Those of us not in sales often make fun of salespeople, well … because it’s fun. Our first gut reaction says of course we can’t give pricing authority to sales. They will only sell on price and we’ll be giving huge discounts to too many clients. Unfortunately, a lot of salespeople do sell on price. Besides, every customer asks for a discount and it’s easiest for sales to give them one.
However, who better to figure out how much a customer is willing to pay than sales? They have the relationship with the client. They have direct knowledge. If only we could find ways to keep salespeople from selling on price and instead use their close knowledge of the customer to discount when it’s needed.
The hard part is balancing these two opposing forces. The trick is to provide incentives and tools to help the sales people sell value instead of price. Here are four tips to help.
- Distribute authority throughout the sales hierarchy. You may give your salespeople the ability to discount 5%. Your sales managers can go to 10% and your sales directors down to 15%. Anything lower than 15% off has to be approved by headquarters. (The numbers are an example. Use what makes sense for your sales team.) The good thing about this is that one salesperson alone can’t do a lot of damage.
- Monitor, on a salesperson by salesperson basis, how much discount they tend to give away. Report it. No salesperson wants to be on the bottom of any list. Hopefully those salespeople who discount less can help the rest of the team learn how they do it.
- Talk to your sales team about NOT jumping to the maximum discount. Instead, start small. Every percentage can have a big impact on company profit.
- Create an incentive program that rewards the salespeople with the smallest discounts. We often hear the saying, “salespeople are coin operated” meaning they do what they are paid to do. Let’s pay them to not discount.
Finally, it is our responsibility to make sure sales has the right tools to be able to sell on value. Take a hard look at what you give your sales people and how that helps them sell value.
When we give sales the tools to sell value and the incentives to not discount too easily, we maximize our chances of winning business at the highest possible prices.
Picture by 92Five
This past Thursday I taught the first fully released pricing course for Pragmatic Marketing. The day was better than I could have hoped. The students were energized, asked great questions, contributed their own stories and I’d like to believe they all walked out with a smile on their face and several action items to help them in their pricing endeavors.
However, about three quarters of the way through the class, I put up a slide and to emphasize its importance said, “this is my favorite slide.” A lady in the front decided to make fun of me by asking, “how many favorite slides do you have?” Embarrassingly, I had to admit that I’d said that line many times during the day. And it’s kind of true. There are so many great concepts in pricing that can help companies be more profitable. So many concepts that aren’t obvious and produce aha’s in the students. Many of these concepts seem to be my favorite.
But it did prompt me to think, “what should be my favorite slide? What is the most important concept in pricing?”
The answer: The most important concept in pricing is to price based on what your customers are willing to pay, not your costs.
I teach that concept first thing in the morning. Companies must use Value Based Pricing. Charge what your customers are willing to pay, not costs. There is a little pushback at first, but soon everybody nods their head and has accepted the concept, almost. Throughout the day, students sometimes make reference to why they needed to use costs to price. Of course I’d have to correct them. By the afternoon, they were catching themselves whenever they were about to mention costs again. It’s amazing how ingrained pricing based on costs really is.
What about you? You may nod as you read this, agreeing with me, but then do you go talk to your company about costs and pricing? It is fascinating that pricing based on costs has penetrated us so deeply that it’s hard to let go. That’s one reason I think Value Based Pricing is the most important concept.
The other reason though, if you don’t accept value based pricing, then you lose the power of all of the pricing strategies that come with it. There’s no need to segment pricing based on willingness to pay if you only price based on cost. You can’t take full advantage of a good-better-best strategy if you only price on costs. There’s no reason to think of pricing portfolios if you only use costs.
Yes, value based pricing is without a doubt the most important concept in pricing. But that doesn’t mean I can’t have more “favorite” slides does it?
Photo by Valerie Everett
Do you like Freakonomics? I sure do. Levitt and Dubner’s latest book, “Think Like a Freak”, is a fun read which I highly recommend. But I had to think hard about chapter 7, “What do King Solomon and David Lee Roth have in common?”.
If you haven’t read that chapter, you should, but here’s a very quick synopsis. (spoiler alert) Both King Solomon and David Lee Roth used game theory to create separating equilibria. This essentially means they set up a “game” so that people inadvertently reveal their true identities.
One of their examples was why David Lee Roth used to ask for M&M’s with all of the brown M&M’s taken out. At first glance this seems like another wacky, self-absorbed superstar demanding eccentric treatment. However, David Lee Roth added this requirement for a very strategic reason.
When they were touring, they had a wild show, with pyrotechnics, lights, complex stages and heavy speakers. If the stage was not set up exactly as the contract specified, someone could get hurt. So how could Roth know which venues carefully read the contract and set up the stage according to specifications? He needed a separating equilibrium where he could tell the two different types of venues apart.
So Roth buried a clause deep in the contract stating he wanted his special serving of M&M’s. When he showed up at a site, if his M&M’s were there, without brown ones, he was more confident that the contract was read and followed carefully. If not, they assumed the contract was not read carefully so they had to carefully check the entire setup.
Why is this a separating equilibrium? Because two different behaviors indicated two different “types”. Venues who didn’t read the contract carefully wouldn’t serve the M&M’s properly. Those who did read it would. Just by looking for M&M’s he was able to tell which group read the contract and which didn’t.
After reading this, two questions came to mind. 1. How do we set up our own separating equilibria? and 2. What does this have to do with pricing? Sorry, but I haven’t figured out how to answer question 1, but question 2 is what prompted this blog.
