from the same sheet of music. In certain companies, they have a chief revenue office who orchestrates between sales, marketing, and sales support. Complexity comes from the subdivision of certain functions. When you have a situation like that, you need greater integration efforts.

Pricing analytics are even more important than analyzing the sales funnel. [Emphasis added.] In most companies, the price is made up by somebody who looks at the cost side, but a price is a function of 2 factors-- what does it cost to produce, and what is the value in the market and how much are people are willing to pay for it?

For example, I deal with a lot of speakers, and I ask what they charge. Some will say "I charge $5,000 per day." I ask them how they know if this is the best price they can get in the market place and they say that this is because this is how other speakers charge. This is leaving pricing to chance because they are not analyzing their pricing. Have they tried to charge $7500 or $10,000? No. They are going with what is common and getting common results. As a result of these conversations, they charge more and they call me up and say they should have tried this years ago.

The same applies to any product or service. If you never try price testing, if you only go with what others are doing, you are not getting the best return on your investment.

What type of training does sales get in pricing and price negotiation?
That is a very good question. Most sales people do not get any negotiation training. This puts them at a disadvantage because most buyers are trained in negotiation and they know how to extract concessions, and fake walking away. Sales people are who untrained leave a lot of money on the table.

Why are companies not paying more attention to the problem of leaving money on the table?
Companies feel they are doing well enough, and they do not know what they do not know. A lot of sales leaders do not have enough time to explore how they could squeeze more profitability out of their sales organizations.

The economy is forcing everyone to take a harder look at how they run their sales organization. There is a tremendous drive to improve the productivity. How do they get better people? They need more hunters. People are moving a lot of sales functions to inside sales to save costs. They are spending a lot more time analyzing what they need to teach the sales reps, and also harvesting the collective intelligence of the sales organization. They are also looking very closely at sales technology that can deliver predictable ROI in a short period of time. Sales 2.0 is a huge opportunity for everybody, because there are over 1000 sales technology tools that sales leaders can explore. There's more know how about sales processes and more science available around people, such as tests and behavioral profiles to help managers reconstitute the sales force.

Is there a risk that there is too much choice, too many paths?
We cannot stop learning. There is always the illusion that when we reach the next level, whatever that may be, that we can sit back and relax and enjoy the spoils. That illusion does not lead to progress. The moment we stop by being curious, we are cooked. The law of evolution mandates that we need to learn faster than everyone else if we want to stay ahead. There is no silver bullet that can eliminate the need for vigilance. As a sales leader, you need to be a productivity vigilante.

Is there a risk that desperation for revenue can lead to sales teams bringing in unprofitable business?
Smart sales leaders look at the reality of the market place. In a recession, you need to bring in 30-40% more leads just to stay in place. Pricing really starts with getting the right leads into the sales funnel. This means attracting prospects that have the need and the budget for your solution. Pricing and lead management need to work hand in hand. If you're not doing a good job with lead management, you will end up with a lot of garbage in the sales funnel. The reps will chase the garbage trucks and come back saying the price is too high. You need a clearly articulated value proposition that lets customers understand the value you bring. If you don't have one, and your reps can't articulate it clearly, you have no chance of surviving.

How can sales 2.0 technology help improve the relationship between sales and pricing?
One issue is the mindset around pricing. Pricing is not like a statue. Pricing is more like a river. Pricing as a statue is the old approach. Everyone has one price and if the customer didn't meet it, you lost the sale. Today you can't walk away. You need to match price with value. Price is the science. Value is the art. You need to be build an artful value structure around the price, so the customer can say "the price looks a little high, but this really meets my needs." The pricing people and the sales people need to have periodic reviews to go over the total value proposition with the customer. You may have to make adjustments for certain markets and certain conditions.

There's a story I like about 3 guys who buy a movie theater. One guy wants to charge $15, redecorate the lobby, and cover the seats with leather. The second guy wants to charge $12 and cover the seats with vinyl. The third guy says "let's charge $6 and cover the seats with people."

