This is a story about the difference between Space Vehicles and Wheat.  Space Vehicles are an expensive engineered solution and buyers of these rocket sleds worry about performance a lot more than price.  Wheat, on the other hand, is a commodity.  A bushel of wheat is a bushel of wheat; what more than price do you need to know?

Not a week goes by that I don't hear someone in the security industry bemoaning the fact that the industry has become commoditized;  cameras, DVRs, monitors, card readers, and all the other common industry products are on a race to the bottom on pricing.  The implication is always that the fault lies with someone "off shore".   The fact that someone can make a $50 DVR, put it on a boat, and still sell it in this country at a profit produces a lot of head shaking.

So here's the thing: all of these products started out as profitable engineered solutions; prox readers from Indala, cameras from Burle…  They weren't cheap and they weren't commodities.  The manufacturers were some of the few people in the world that knew how to make and deploy those devices.  End users paid extra to buy that knowledge.  But over time, in this industry, as in all industries, those engineered solutions moved to become commodities, as more people learned the technology, and vendors became more plentiful.  We are not alone; Back in the days of Zenith, televisions were a "space vehicle".  Today, anything smaller than a 60" LCD gets treated and priced like wheat.  Computers and software used to be engineered solutions.  Today, more wheat.  The reality is that any engineered solution becomes a commodity over time.  Some slower, some faster, but they all succumb. 

There is only one answer to the problem.  The industry has to keep filling up the hopper at the engineered solutions end.  When you introduce revolutionary products like say an iPad or a Prius Hybrid, you enjoy the benefits of jumping out of the commodity world.  We don't do that very often in the security industry because we have a tough time making those kinds of investments.  Just as importantly, most companies seem to be comfortable in an evolutionary development process rather than taking the risks of being revolutionary.  But there is a price to be paid for not pushing for products that are more than 10% better than the last generation;  you wake up one morning and find that you are making wheat that a lot of people know how to make. 

The most often asked questions I get have to do with product pricing.  Yes, each case is different, but I can summarize the most common issues with these six tips:

1. Most Companies Set Their Prices Too Low

One lesson I learned over they years is that you can always get more for a product than your gut tells you is possible.  Most people price by looking at the competition and playing follow the leader.  Sure, competitive pricing is a good thing, but letting your competitors tell you what your product is worth, is not.  Checking competitive pricing is necessary, but it is only one step in a process of looking at your costs, your margin needs, and the value your product brings to the buyer.   Yes Virginia, it is possible to get a higher price than your competition. You have to be able to answer a prospect's question, however, when they ask why your product is worth the asking price.  Remember, the answer can be a differentiated product, but it can also be post sale service, warranty, commercial terms, business stability, or a host of other reasons.  Bottom line, if you can answer that prospect's question, don't be afraid to charge a higher price.  If you can't answer the question, you have a different problem that you need to work on.

2. You Just Take Your Cost and Mark It Up? Really?

Ouch.  OK, you never have to worry about someone in accounting asking you why your margins are so low.  You do have to worry being asked about the lack of sales.  Look, I know this is the easy way to do pricing, but it doesn't work.  You need to understand what the market is willing to pay for similar products, and then set a target price.  You decide what kind of margin you would like to have, and then investigate if you can make or buy the product at a cost that will allow you to hit the targets.  Discover competitive price, adjust for your added value, figure out desired margin, and then set a target cost.  If you can't find a way to hit that target, save yourself some effort and kill the product before you start.

3. What if there is no competition?

There is always competition, even for a new concept product.  Yes, you may not be able to find a direct competitor for your new widget.  When the first security camera was invented, the competition was a security guard.  Look at the user's other choices including the cost of doing nothing.

4. Look at your channel's margin; not just yours

This is one of the most common start up mistakes.  The neophyte error is to invent a new product and then assume you are selling direct to the end user and set your pricing accordingly.  Of course, pretty soon, you realize you need a channel but you have now established a market price and you have no margin to give to a distributor or dealer.  This is a tough mistake to recover from and it is often "game over" for the product.  Always set your pricing assuming a professional sales channel.  If that seems to over price the product, you likely have a product cost problem.