Is there a mechanism which produces a separating equilibrium whereby we can distinguish customers with high willingness to pay from customers with lower willingness to pay? Yes. Think coupons. Only people who are price sensitive go through the hassle of finding, clipping, storing, carrying and remembering to use coupons. People who are not price sensitive don’t.
We can use a similar concept to create more separating equilibria. In essence, anything that offers a discount for effort (or anything negative) would be a separating equilibrium. Imagine when you get to the grocery store checkout, the clerk offers you a discount if you let her stab your arm with a thumbtack. Some people, who are very price sensitive, might say yes. Most of us would not. That is a separating equilibrium.
Okay, maybe that last example was over the top. Besides coupons, are there any other separating equilibria in use in pricing today? Sure. Think about who shop at stores like Macy’s, who have frequent sales. Some people just walk in and buy what they want when they want it. They are not price sensitive and usually end up paying full price. Others wait for Macy’s to have a sale and then shop. Only price sensitive people are willing to wait.
Many stores, including Macy’s, will offer you a discount on a full price item if you ask. However, only price sensitive people have the gumption to be willing to ask for a discount. In January 2014 NPR’s This American Life (available on podcast) had a fun story on one of their producers trying to get the “good guy discount,” simply asking for a discount. It certainly doesn’t always work, but it does sometimes.
You never know when or where we can learn pricing lessons, but it’s certainly fun learning them from the Freakonomics guys.
You have access to invisible leverage that could improve product launch success, but few tap into this valuable resource. They’re ‘invisible’ because we often overlook them yet they can have an important positive impact.
In the flurry of getting the deliverables ready and activities completed for launch, I’d like for you to stop for a moment. Think about all the points of leverage that you could tap into that are beyond the obvious: your customer support team, sales engineers/product specialists, finance, partners, training, customer evangelists; anyone or any group that has regular contact with your target market. How could you take advantage of this to make the next product launch better? By assembling your armada for the big invasion.
Your customer support team has daily contact with customers. You could leverage this daily contact to plant seeds of interest for new offerings. So if your launch goal includes getting your customer base to upgrade to a new version or to consider a new offering, the customer support team could be a great avenue to generate some excitement. How might we do that?
When the timing is appropriate we could brief the customer support team on the new offering. You don’t want to do this too early but at the same time if you wait too long you lose the leverage. You will be amazed at the creativity the customer support team will offer. You may have a specialized newsletter that is managed by customer support, there may be a special list for high-priority communication, or they may offer regular educational webinars.
Sales engineers have contact with customers and prospects. They regularly see, from the field, rough spots and pushback the new version may address. As the time approaches to launch we could cultivate a handful of evangelists within the sales engineering team to be internal resources. We could also leverage this group of evangelists to organize and deliver technically-oriented education about the new offering to the customer base.
Finance is often overlooked as an ally in launching products, but there are times when leveraging the Finance team makes a lot of sense. What if your new offering includes important changes to the way your product is licensed, which may impact what customers pay? We certainly want to educate the sales team/channel partners on this change but we also don’t want to overlook the people who are responsible for billing and collections. It may be beneficial to equip Finance with frequently asked questions (with responses) and ways to have a conversation with customers so they will better understand the implication of the change from a financial point of view.
What points of ‘invisible’ leverage do you have available to you today? Build a list of internal and external resources that have routine interaction with your target markets. Don’t hold back; think outside the box. After building the list go back through it and consider how each of these resources could be leveraged to improve launch effectiveness. If you run into a block and can’t figure out how they could possible help, reach out to them and get their insights. You will be pleasantly surprised.
Pragmatic Marketing’s box of the month is Innovation. At first glance, what does pricing have to do with innovation? After all innovation is about solving customer problems. Usually with new technologies and capabilities. It’s about new products. It’s about invention.
Innovation is about solving customer problems. We sometimes have the chance to innovate using business models. When you hear the phrase “business model” you should think “pricing”.
Netflix changed the business model for renting DVD’s from daily rentals to a monthly fee. They solved the problem that people didn’t want to pay late fees.
In October, 2007, Radiohead (a music group) used “Pay As You Wish” pricing for their album In Rainbows. This solved the problem of prices being too high to attract new listeners, but still collected revenue from their fans.
In 2013, Kid Rock announced he would lower ticket prices and make up that revenue with a share of the concessions. Again, solving the problem of price being too high to attract new fans.
There are many more possible new business models. Freemium has become huge in many software businesses. (think LinkedIn). Uber changed the business model for taxis. Airbnb changed the business models for nightly rooms. Craigslist changed (obliterated) the business model for classified ads. The list could go on for a very long time.
The big question though, how can you change your business model? Should you?
Here’s an idea. Determine what your customers purchase from you. Not the physical product, but the benefit. Can you deliver that benefit another way?
Think back to your college marketing class where you probably heard the lesson from Harvard Business School Professor Ted Levitt: “People don’t want to buy a quarter inch drill. They want to buy a quarter inch hole.” If you are currently selling drills, realize your customers are actually buying holes. Is there the possibility of a new business model? Absolutely.
Back to Netflix. Customer buy the experience to watch a movie in their own family room. They weren’t “renting DVD’s”. Netflix found a new business model to serve that need.
Your homework for today, think hard about what your customers actually purchase from you. What is the benefit they are trying to achieve? Then, determine what gets in their way of more efficiently reaching that benefit. That is where you may find an opportunity for innovation in pricing.
Oh, instead of thinking about what, why and how your customers purchase, you might actually try asking them.