How is the evolution of sales and the death of transactional selling impacting pricing?
Price explains how the product is made and price justifies the cost. Value justifies the purchase. For the buyer it's all about the value. The rep should never quote a price before you establish the value. It's totally self-defeating.

How do you handle buyers who want to know the cost?
We are moving towards a conversation economy. The old model of selling was a symphony orchestra, where everyone says the same thing. Now, it's more like jazz, where you listen to a riff from the customer, and respond appropriately, and you co-create the sale. Depending on the quality of the conversation, you have a confrontational conversation or a collaborative conversation. As a sales person, I don't want to be in a position to quote a price without having an opportunity to discuss value.

For example, you want to buy a camera with a telephoto lens. You have done some online shopping and found a lens that goes from 70-200mm that goes for about $600. You call a store and ask for a price. The rep can quote the price, but they need to understand what you are using the camera for. If you are trying to capture safari pictures, they can tell you that 200mm is not enough. Consider the 100-300mm lens that is available for $500. They have found a better solution for less money, and they get an instant sale.

If they just want a price, it's a transaction, not a conversation, and you don't need a sales person. They can do it online.
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Thank you, Gerhard for the insight the wonderful musical metaphors. There you have it. Sell value. Coordinate pricing between sales and the rest of the organization with period reviews. If your sales team is just quoting prices, they can be replaced by a website. If you are chasing the wrong leads and can't sell value because they don't value what you offer, you're not going to make it.

Of course, we wholeheartedly agree with the importance of pricing analytics and arming reps to compete in purchasing negotations. If you can't see what you're doing or where you're going, you're probably not going to get to the right place. Especially in this environment. You can get more information on Mimiran solutions for these areas.

Connecting in the Clouds

2009-03-16T10:09:00.002-05:00

With companies trying to shave costs and grow revenue without big budgets, software-as-a-service (SaaS) is a critical paradigm shift. Most of us are used to logging into email hosted by Google or Yahoo or Hotmail. We don't think about maintaining the hardware and software infrastructure required to manage email (unless we have to administer an Outlook or Lotus Notes server at work). Salesforce.com made SaaS mainstream for business users, but many other companies also offer SaaS solutions, including Mimiran.

For companies trying to figure out how to put together SaaS solutions quickly and cost-effectively, Astadia is hosting a series of events called "Connecting in the Cloud." These are day long sessions offering workshops and panels on SaaS solutions, along with vendor demonstrations (where Mimiran comes in).

We will be presenting at the Connecting in the Cloud event in Dallas on April 9. Register before April 2 and your registration fee will be waived. There's some stimulus for you.

For those of you who will be joining us in Dallas, be sure to visit and check out a new offering. Details will be coming soon.

Want to Stimulate the Economy?

2009-03-09T22:12:00.002-05:00

If you want to do something to stimulate the economy, hook up small businesses that you like with potential customers. Take a look at Make a Referral Week and pledge your support.

"Transactional Selling Is Dead"

2009-03-04T22:06:00.002-06:00

This morning at the Sales 2.0 Conference in San Francisco, Gerhard Gschwandtner, founder of Selling Power magazine, pronounced the death of transactional selling. He said that in the next few years, millions of transactional sales reps need to learn consultative selling or get a new job. Order takers who have not already been replaced by technology will be soon.

This has a couple of interesting implications for pricing.

First, sales reps will have to get better at pricing. They will own the creation of value in the customer relationship. If they don't also effectively own the value capture side of the equation, their companies will be in big trouble. (A lot of them won't make it through 2009 unless they turn their act around in a hurry.)

Second, marketers are will have to get better at pricing, too. Some of you will say, wait, marketing already owns pricing. In some cases, this is true, but in many cases, marketing only owns list pricing. The "real" pricing takes place in negotiations with the customer. Marketing will have to get more involved in the price companies actually have to pay.