Even if you don't make the mistake of overlooking the channel entirely, many companies make the mistake of trying to set their pricing based on a competitor's price to distribution.  The right answer is to start with an expected street price to the end-user and then calculating the margin the channel needs to be happy.  Make sure the distributor / dealer can sell it to their customers at a reasonable price if you want sales to grow.  Don't bother getting mad that the channel makes more than the manufacturer does.  No channel, no sales.

5. Look at all of your costs

If you are buying the product from someone else, always develop a "burdened" cost and use that to do all of your pricing calculations.  The burdened price should include an allowance for the cost of purchasing, duty and import costs, freight, etc.  You can make it simple by coming up with a fixed percentage that you add to your purchase cost to arrive at the burdened cost.  It is important to add these very real costs into the numbers before you start making pricing decisions.

6. Your Sales Force Will Always Tell You The Price is Too High

Even if you buy $100 dollar products and sell them for $50, someone will come running into your office and tell you that they just lost a job because the price was too high.  It's the nature of the beast.  This happens for two reasons: first, the customer had another reason to buy from someone else, but it was easier to blame it on price.  While it may not be the Sales Force's fault, your product message did not get through and you were outsold.  Second, and perhaps more troubling, the guy running into your office has yet to be convinced that your product is worth what you are asking for it.  All prices need to have a story attached or this problem will never get solved.

One of the biggest problems the security industry faces is our products are difficult to use.  I don't know of a single video management or access control product in the industry that is intuitive enough that the manual isn't an absolute necessity.  For that matter, I know of a number of cameras and card readers that also fail that test.  I also see a lot of  product that is so hard to install while you are standing on the top of a ladder that it is clear the engineer that did the design doesn't spend much time up there. When you think about the amount of wasted time that creates for installers and end users the cost is huge.  More importantly for folks like us that make a living off of this industry, the ease of use problem discourages adoption.  If the time and effort it takes to get comfortable with a new product is too great, people will stick with what they know (or do without). 

The reason for this sorry state of affairs is simple: making something easy takes a lot of hard work.  You have to think very carefully through what the user does and how it can be made simpler and more obvious.  That means being "close to the customer".  It also means having a management team that can define what easy means, and is willing to prioritize that work item on to the list of new features in a next release.  So it's more than just telling Engineering to make it easier.  Given the size of the average development team in the security industry, it means giving up some other new feature that is tied to a sales opportunity.

The solution to this dilemma requires two things: first, a development team that understands the design process needed to simplify a product.  Many existing teams can handle that assignment, and the remaining ones can do so with some outside help.  Second, and most importantly, senior management has to recognize and champion the sales growth and cost avoidance opportunities associated with a push to make products easier.  It's well worth giving up a feature or two. 

I often get called upon by manufacturers to "review" a product with an outsiders view.  "Tell me why this product isn't selling" is the mission, even if it isn't said that way.  Many times, of course, they already know the answer and just need an outside authority to handle the nasty job of telling management that the R&D process missed the mark.

Sometimes the development was led by upper management who made the mistake of letting their own "gut feel" drive the development process.  In other cases,the problem stems from a process driven by the latest technology, not by customer needs.  Other times, however, especially if the development team and product managers are located overseas, they truly don't know why the product was a market failure.  They don't know the competition, local channels, or the end users, and just build the product to be successful in their own local market.

There is value in an outsiders point of view, particularly if the message is going to be a bitter pill.  Still, the real answer here is to get the development team the direction they need before the design is begun.  Almost always, a consultant's time is better spent helping to fix the specification or the process.

Once a company gets to certain size, Senior Management starts to fall in love with the idea of an acquisition as their primary growth strategy.  Desperation often sets in with a desire to buy anything if it will "move the needle".  Mind you, acquisitions should never be the growth strategy; they are at best a tool.  Strategies are things like entering a new market segment or geography, adding additional complementary products to your line, buying technology, expertise, or a brand that would take years to develop, etc.  When you approach the problem as just buying revenue, your chances of success are pretty small.  In fact, McKinney reports that 70% of all acquisitions fail to meet their revenue expectations.  Yup…70%.

