VeraSage Institute

What a WEEK in Pricing!

ed.kless@choosegreat.com (Ed Kless) — Fri, 03 Jul 2009 06:15:48 PDT

It has been an interesting week in the world of pricing.

In case you have not heard, Chris Anderson of Wired is set to release his new book Free (the title, not the price), and before it even comes out stirs up a controversy. Surprisingly, the book does not seem to be available on Kindle. Hmmm.

UPDATE: Free is now available for free, at least in audio version. According to a video posted on Wired. Free will be available in most electronic formats for free. The exception is the three hour abridged audio version which Anderson believes has more value than the full-length edition (posted above) because of the opportunity cost trade off of listening to the longer version.

Anyway, first, Malcolm Gladwell chimed in in the New Yorker. Then, Seth Godin responded to Gladwell.

In my opinion, the camp of Anderson/Godin is right and Gladwell is wrong. I think Gladwell misses the idea that free does not mean there is not a business model. He is right that youtube and other free services (Twitter) have yet to create a business model, but that does not mean they never will be able to create one.

Gladwell uses the example of former head of the Atomic Energy Commission, Lewis Strauss’ famous late 1950’s prediction that “our children will enjoy in their homes electrical energy too cheap to meter.” To say that since this prediction has not come to fruition would be shortsighted. Gladwell is right (currently) about that fact that power infrastructure costs are larger that power creation costs, but I can foresee a time when we have personal (or neighborhood) nuclear reactors. This of course will reduce, and almost eliminate, those infrastructure costs.

I would love to hear each of your thoughts on this.

Thoughts on Pricing with Confidence

ed.kless@choosegreat.com (Ed Kless) — Wed, 01 Jul 2009 02:52:15 PDT

This blog post kills three birds with one stone.

First, I have been serving on an internal team at Sage regarding pricing and the ideas found in this book will help this team. Second, Ron as me in January to write about the most impactful book I read in 2008. While I would not have written about this book then, but upon reflection it has been the book that has influenced me the most thus far in 2009. Third, I have an email from Amazon.com dated March 14, 2008, asking me to write a review. Talk about procrastination!

Executive summary (and Amazon.com review)

Reed Holden and Mark Burton’s Pricing with Confidence makes the complex topic of pricing strategy understandable and usable to businesses of all industries and sizes. Many of the examples are easily transferrable from one industry to the next. Their approach is logical and rational and can be adapted to a sole proprietor with an entrepreneurial idea to the largest of companies. The only thing, I severely disliked about the book was the poker analogy which runs throughout the book. Business, unlike poker, is not a zero-sum game. I understand the analogy they are trying to make, but, in my opinion, it detracts from the overall value of the ideas presented.

Important ideas in the book

Develop and offer options. Having at least three options with different value propositions positions the organization to make fewer concessions during negotiation. When a prospect balks at price you can always direct them to a lower cost, but lower value (to them) option. Companies should establish a “walk-away” price for your lowest priced option. This assists in making sure you do not take on a bad customer.

Create a good “fence” between options. A fence is the way to protect one option from the other by providing a clear trade-off of price and value between the options. Well developed fences will make sense for both the customer and provider. The most utilized fence strategy is bundling. When you bundle, if a customer asks for a break down, you should explain that while you could provide that for them, the overall price will be higher.

Setting price is one of the most difficult decisions leaders and managers can make. The strange thing is they often delegate it to others including allowing competitors to be a large influence on price. Price competition (price war) can only work during the high growth phase of a business’ life cycle. At any other time, price competition is never a sustainable business model. Lowering price is the least sustainable competitive advantage.

If you discount to meet the numbers, you will inevitably kill your long-term profitability. It should not come as a surprise that few businesses (if any) have ever created a long-term profit strategy around discounts. Discounting demolishes the self-esteem of the sales force to the point that they themselves begin to question the value of the very products and services that they are selling. This is poison to an organization.