What if you create value and no one perceives it?

2009-02-24T11:59:00.002-06:00

If a tree falls in the woods and no one hears it, does it make a sound? If your offering has value that customers don't perceive, can you charge for it?

Price is limited by perceived differential value. So if you are busy creating value through market research, design, R&D, better customer service, or some other aspect of the business and customers don't perceive it, you're just losing money (and wasting lots of time and energy). With everyone trying to cut expenses (both in purchasing and cost of goods sold), now is a good time examine where you think you are creating value and where your customers are actually perceiving it.

The first test is whether your customers actually know about it. Everyone says they have "great service." If you think you truly have better service, you need to be able to tell your customers why. For example, if you always get a person in 3 rings or less when you call a toll free support line, you can highlight that. Some customers won't care. They'd rather go with a cheaper provider who doesn't even have a phone number on their website. (This is where unbundled comes in.)

Next, make sure you highlight the areas you're different. If you spend a ton of time and money talking about the ways you're just like the competition, you aren't doing anything to create differential value. Apple, which does a great job at commanding premium price points through strong perceived differential value, has been stepping up the attack here. As computer prices continue to fall-- the fastest growing segment of the market is sub-$400 "netbooks" -- Apple is selling machines costing 2-7 times that amount. They introduced a new manufacturing process that fashions the core frame of a notebook out of a single piece of aluminum. Not only does this make machines relatively lighter and stronger, but it's hard for other companies to copy. So what? To encourage people to care, they showed a video when they debuted the new product line, and posted it on their website. The video shows actual blocks of aluminum going through "13 separate operations" to become a new Macbook.

They also claim an 8 hour battery life on their highest end notebook. Rather than just claiming longer battery life, though, they used another video to highlight why their innovation-- from design to manufacturing-- produces better results. They are saying that other computer makers who use off-the-shelf components might save a few bucks, but they can't innovate like this. (The videos also sidestep the fact that these factories are not actually Apple factories at all.)

When Nike started putting "Air" in its shoes, few people noticed. When they managed to cut away part of the outsole so you could actually see the bubble inside the sole, sales skyrocketed. They "visibilized the technology."

Now, you have to make sure that customers actually care about your great innovation. Thinking from a slightly different perspective, you can also target prospects who are likely to place value on the results of your effort. We have seen cases where a company's "Gold" customers always got free express shipping, regardless of whether they actually cared about it. This was a huge expense, especially as shipping costs rose in 2008. Instead of being a differentiator, it was just something that customers took for granted, because they had never built the value story around it.

Lastly, if a customer does not value something that you think is tremendously valuable, take it away. Then you protect your premium with the customers who do, while protecting your margin on those who don't. Often, customers who claim they wanted you to match the competitor's lower price will relent when you offer to match their lower price and lower service level.

Starting from the inside out like I describe above is a way to treat the symptoms. You really want to start by figuring out what the customer values and working back from there to deliver it to them. However, this is not always possible, especially in the short term.

With a lot of companies at risk for negative growth for 2009, make sure your effort is in the right place. Areas where customers perceive strong differential value will generate a great return. Areas that customers do not value do not create a good return and divert valuable resources from those that do.

More on risk measurement-- recency bias

2009-02-11T10:24:00.003-06:00

Measuring risk is a critical, yet impossible task. How can we act effectively without understanding the risk? How can we see the future? Or, what is the right balance between educated estimates of risk and potential benefit? These questions are important in many aspects of life, not least pricing. A lot of companies make pricing decisions without a good understanding, or even an attempt to measure risks. And, as we've seen recently, even businesses who are supposed to be really good at measuring risk-- banks-- can screw up terribly. Now your business needs to weather a bad economy, while subsidizing those who are supposed to be experts at measuring risk.

