You’re on the edge of closing a huge deal. Your salespeople have done a great job of selling value. They have convinced the buyers and the users that yours is the right solution for their company. All is on track. Then, of course, purchasing gets involved to get a better deal and mostly a lower price.
Purchasing agents are well trained negotiators who know every trick in the book. They do this multiple times a week. Most importantly, they are very patient. There is no sense of urgency on them to close the deal.
Your CEO, on the other hand, wants to know why this deal hasn’t closed yet. It should be done by now. He says “take me in there and I’ll close this.” And of course he does. The purchasing agent says “all we need is another 3% and we can close this.” The CEO says “Deal!”
The CEO has the authority to close any deal. He is often impatient to have the contract in hand and he certainly doesn’t want to spend a lot of time in front of the purchasing agent. Besides, he looks like a hero when he succeeds and he looks feckless if he fails. All factors point to the CEO closing too early at too bad of a deal.
Negotiation training firms will tell you when they run pre-training exercises, executives typically perform the worst. Not that they are dumb or incompetent, but more that they are over-confident and impatient.
Of course, sending the CEO in to negotiate makes it more likely the deal will close. They will typically do whatever it takes. This means sales people are thrilled to invite the CEO in. The salespersons biggest goal is closing the sale, perfectly aligned with the CEO closing impatiently. And purchasing invites this as well. Purchasing agents often ask to have an executive come negotiate. Why wouldn’t they? Bringing in an impatient executive with the authority to give in is a surefire winner for the purchasing agent.
This means it’s you, product and pricing, against sales, purchasing and the CEO. Not a very comfortable position. The solution, have these conversations when you’re not in the throes of a big negotiation. Share this blog with them. Talk to whichever company provides negotiation training to your sales team to corroborate these claims. (I’ve heard it many times so you will inevitably find the same.)
Don’t forget, small improvements in price can lead to huge improvements in profitability. Focusing on who negotiates and making sure they are well trained is an easy way grow profits.
Photo by Pixabay
Here is a recent question by email.
Thanks Mark for great blog and insightful book. I’m currently working my way through a Kindle edition, learned a lot about pricing that’s for sure and will definitely recommend to clients. One thing I didn’t see you talk about on your blog is the 9 vs 7 pricing gimmick. In the real world, most prices will end with a 9 or 5 occasionally (9.99, 99, etc.). But, online and especially with info products, there has been a trend to end price with a 7. For example, most ebooks and programs are 17, 27, 47, 67, 97, and so on. What’s your expert opinion on this? Have you seen any credible research that clearly shows which one is better? I know why we use 9.99 instead of a 10, but how effective is 7? Thanks a lot!
This question hits me close to home, particularly because my dissertation was on why firms use 99 cents as their price endings. Although I’ve blogged on this before, here is a quick review.
The driving factor behind the effectiveness of 99 cents is that was are bad or lazy subtractors. For example, a product that normally sells for $400 on sale for $299 feels like a much better deal than a product that normally sells for $399 on sale for $299. The same happens when people are choosing between our product and a competitors.
That driving factor has led products that end in 99 to look to people like a good price. The opposite of that is we have learned to associate prices that end in 00 with higher quality.
However, none of that answers the question posed above. And unfortunately I don’t know the answer. First, after searching on Amazon and iTunes, I still found that most prices end in 9 rather than 7. Please feel free to share sites with prices that predominately end in 7.
I searched the academic literature and didn’t find anything either. If you know of something, please share.
I found a couple discussion sites on software on this topic, and the conclusion was you should A/B test it to see which works for you. In other words, there wasn’t a conclusion.
Don’t forget that many retailers use the right hand digit of a price to indicate the state of the product. For example, Costco uses prices that end in 7 to indicate that the price has been marked down from the regular price (which ends in 9). Gap and Old Navy use prices that end in 7 to indicate they are the final markdown, the lowest price they will go. This means to me that they don’t think any psychological effect is very big, so they use the digit for internal communications.
At this point, I’m not satisfied with any answer. If you have an answer, or evidence, or research, please share it. We would all like to know.