Business must focus on creating greater value for customers. Companies that focus on value, in dollars, delivered to customers are more profitable. Talking about anything other than real financial value is just noise.

Great new term: discount creep - the propensity of a company to begin discounting for good reasons and having it then become systemic. If you must discount by all means measure it. Holden and Burton suggest creating a “discount bucket” that is only allowed to be emptied over a certain predetermined time period.

Pervasive discounting is usually a function of poor customer selection. The authors cite a study which says that 79 percent of business-to-business companies respond in some way to all prospective customers. Going further they posit that there is not just an 80/20 rule for customers but a “20-225 rule.” 20 percent of customers account for 225 percent of the profit. Yes, kids, this means that 80 percent of customers account for a 125 percent loss.

There are only three, count ‘em, three, pricing strategies: skim, neutral and penetration. Skim only applies when you are clearly differentiated from your competition. Chances are, unless you are Apple, you are not clearly differentiated. Neutral pricing is used when you want to compete on something other than price. Penetration pricing is used when you want to establish a dominant position in a new market place.

There are four, count ‘em, four, buyer types: price, value, relationship and unknown (OK, they call these guys poker players, but I dismiss the analogy). Aside from the poor term, the book is worth reading just for this deeply developed idea.

Most companies think they sell to price buyers, they are sadly mistaken. The following sentence clearly excludes all professional knowledge firms from thinking they deal with price buyers - “Price buyers are very careful not to let themselves get committed to any particular supplier by making sure they have no switching costs.” Emphasis added. This is clearly not the case for professional knowledge firms. If all of your customers look like they are price buyers, it is because your sales force is not establishing trust during the sales process.

You need to be paid for your high value knowledge as soon as you begin providing it. The trouble is usually some demonstration of knowledge is needed to get you in the door. Their suggestion is to set a minimum price for knowledge.

A great strategic question for a company to mull is “What can will do (other than discount) that would force our competition to react?” Answering this question is not easy, but it does get to the very heart of innovation.

In conclusion

I thoroughly enjoyed this book and looking back on it has made me realize what an impact it made on me. Many of the ideas listed above have come to the forefront in my coaching conversations with Sage partners. It is clear that this book will continue to influence my thinking for years to come.

Southwest Airlines Continuous Customer Service Innovation

dan@verasage.com (Dan Morris) — Sat, 27 Jun 2009 17:45:50 PDT

One of our (VeraSage’s) cornerstone philosophies has been ”study success for success leaves clues”. As my colleague, Ron Baker, likes to remind people - “study success - and model that. Because if you study failure, what do you expect to learn? How to produce more failures?” Mistakes and failures (like poverty) are commonplace. What is rare is success and wealth. I believe this is an important distinction between what we, at VeraSage, promote and celebrate and what almost every other consultancy/advocacy organization celebrates. While others are content with following the herd, we seek knowledge and wisdom from outside of ourselves. Speaking (well actually writing) about outside in analysis, I return to the topic of this posting: The celebration of Southwest Airlines.

Yesterday I was coordinating the use of my Rapid Reward tickets. Southwest provides a fairly straight forward online assistance but I have learned that when the trip involves coordinating more than 1 person and multiple 1-way trips, a helpful and knowledge person is superior. So, I dialed the 1-800-IFLYSWA number and was placed into the on-hold queue. After about 15 seconds I was informed of my anticipated wait time (in this case 4-7 minutes) (a customer centric information tool {thank you} that allows a person to determine if they can wait). Immediately thereafter (and this is the gist of this message) I was offered the option to enter in my phone number and they would call me back when my turn was ready - and note - they informed me that I wouldn’t lose my current on-hold position. I thought this was great. So I tried it. I entered my phone number and confirmed it, spoke my name for reference, and hung up. About 5 minutes later, my phone rang and I answered and the auto attendant informed me to press the pound key when I was on the phone (this assumes that maybe another house guest answered) and they would connect. I did, and I was connected. Great idea. Great service. Excellent KPI - thinking about the customer experience.