I wrote a post a few of weeks ago about the risks in measuring risk. Here is another article on the pitfalls of simplistic risk measurement, focusing on recency bias. Recency bias-- the natural tendency to weight recent events more heavily than earlier events that are just as statistically relevant-- is a common trap in risk assessment. The article notes that if you took a simple view of the risk of recession in any economic quarter, your time horizon has a huge effect on your results. If you only look over the past 20 years, the threat of a crash appears very slim-- once every 624 years! But if you go back to WWII, the same measurement leads you to expect a crash about every 8 years. What's really interesting is if you graph the odds of a crash over any 20 year period, the results change dramatically depending on which 20 years you pick.

Here is the graph from the article (clicking will take you to the article):

Note how the relative stability of the last 20 years has caused a lot of people to "forget" about the possibility of a severe crash, even though everyone "knew" that a lot of adjustable rate mortgages were about to reset and their was a lot of risk in the system. (Here's a great take on the problem.)

In my previous post, I noted that using multiple assessments of risk, and modeling risk at the lowest level of granularity and aggregating up would give much better results than simply looking at aggregate data and having one expert pronounce their opinion. There are three other things you can do to mitigate risk that are especially important when the economy is weak.

First, don't force customers into all-or-nothing choices. This type of bundling might be useful when customer don't have a lot of alternatives, but when times are bad, it can lead to cancelation of entire orders or contracts, rather than a "graceful degradation." Removing value-added services or reducing order volumes might be painful, but it's easier to manage, financially and operationally, than suddenly losing big chunks of business.

This leads to another important process when modeling risk. Don't just consider the financial impact of what-if scenarios-- consider the operational implications. In other words, what might you have to do under certain scenarios? How might you adjust discount negotiation parameters if your company's economic climate changes? How might you have to adjust production schedules? Thinking about this in advance avoids panicky decisions that can make the problem worse. For example, companies that develop strict discount negotiation policies during flush times find that their sales are slowing, and instead of adjusting their discount parameters, they throw them out, which keeps deals flowing in, but starves the company of vital profit. Companies that are not actively tracking sales, orders and their profit implications can suddenly find themselves in a bad position and they lay off the staff they might need to dig themselves out. Having a contingency plan and a dashboard would have allowed less drastic, more effective action, earlier.

Third, go back further. A lot of pricing decisions get made "because that's how we always done it." Go back to the folks who set up the pricing policies in the first place. What were they trying to accomplish? Does the policy still accomplish that goal? What risks were they concerned about? Have any sales reps who sold through the last big downturn? What did they do to survive that one (or not?)? Reaching back and asking the right questions will help avoid or mitigate recency bias and devise better scenarios and better contingency plans.

Webinar on Mimiran Deal Manager

2009-01-28T23:42:00.003-06:00

It's late notice, but on Thursday I'll be doing a webinar on Mimiran Deal Manager, which helps sales reps negotiate prices faster and more effectively. DM provides a recommended price as sales reps work up a quote, and then either approves pricing automatically or routes prices outside of guidelines electronically to an approver, and gives that person the embedded analytics they need to make a quick, confident decision. The webinar focuses on the solution plugged into salesforce.com, but the concepts apply to any B2B sales negotiation. We'll also talk about different approaches to price negotiations and why some of the more popular approaches are dangerous, especially with the economy so precarious. Obviously, we'd like folks running salesforce.com for their CRM system to join us, but even if you don't, you'll probably find the discussion useful. The webinar is 11-12 AM CST on January 29.

You can register here.

Thoughts on commodities

2009-01-26T20:53:00.002-06:00

I recently returned from a two week trip to India. I visited high tech campuses that shimmered more brightly than their counterparts in California and villages where people relied on manual water pumps. The responsibility for feeding the billion-plus Indians (and billions more across Asia) falls primarily to one grain: rice.

There are hundreds of millions of Indian citizens who live in extreme poverty, although over the past decade, the middle class has grown considerably. Indian electoral politics being what they are, rice is heavily subsidized for poor people, even in fertile agricultural areas. This depresses rice production and milling, because the government pays less than market rates for the subsidized rice.