That's not to say acquisitions are a bad idea.  They can work brilliantly to speed up growth.  But you have to have the right approach.  Part of the problem is the common misconception that due diligence is the accounting and legal team's problem.  In fact, very few failed acquisitions are due to the basic due diligence issues of that we look for in the company's data room.  The real issue is almost always the big picture items like the strength of the acquired management team, their product competition, the fit of the new company into the Acquirers' strategy and culture, and projected cost and revenue synergies.  Those issues sit in the CEO's office.

The point is a simple one; due diligence is important, but real due diligence may not be what you are thinking.  Reviewing the big picture items are key to success. 

Click here for more information on the five key questions your team should ask before due diligence is done.

I once worked for a guy who was a very good salesman.  So good, in fact, that he became to believe that the only thing that mattered in the race to meet this month’s revenue numbers was the skill and diligence of the sales force.  We were in the systems business, and the sales were complex, 6 month long relationship sells.  He wasn’t wrong that sales skills were key, but he tripped over the edge when he started to believe that you could OEM any old product and the sales force could turn it into a success.

Products make a difference, just like price, service, promotion, and sales relationships make a difference.  Sell a bad product and it always catches up with you.  It costs you not only the short term support and warranty costs, but in the long term, it kills your brand’s reputation and potential.   Thankfully, most products are not “bad”, they are just mediocre.  Sell a mediocre product, one that is not demonstrably better that the competition, and you will end up giving your profit away to make the sale.  You make it easy for your customer’s purchasing manager to consider nothing other than price.  With every Chinese camera manufacturer selling generic products at dirt cheap prices to anyone who wants to buy, it is frightening that most US manufacturers over the past few years discontinued developing their own differentiated products and instead started to sell commodity OEM product.  Can you imagine Apple adding an MP3 player from Lucky Goldfish Electronics to their product line?

The only chance we have to develop significant revenue and profit growth is to ensure that the company has a balanced portfolio of product, price, and service.  Putting the effort and creativity into developing a superior product is tough and it takes money and time.  The companies that do product development right, however, make it easy for their sales force to look good.

If your company is like most,  the marketing message you send your customers is all about  product; features, performance, competitive advantages, and on and on.  So here's a thought:  Do customers really want to hear all of that? Well of course, it depends.  If they have already decided to purchase a product like yours, then perhaps they do.  That decision, however, comes late in the game.  Well before they decide to buy, they just know they have a problem and they need a solution.  The problem then is simple; all of your marketing dollars are being spent on people who have already decided what the solution to their problem needs to be. 

Marketing messaging is a crucial part of your success.  A very smart marketer once told me that customers don't buy 1/4" drill bits, they buy 1/4" holes.  If your message focuses on the advantages of your drill bit before the customer realizes he needs a hole, your marketing dollars are being wasted.

The solution to this issue often requires a change in the culture of both Sales and Marketing.  The focus has to shift from the features of the product, to the problem the customer needs to solve.  While that may not be easy (old habits die hard…), this approach will set you apart from the competition in many ways.  To learn more, download our free whitepaper Your Customer Doesn't Care About Your Product  or give us a call to discuss getting the right message to your customers.

It always amazes me how many companies ignore customers while they develop a product.  If it's a brand new product, they often don't talk to customers until sales fail to appear, and the team is under pressure to figure out what's wrong.  What seem to be brilliant ideas to the development team, often don't solve any real world problems for customers.  Witness some of the current group of refrigerators with a built-in screen and internet browser.  Technology for it's own sake without a clue about solving a problem.  In our industry, look at the number of analog cameras with motion detection but no alarm output.   Nice technology, but no real world use.

If it's an update to an existing product, the development priorities seem to often be driven by the features the sales force reported as the cause of the last lost project.  Worse, the list is often features required by one major customer.  At least they are listening with customers, you say?  Yes, but they are often the wrong customers.  Loss reports are a notorious source of bad information.  The desires of customers with one major project almost always have no value to the rest of the market.

So what's the right answer?  Talking to customers is the cliche answer, but often doesn't directly help.  (Henry Ford was once quoted about building the Model T "If I'd asked my customers what they wanted, they'd have said a faster horse").  The real answer is to understand your customers problems better than they do; that takes effort, time, and focus, but the result is product features that make a difference.  OK, you may not develop the next iPod, but when your competition is doing "me too" development, solving real customer problems is a great way to grow your business.