Here is a High-5 to SWA. If only the IRS would provide this (no one wants to listen to an hour or the same Muzak followed by commercial breaks about how important my call is). For Southwest - my call is so important they free me up and call me back.

Thanks Southwest. Thanks for thinking of your customer and valuing what is important to us.

For all of the other businesses and organizations that place people on hold - think about your customer experience and learn from Southwest. Your customers will appreciate it and your business will thrive because of it.

Now - go have a great day.

Dan Morris

Always State a Value When Asked for a Price

ed.kless@choosegreat.com (Ed Kless) — Wed, 24 Jun 2009 17:25:12 PDT

This has been around quite a while, but I think it bears repeating.

Often times a professional is asked about cost, as in, “How much will this cost?” One of the best answers I have heard goes something like this - “Customers of ours who have saved and/or seen an increase of $V, have spent $P, but unless we can discover $V we won’t even send you a proposal.”

I personally believe that V should be at least three times P. My reasoning is that in the rare cases the price ends up being 2P, the value is still greater than price.

This is not a perfect answer and does not always move the asker off the cost question, but it is the only way I have seen that has a chance in moving them at all.

Virtual Seminar: Basics of Project Management

ed.kless@choosegreat.com (Ed Kless) — Fri, 19 Jun 2009 11:28:31 PDT

I will delivering a seminar on Second Life on the Basics of Project Management through the Maryland Association of CPAs on Friday, July 17, 2009 ay 1pm ET.

Description:
This course is designed as an introduction to project management for individuals who are involved with projects (customer engagements) but have no formal project management training.

Objectives:
Help the participants gain some basic project management skills

Major Topics:

The difference between goals and objectives

Three foundational assumptions of every project

The triangle of truth

A basic understanding of risks

The change request

Who Should Attend:
Anyone involved on projects (customer engagements)

Prerequisite:
None

If you plan on attending, please register and make sure you have created your Second Life avatar in advance.

Nothing Else to Do

ed.kless@choosegreat.com (Ed Kless) — Wed, 17 Jun 2009 16:58:06 PDT

I had a brief, but funny conversation with an attendee of the AICPA Tech+ Conference is Las Vegas earlier this week.

After moderating a panel entitled The Firm of the Future, he broached me during the coffee break and said, “You know, Ed, the funny thing about time and billing systems in many accounting firms is that they tend to collapse during the pressure of tax season. Of course, that is when we are the most profitable.”

I laughed, but he continued, “Sometimes I think we enter our time sheets during non-busy time because we have nothing else to do.”

Huge HSD for VeraSage Senior Fellow Paul Kennedy

ron@verasage.com (Ron Baker) — Fri, 12 Jun 2009 11:43:56 PDT

One of the arrows in your pricing quiver is the TIP clause (sometimes referred to as a Retrospective Price or Success Price).

We’re always asked if customers actually pay these? Yes, they do, and we have many stories to prove it. Our Senior Fellow Peter Byers in New Zealand has received nearly $1 million dollars in TIPs since I met him back in 2000.

The largest TIP we are aware of was to Gus Stearns, a CPA in Dallas, Texas who received a $950,000 TIP from a customer.

We can now add to the list Paul Kennedy, of OBK in Great Britain, who sent me this email the the other day:

Hi Ron,

I got the attached letter from a client and wanted to share it with someone who understood its significance. The background to this is that I had a fixed pricing agreement that was well “value” priced but did not include a TIP clause (an oversight I regretted as project progressed!).

So not only was I well paid but I got an unsolicited “tip” of £30,000. Doing the right work for the right clients!

The great part of this story is this was an “unsolicited” TIP—that is, it wasn’t agreed to up-front as part of the price.

Who can argue now that sometimes firms leave an enormous amount of money on the table by pricing by the hour?

Let’s not forget that the billable hour is a theory. It may be widespread, well understood, and accepted, but that doesn’t mean it’s optimal.

Especially when you are doing something that resides at the top of the Value Curve.