However, a variety of premium rice has taken hold, even among the poor, meaning that the government is having trouble unloading its lower-grade rice. (I wish I could remember the name of the variety, or provide a link, but Google News is not able to find the article. If anyone can help me out, leave a comment.) This rice variety apparently retains its shape and texture better than more common

Instead of paying approximately $0.25/pound for rice, people are sometimes willing to pay $0.30-$0.50/pound. In other words, even when you have one of the most basic commodities in the world, and you're selling it to some of the poorest people in the world, differentiation and added value can still have a dramatic impact on perceived value and price realized. Why can't you do the same thing in your market?

How do you measure risk?

2009-01-05T22:02:00.004-06:00

Few decisions in business or in life are without risk. The outcomes we expect from our decisions depend in some part on a set of assumptions about the world around us. For big decisions with a large impact, we often attempt to gauge the risk involved. This can give us not a single expected outcome, but a range of outcomes with different probabilities.

For example, if we raise prices 5%, we can attempt to measure the risk of decreased demand. In some cases, we can derive a mathematical view of price elasticity, but in many cases this is either impossible or more of an exercise in gaming the numbers than useful statistical analysis. Most pricing decisions are made in the latter circumstances. We still need to make decisions-- after all, not making a pricing move carries risk, too. We'd like to have some idea of the risks involved, but we may have very little real data.

There's a great article in the New York Times Magazine on Risk Management in the financial sector, arguing that overly simplified ways of looking at "Value at Risk" or VAR may have contributed to the current meltdown. In short, back in the early 90s, analysts at JP Morgan developed a methodology for measuring how much risk was involved in certain trades up to a certain expected probability. This VAR metric became the standard for judging risk across Wall Street. The beauty and the curse of VAR was that it wrapped all the risk factors up into a single number. Management could even aggregate VAR from different parts of the company into a global view of value at risk.

For a group of people who are well versed in the notion that proxies do not directly represent underlying systems, Wall Street bought into VAR. When everyone was making money, no one seemed to mind that the numbers could be fudged, that there is no way to keep track of all possible risks, and that if you run a system long enough under conditions of 99% certainty, sooner or later you run into the other 1%.

(Perhaps more intriguing than the debate over the merits of VAR is the larger systems issue. Whether or not VAR oversimplifies risks, in a surging economy, firms that take large, risky positions often outperform those who adhere to more prudent strategies. Money, acclaim, and talent flow in that direction. The safety net implied by the rescue of Long Term Capital Management, which destroyed itself in part by relying too heavily on computerized risk models, further encourages risks.)

While this type of risk assessment has its drawbacks, it's a lot more useful than no risk assessment at all, if used properly as a tool rather than a crutch. And it's certainly more information than most companies have when making pricing decisions.

In the absence of strong risk models or data to fully support predictive analytics, it can be helpful to develop scenarios run with different assumptions at different levels of probability. For example, the company contemplating the 5% price increase might expect to see accelerated growth, steady growth, flat sales, a small decline in sales, or a large decline in sales depending on the circumstances. We can guesstimate best, likely, and worst-case scenarios. (This often shows that better pricing discipline with low margin customers has a positive impact even in the worst-case scenario, providing organizational support for narrowing price bands.)

Naturally, this type of modeling is best used as a tool, not a crutch. In one meeting with a manufacturer early in 2008, a senior executive stated that they expected strong commodity prices to continue for several years. They wanted to move quickly to capture that opportunity and not waste time building flexibility into tools and processes to adjust for declining commodity prices. Whether or not subordinates felt the same way, they did not express disagreement. We raised the issue but this was perceived a way for us to charge more without providing any more value and the idea was rejected. Although we tried to do the right thing, we failed to effectively convince the customer and now they are suffering under declining commodity prices.

