Competitive Intelligence: Use Employees and Internal Knowledge to Create a Competitive Edge
Pragmatic Marketing is pleased to host Tim Rhodes, Oracle’s director of competitive intelligence, at our upcoming webinar, Tuesday, Sept. 23, 2:00 – 3:00 p.m. EDT.
Tim will discuss how companies have increased their win-rates, improved competitive positioning and planned for the future using internal crowdsourced competitive intelligence. Learn about real-world examples and the best practices that you can put to use at your company.
The following question was asked on the LinkedIn group Pragmatic Marketing Alumni. FYI, Rhoda, who asked the question, works for a large company that sells information products.
Global Pricing – Fact or Friction
No. It isn’t a typo. I really mean friction. Lately I’ve been thinking a great deal about how readily we do business on a global basis. Yet, working for a company that has been around for over 170 years, we’re faced with many traditions. In some cases, it is those traditions which have made our brand recognized around the world as being trustworthy and accurate. We’ve continually adapted and changed with the times.
With physical products there are clearly reasons for pricing differences based on geographies, but with software (or in my case, data), I’m not so sure. With the current trends of transparency, do we create more buying friction by having geographic pricing differences?
I am not a pricing expert, so I ask the group membership to weigh in on this topic. Are differences in pricing based on geography a leftover, unnecessary legacy or are companies justified in charging a different price for the same product or service in different countries?
Hi Rhoda, If we could boil all of pricing down to a single concept (which we can’t) it would be “charge what your customers are willing to pay.” Pricing based on geography is typically based on the fact that customers in some regions are willing to pay more than customers in other regions. For example, many hardware components (e.g. semiconductors) sell for less in Asia and for more in US and Europe. This isn’t about cost to serve, this is about willingness to pay.
Two cautions, which may be causing your angst. First, we have to be careful of arbitrage. Can someone in one region buy at a lower price and resell at higher price in another region. As a digital information product, you have this problem even if you charge the same price to everyone because typically there is no cost to your customers if they replicate your information. I’m sure you have means in place to minimize people pirating your information.
Second, sometimes customers in one region get upset that they have to pay more than another region. This only happens when they are aware of what others are paying. Most companies who charge different prices by the region try to not let anyone else know what prices are actually paid. The easiest way to do this is to publish a single worldwide price and then offer discounts to the geographies who you think have a lower willingness to pay.
Now you face the problem of large multi-national organization that get quoted different prices for the same item across regions. This is extremely hard to deal with. You either get to try to justify the price difference (support costs?) or offer the same price for the large multi-nationals regardless of where the information is consumed. My preference is usually to be a true partner to your multinationals and give them your best price regardless of location.
Of course there could be many nuances, but these three points should get you started in the right direction:
1. Charge what your customers are willing to pay
2. Avoid arbitrage across regions.
3. Hide your best prices from those who pay more when you can.
Most people don’t know pricing, and most people don’t know they don’t know pricing.
More and more companies are building pricing departments in recognition of these two “facts”. I’ve seen several different ways of organizing pricing, but one seems to stand out, especially for large corporations.
These effective pricing departments essentially act as internal pricing consultants. They understand how to apply pricing concepts, they understand the pricing systems used within the company, and they understand the corporation’s objectives and how pricing contributes to achieving those goals. However, pricing departments do not understand the unique value proposition offered by each individual product.
Given that, pricing departments have several critical roles. They provide pricing expertise to product lines who ask for it or need it. This often looks just like a consulting role, coming in to learn as much as possible, helping clean up the situation and then leaving it to the product line to do the continuing execution.
Pricing departments also help define, resource, and implement new pricing tools and processes. Pricing touches on almost every other department within a company. It certainly effects sales, marketing, and finance. Everyone seems to have a strong interest. Pricing is the role that can balance all of these interests in creating company wide processes and systems.
Finally, pricing departments take a lead role in monitoring pricing effectiveness. They usually set up the systems to collect the right data and share that information with the product teams. They frequently build in alerts to notify the product teams when something interesting changes.
Ironically, one thing pricing departments rarely do is set prices. They don’t know enough about the specific products to do so. Instead they work closely with product managers or product specific pricing people to make sure they know how to determine the right price.
Of course, it’s never as simple as this, but as a general guideline this structure for pricing departments within large corporations works well.
Graphic by Pixabay
For hardware products, we typically charge per unit. When you make hamburgers, you charge for the number of hamburgers people want to buy. (Of course it is more complex, but that’s for later.) This is typical because your costs of manufacturing are directly proportional to the number of units purchased and … buyers assume firms use cost plus pricing. So it’s natural.
For software product though this is very different. The marginal cost of the next unit of software is close to zero. What does it cost Microsoft to download the latest version of Office to you? Almost nothing. That’s not to say there isn’t development cost, but the cost to manufacture the next unit is minimal.
In software, buyers can’t use cost plus buying. Instead, they have to decide if the product is actually worth the price you are charging. Therein lies the clue. When pricing software, we want to charge for the items your customers get the most value from. In pricing literature these are often called value drivers.
The goal is that the people and companies who receive the most value pay the highest prices.
Many enterprise level software companies charge by the number of users and the number of modules implemented. For example, Saleforce.com does exactly that. The more salespeople and support people using Salesforce, the more value these companies receive, the higher the price. Similarly, the more options companies enable in Salesforce, the more value they receive, the more they pay.
The hard part is determining your value drivers. For them to be effective they must differentiate customers with different willingness to pay, they must be actionable, and they need to seem fair to your customers.
Let’s keep exploring Salesforce.com as an example. What else might they be able to charge for that differentiates willingness to pay? How about companies that currently have horrible sales processes vs those that have great sales processes. The horrible ones would surely get more value. Yet, that isn’t very actionable. It’s difficult for Saleforce to set a price based on the starting conditioning of their customers. (Although not impossible by any means.)
Maybe Saleforce should charge based on the revenue of the companies they serve. Companies with higher revenues surely get more value from closing deals through salesforce than those with low revenue. However, as a general rule, companies don’t see this as fair. Simply charging a portion of revenue is frowned upon. It’s not a “feature” in their software they can charge for.
Another wonderful example is LinkedIn. Recruiters get the most value by far from using LinkedIn. So, LinkedIn created a set of features that are valuable to recruiters and they charge a lot for them.
If you are selling software, the key questions to answer: What drives value to your customers? How do you charge for that value?
Photo by Pixabay