Photo by thebayentrepreneur
Last week, the least expensive paperback version of my book on Amazon was $236 even though the cover price is $20. Wow. The Kindle version was reasonably priced at $9.99. But $236? And it wasn’t just one company. There were multiple vendors offering my book in that price range.
You may or may not know there are software applications vendors can use to automatically reprice products on Amazon, eBay and other online retail sites. These applications monitor competitors’ prices for products and then adjust the vendor’s prices up or down based on the situation. As examples, check out Appeagle, Feedvisor, and Repriceit.
First thing to know, about a year ago Amazon ran out of stock of my book and the publisher decided against a reprint. Amazon no longer has stock. The only new paperback versions you can buy are the ones in inventory at some smaller resellers.
Even with limited inventory, no sane person would price my book for $236 (even though it is surely worth it.) Instead, every Amazon reseller that has inventory of my book is also using one of these these software repricing applications. The software, without human intervention, slowly worked their price points up to unreasonable levels.
When I saw this, I decided to sell what small inventory I have just so more people can have a reasonably priced book, and because I wanted to watch what happened. I priced the book at $22 plus $3.99 for shipping and handling.
(As a quick aside, it was very easy to set up an Amazon reseller account.)
In the week since I listed my book at $22, the other resellers have started slowly lowering their prices. As of this writing, the next least expensive vendor now sells it for $118.50. It would not surprise me if within a few weeks other resellers have undercut my price. That would actually make me happy both because I was able to manipulate other vendors’ prices and because more people will get the chance to read it.
The lesson: Is it possible to use some algorithm to constantly adjust your prices relative to competition and the market conditions? If so, it is probably a better bet than using the set it and forget it strategy (i.e. never change your price). However, even if you can use automation, you should still monitor the prices for ridiculousness. Although I’d like to believe that the information in my book is worth way more than $236, I doubt anyone buys it at that price.
Determining the most effective way to deliver a complete solution to an identified market problem can prove challenging. It’s important to analyze whether it is most effective to buy, build or partner to complete the solution for your market—especially when you have gaps in your offering. This month’s deep dive offers some great best practices and real-life examples to help, and here are some resources to get you started:
• Two to Tango: The Art of Crafting, Building and Maintaining Business Partnerships
• A Fact-Based Approach to Outsourcing for Product Managers
• Marrying Up: Partnering with Big Companies
• The Trophy Spouse: Partnering with a Startup
• Breaking Through Boundaries
A student recently asked, “when does it make sense to use two-part pricing?”
First, let’s define two-part pricing. It is when you charge one fee up front, and then another fee as the product is used.
For example, popular bars have a cover charge and then charge for drinks as the night goes on. Health clubs have initiation fees then charge monthly rates. Country clubs have large initiation fees with monthly or annual dues.
In each of these examples, a customer cannot access the facility or the product without paying the up front fee. This works because customers get two different pieces of value, both of which they are paying for. For example, they get value from going to the bar and they get value from the drinks. They get value from having access to a workout facility and they get value from working out. They get value from saying they are a member of a country club and they get value from using it.
Of course this only works when you can control access to your facility or product. People who have not paid the upfront fee cannot purchase the other products.
Two part pricing can also be used as a technique for price segmentation while building loyalty and increased demand. Amazon Prime is an upfront fee that gives you free shipping as you buy goods from them. But you don’t have to use Prime to buy from Amazon. Amazon gives you a choice.
Infrequent buyers or people who are not price sensitive probably will not purchase Prime. However, heavy users who are price sensitive will pay the fee to join Prime. Once these people have joined Prime, they are more likely to shop from Amazon than elsewhere.
So should you try two-part pricing? Sure, if your market conditions allow you to meet one of these two scenarios. Do you have a popular product that provides a lot more value to your customers than just the use they get? If so, you may try charging an up front fee, just like a country club.
Do you have a product that is frequently purchased and you have some users who are heavy users and price sensitive? Then try imitating Amazon Prime. You don’t have to force everyone to go this way. Let the targeted segment reveal themselves.
Photo: “Cycle Class at a Gym” by www.localfitness.com.au