Another important point to keep in mind is that if you are trying to determine risk for a pricing move, it's critical to have low-level data. For example, if the average price yield is 80% of list price and you want to move the yield to 82%, you will run into all kinds of trouble if treat customers as a single entity and simply move the average price up and then assign a defection likelihood. You have to look at each customer individually, and potentially move some customers more than others, and examine customers' defection chances individually. This may not be possible to do at the level of detail we would like to be completely certain, but it can be done using attributes of the customer to give a much closer approximation of likely behavior.

We worked with one company that was making adjustments to its product portfolio that involved, among other things, introducing new products. While the goal of the new product was to encourage people to trade-up from a less expensive offering, there was also the threat of people trading down from higher-priced offerings. At first the "value at risk" seemed enormous-- too great to justify the modest expansion in the market from the new offering. However, deeper analysis revealed that while the theoretical maximum number of potential downgraders was huge, practically speaking only a small fraction would even really consider it. Running through various scenarios showed that through careful pricing of the new product, we could almost guarantee a positive overall impact. (Different prices optimized the best, likely, and worst-case scenarios.) This was more than enough information for the CEO to greenlight the new product, which proceeded to have positive bottom-line impact. Part of the reason this exercise was successful was the executive team was not simply looking at a number for comfort, but actively debated the numbers and the methodology behind them until everyone had a good "feel" for what the numbers meant and some of the risks involved.

If you are contemplating price changes in 2009, whether in list prices, contracts, or discounts, doing a risk assessment can help you find the "sweet spots" and avoid negative outcomes.

One area of pricing strength

2008-12-23T10:54:00.002-06:00

While the economy as a whole risks deflation, there was one area with strong pricing power. According to PNC's annual survey the cost of hiring lords a'leaping, buying partridges, pear trees, and other accoutrements of the 12 Days of Christmas rose 8.1% to $21,080. The swans account for about 25% of the overall cost, which leads me to ask "does your true love really want swans?" They look nice, but they are tempermental. And who wants to clean up after them? Notably, if you want to avoid the malls and shop online, the cost is over $30,000, driven by shipping charges, and perhaps convenience pricing.

2008 was a wild year for pricing. Surging commodities prices were threatening to drive companies out of business if they could not pass along the cost increases quickly enough. Then, just when some businesses were getting around to passing along some of those cost increases, the financial meltdown sent commodity prices tumbling.

One of the critical issues for 2009 will be how business handle this type of volatility. In general, we expect a tough environment with soft demand, but businesses will need to capture differential value when the opportunities present themselves. Companies that have done an about-face on price increases and are now locked into bargain mode will have trouble doing this.

You need a strategy to guide actions that will impact every part of the company. You don't want one group in fire-sale mode and another in value-capture mode. Everyone will end up unhappy.

You need the analytics in place to monitor what's happening and alert you to situations that require course correction. This could be a price change, a surcharge adjustment, changing discount guidelines, or just a warning that certain pricing policies are not performing effectively. In some cases, you can change the price, in other cases you will need to make deeper changes in product offering or customer interaction.

And of course, you need a process to make it happen.

Thank you to all of our customers who have made 2008 a successful year for Mimiran. We are happy that our efforts helped make 2008 more successful for you, and will better prepare you for 2009.

Happy holidays!

The real end of the line for airline fees

2008-12-03T13:17:00.002-06:00

Back in August, I wrote a post titled "What Other Fees Can Airlines Charge?" Well, as several alert readers pointed out, The Onion has the ultimate answer.

When it comes to airlines' pricing power, the good news is that the economic meltdown has slashed the cost of fuel and should lead to lower costs as current fuel contracts expire. The bad news is that the economic meltdown means fewer people want to fly. I think we'll see some lower fares, and even lower fees. While charging customers extra to check bags makes sense at a certain economic level, it hits price sensitive leisure travelers harder than business travelers, pushing them to airlines like Southwest, which proudly advertises its "No Hidden Fee Zones". While the major carriers make the bulk of their profit on business fliers, they still need the incremental revenue from leisure travelers to be in the black.