Congratulations Paul. Your HSD is ours too.

Revenue Management is a Brand-Destruction Machine?

ron@verasage.com (Ron Baker) — Fri, 12 Jun 2009 10:55:47 PDT

I like Al Ries, he’s a smart guy and writes good books.

But he is so wrong in his June 8, 2009 Advertising Age article, and mis-characterizes Revenue Management pricing in this article it’s hard to know where to start.

He starts out with the most simplistic case against Yield Management: citing how the airlines (with the exception of Southwest) are losing money, or have gone bankrupt.

So what? The fact of the matter is no airline could operate without utilizing Yield Management, period. Imagine an airline that charged one price for all seats. See how long that would last in the real world.

He also doesn’t seem to recognize that a lot of profitable businesses use Yield/Revenue Management (RM)—from hotels, rental cars, retail, cruise lines and a host of other industries.

Ries seems to be arguing that RM is a bad idea—no matter how well it’s executed— it’s a loser, and destroys brands.

I totally agree that there is no way to execute a bad idea, and we do not believe “execution is everything.” That’s nonsense. Is communism a bad idea, or has it just been poorly executed? Obviously, both the quality of the idea and its execution are important.

Why didn’t Ries mention the airline’s successful loyalty programs. I fly a lot, with United Airlines. They reward me with upgrades and many other perks. They get nearly 100% of my airline dollar. I know the airfares can vary greatly from one minute to the next. So what?

Ries’ example of Pepsi and Coke is not an example of RM, but rather price discrimination. The price of a Coke (or Pepsi) is incredibly variable, depending on where you buy it. That hasn’t seemed to destroy the brand value of either.

I think Ries is confusing a pricing strategy with a business strategy.

It’s a company’s purpose that drives its strategy, and its strategy that drives its pricing, not the other way around.

Strategic pricing just recognizes that different customers are willing and able to pay different prices. Economists call it price discrimination, and it is ubiquitous. So much so, that it destroys Ries’ argument.

Though I totally agree with Ries’ example of Lenovo and the American automobile companies. Trying to be everything to everyone is not a strategy—it’s a lack of strategy.

But that’s a bad strategic idea, not a pricing failure.

What do you think?

Free TeleSummit: 13 Experts Teach How to Recession-Proof Your Practice

ron@verasage.com (Ron Baker) — Fri, 12 Jun 2009 10:27:15 PDT

You’ll DEFINITELY want to register for the no-charge Practice Owner Recession-Buster TeleSummit, to hear THIRTEEN highly-acclaimed business growth and personal development luminaries guide you through the recession-proof way to thrive no matter what.

I am delighted to be a part of this, speaking on Pricing on Purpose. Top minds in the world of business and personal growth have come together to give you advice and share their collective wisdom and experience, with a focus on helping you and your practice remain financially fit.

WHEN: June 17, 19, 22, 24, 26, 30, July 1, and July 3, 2009.

EXPERTS: Les Brown, John Di Lemme, Jay Foonberg, Carolyn Elefant, Stephanie Frank, Garrett Gunderson, Carrie Wilkerson, Chris Wise, Ronald J. Baker, Alexis Martin Neely, Dr. Rodney Burge, Dr. George Huang, and Dianne Legro.

To learn more about this virtual event and register, visit here.

A Little Value Humor

ed.kless@choosegreat.com (Ed Kless) — Thu, 11 Jun 2009 19:30:25 PDT

Tim Williams posted this picture on his Facebook profile today. It is too good not to share.

His caption read: How some agency professionals react to the topic of value-based compensation.

I think it is more universal than that: How some professionals react to pricing on purpose.

Thanks, Tim.

Peter Drucker and Time Sheets

ed.kless@choosegreat.com (Ed Kless) — Wed, 10 Jun 2009 18:52:29 PDT

In a recent debate with a VeraSage naysayer, Peter Drucker was invoked as saying, “If you can’t measure it, you can’t manage it.”

First, let me say that I cannot find this as a direct quote of Drucker’s other than continuous and unsubstantiated citations in many articles, blog posts, and PowerPoint presentations all over the Internet. If anyone has the direct knowledge of the book or published article wherein Drucker says these exact words, please let me know. Until such time, please do not attribute this quote to Drucker.

Second, in my research looking for this quote, I found the following:

Reports and procedures should be the tool of the man who fills them out. They must never themselves become the measure of his performance. A man must never be judged by the quality of the production forms he fills out - unless he be the clerk in change of these forms. He must always be judged by his production performance. And the only way to make sure of this it by have him fill out no forms, make no reports, expect those he need himself to achieve performance. - Peter Ferdinand Drucker, The Practice of Management, 1954, page 135.

All emphasis mine.

Does anyone now want to say that Peter Drucker would be in favor of submitted time sheets to measure productivity? I rest my case.

Are Advertising Agencies Regulated Utilities?

ron@verasage.com (Ron Baker) — Mon, 08 Jun 2009 10:21:05 PDT

Ad Week has a June 7 article “Unilever Set to Join Cost-Cutting Push: Agencies working for the CPG giant face lower margins, extended payment terms.”

Dictating a 5 percent profit margin, up-front, on its agencies, Unilever is now acting like a governmental agency that regulates how much profit a utility can earn.

This is happening because agencies are resisting the necessity of changing their pricing model from selling hours to selling intellectual capital. That onus is on them. To the extent they don’t do it, their clients will do it for them.

The article incorrectly, in my opinion, equates this move by Unilever with Coca-Coca’s new Value-Based Compensation Model. They are not equivalent at all. Coke is not dictating a profit margin on its agencies.

This is an interesting quote from the article:

Clients have never had a higher demand for big ideas, greater creativity and innovation, said a source. At the same time, they have never been more prepared to treat everything we do as a commodity. The source added that the trend “has been happening for a while, but the intensity of it now...is just pervasive.”

Well, that’s just nonsense. No one can treat your offering like a commodity without your permission. There are some agencies out there who refuse to accept the premise they are commodities, and have differentiated themselves based on a focused strategy and innovative value offerings.

If bottled water companies can differentiate themselves, why can’t a Professional Knowledge Firm?

The choice continues to be up to agency leadership. You can innovate new pricing/business models, or your clients will be happy to do so on your behalf.

I wish I had a Nickel…

ron@verasage.com (Ron Baker) — Thu, 04 Jun 2009 10:57:22 PDT

One of the problems with the Almighty Billable Hour is it provides zero knowledge in terms of how to improve pricing.

How do we know? Because we hear stories like the following I received earlier this week from a CPA colleague. I’ve sanitized the names to protect the guilty.

Here’s why there’s no education in the second kick of the mule:

Hello Ron:

Been meaning to write to tell you a story.

I recently got a new SEC audit client. The predecessor auditors were a large regional CPA Firm.

The engagement letter for the 2008 year end wasn’t signed until about March 10. The client and auditors met in mid February to iron out the fee. By the time the letter was signed, at least 90% of the audit was done. The client fired them for various reasons, and hired us about a month after the 2008 audit was completed.

Client receives a letter and an invoice about a month later from the predecessor CPA Firm for overages on the audit—67% higher than the so called fixed fee in the engagement letter. The explanation is they had all of this excess time and so on and so forth. CPA Firm provides hour and rate detail and reduces their standard rates by 20%.

Needless to say my new client is rather upset. Me being your disciple says to the CEO “It isn’t your responsibility that they can’t manage things on their end” and “You sell your product for a set price and it is up to you to make money at it. They have to make money at what price they sell you the audit.”

I point out how the engagement letter says that if they get into trouble on hours that they will contact client and discuss and agree on a resolution before they go further. Too bad for the CPA Firm that they didn’t do that.

Audit Committee Chair sends a polite letter saying we don’t accept invoice and gives a couple of reasons, including what the engagement letter says. CPA Partner writes an email back asking for a telephone conference to resolve. My client was already steamed, but that was the straw that broke the camel’s back. Long email back that discussed a bunch of things, and questions how could things have gotten so bad hours wise when they were almost done when they set the fee.

Of course, I’m thinking of your writings as all of this is going on.

There were several reasons I got this job. For one, I have a different professional approach (predecessor was very adversarial). They like me. But most importantly, I gave them a firm fixed price—lower than the new quote from the old CPA Firm but one I can be very profitable at.

Amazes me how a large firm like that one could get that big with this kind of behavior.

Firms make this mistake all the time, never learning a single thing from losing the customer.

The billable hour and timesheets lets the firm off from doing the following: proper project management; communicating with the customer scope creep changes; pricing up-front, which all customers expect for everything they buy; the opportunity to win back an unhappy customer.

It’s one thing to lose a customer over bad service, or a mistake. It’s quite another to lose them over something like this. There’s little chance of regaining the trust lost due to this type of stupid pricing.

And here’s the sad thing: The larger firm will blame losing the customer because of a lower price competitor. This is the ultimate excuse, enabling the firm to never have to look in the mirror to see what they did wrong.

Long before there is a problem with price, there’s a problem with service and value, as this story illustrates.

When will firms learn it’s the billable hour that is killing their value proposition?

Supply-Side Economics in Second Life

ron@verasage.com (Ron Baker) — Wed, 10 Jun 2009 13:14:24 PDT

Ed Kless and I had a great time presenting Keynesian vs. Supply-Side Economics in Second Life on Tuesday for the Maryland Association of CPAs.

Second Life is incredible technology. Short of a live presentation, I really believe it’s the next best alternative for conducting an educational event. There is something very tactile about it, both as a presenter and member of the audience.

Bill Sheridan, MACPA Editor, wrote-up a nice summary of the program on the CPA Success Blog, which all CPAs should follow religiously.

If you haven’t yet attended one of Maryland’s Second Life CPE events, you owe it to yourself to check it out. It’s an awesome experience.

Visit CPA Island to learn how to get started.

In the mean time, you can watch the video of our presentation here.

Thanks Bill and everyone at Maryland Association of CPAs—you guys are way ahead of the curve!

The future is still blurred

ron@verasage.com (Ron Baker) — Wed, 03 Jun 2009 07:01:00 PDT

Interesting article from June 2, 2009 in Lawyers Weekly from Australia, ”The Future in Focus.”

Walt Whitman once wrote “The future is no more uncertain than the present.” That’s what I continue to think as I read the seismic changes taking place, right now, within the legal profession, as this article discusses.

Sixty percent of new graduates into the profession are women; rates of depression are soaring; career satisfaction is low; many lawyers feel like skilled surgeons assigned to pierce ears; and the baby boomers will be retiring in droves over the next decade from firms that don’t have succession plans in place.

Think only the future is uncertain?

One insightful attorney, Steve Sampson, national general manager at Hunt & Hunt, thinks the billable hour has to be included in the threats to the future of law:

I think the billable hour fronts up somewhere in this discussion. I think the whole focus on productivity, efficiency, profit, partner earnings just drove mistrust into what were otherwise strong trusting advisor relationships. ...Every time you talk to a client, they are wondering how many units, how many hours, you’ll charge

Howard Harrison, managing partner at Carol O’Dea predicts two sectors of law emerging:

One will be the valued advisor—high end, really charge what you want because that’s what your clients should pay. At another level there is a huge move to fixed pricing, certainly—caps, outcomes, gear, remuneration.

I’m not so sure this is new. Anyone who has studied Bill Cobb’s beloved value curve knows that some legal work is much more valuable than others. The insanity is to have one price for all work, regardless of the value.

In any event, the future of the legal profession is a fascinating discussion. I sometimes wonder if firms are just sitting around waiting for things to happen.

I think it was Peter Drucker who said “The best way to predict the future is to create it.”