Pricing in Channels – Channel Partners Are Customers Too

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The August box of the month for Pragmatic Marketing is Channel (training and support).  Pricing through a channel is critical to the success of your product and your company.

There are many types of channels, but for simplicity in this blog, let’s say a channel partner buys your product at a wholesale price and resells it at a retail price.  Of course there can be multiple channel partners.  For example sometimes distributors sell to resellers.  What we will talk about today applies to every channel partner.

As we set our prices, the first price that matters is what to charge the end user.  This end user price must be based on what they are willing to pay.   Manufacturers often don’t get to dictate the end user price, but there are many techniques to influence it and in the end you need to predict what that price will be.  This is not your list price but rather what is often referred to as street price.  The price buyers typically pay.

Once you know your street price, next you have to decide the price to your channel partner.  Sometimes you actually set a price, but most of the time you set a margin for what you expect your reseller to make.  In the end it’s the same thing.

Here’s the important point.  Your resellers get to decide whether to sell your products or your competitors products.  They make that decision based on how easy the products are to sell and how much money they will make.  In other words, you can often influence resellers to sell your products over your competitors by giving them a bigger margin.  Think of your resellers as customers.  They get to decide which to sell just like your customers decide which to buy.  If both aren’t happy, you don’t make the sale.

A seemingly common attitude of executives at manufacturing companies is they think their resellers are making too much money.  I’ve worked with many manufacturing companies whose executives want to squeeze the margin from their resellers.  They forget that resellers have choices.  Some big choices, like whether or not to carry your products, and little choices, like which product to push when a buyer is looking for a solution.

As a general rule, when you give more margin than a competitor to a reseller, that reseller will push your products more and vice versa.  In fact, if you think of your retailer as a customer, each decision they make they are trading off their benefits vs. their costs, just like your end users.

Put yourself in the shoes of your channel partners and see what choice they would make.  They may take less margin if your product has a great brand reputation and is easier to sell.  It may require more margin if you’re trying to break into a market and want your resellers to actively push your products.

Suddenly an old adage comes to mind … You get what you pay for.  If you don’t pay your channel partners well, they won’t work for you.

A Reader Question – Pricing for Altruism vs. Profit.

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An email from a reader:
Hi Mark!
Challenger Health (info@challengerhealth.com) is a very early stage, non-medicinal consumer healthcare products startup; our core customers are physicians (Orthopaedic primarily) and physical therapy professionals. The most effective pricing model is something we have discussed at length, more specifically, if it makes sense strategically to price our products differently depending on whether the customer (doctor, in most cases) intends to resell to his/her patients or provide the products at no cost, wherein the former is charged more than the latter.
Thanks for your time Mark,
Patrick Grams
Thank you for the question Patrick.  Although it’s hard for me to give you a definitive answer, I’m leaning heavily toward YES! you should charge different prices based on how the doctors will use your product.
The most important rule for setting prices is charge what your customers are willing to pay.  It seems very likely to me that those who are making profit are willing to pay more than those who are giving it away.  Doctors who give it away are absorbing the cost themselves.  Those who are reselling it are passing those costs, plus a profit, on to their customers.
As to how to do this, consider setting your list prices at the highest price, the price you will sell to a doctor who is using this to make money.  Then, you can put together “Good Samaritan” pricing levels, for anyone willing to offer your product for free to their clients.  (Feel free to choose a better name.)  That establishes the value at the higher price and justifies the lower price.  Never lead with Good Samaritan pricing though.
You will then need to monitor your customers buying at Good Samaritan prices for compliance.  Hopefully there is a way.  One method might be to monitor the number of units they use per period.  It is likely that people giving it away go through many more than those selling it.
All that under consideration, it seems unlikely that Good Samaritans will buy your product and give it away unless you can demonstrate how it helps them make or save money.  Call me cynical, but people do things when it helps themselves.  If you can’t clearly articulate how this helps the Good Samaritans, you can’t charge much or you won’t sell much to this segment.
Hope that helps.  Feel free to post further clarification or questions in the comments and I’ll do my best to answer them.
Good luck

Money or Time – It’s Pervasive in Pricing

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I recently took up paragliding.  Awesome sport!  Once you’re good at paragliding, it’s pretty easy.  You fly a kite, take a few steps, take off, sit down in your harness and fly.  Awesome!!!  However, while you’re learning, it’s a lot of running, schlepping gear, untangling lines, oh, and a lot of waiting.

While running, schlepping, untangling and waiting, I would often think of a quote from Patricia Fripp, a world class speaker coach, that went something like this:  “When you’re early in your career, you have more time than money.  Later in your career you will have more money than time.”

As a 54 year old sweating, panting, exhausted man who has more money than time (or energy), I kept wondering why my instructor didn’t have an “elite” training package.  I would have paid more to have a program with less schlepping and waiting (the running I had to do and the untangling I had to learn.)  My instructor could have segmented his market.  (Of course I don’t know how big the market is for out of shape old people who want to learn paragliding.)

The more I obsessed on this, the more I realized this concept of money vs. time is pervasive in pricing.  People with little money and lots of time are very price sensitive.  They spend time searching for the best prices, the best values.  They check different distribution channels.  They use coupons if available.  They wait for sales.  They search the Internet for tips on how to buy at the best price.

People with more money than time don’t do any of this.  They decide what they want then buy it.  Of course they want to pay a lower price but they aren’t willing to put in very much time or energy to make this happen.

This same concept holds true during negotiations.  As a general rule of negotiations, the most patient person wins.  People with more time can be more patient.  People with less time (or patience) tend to pay more.

In B2B businesses, when your customers have “use it or lose it” budgets, they are time sensitive, impatient.  They may not want to pay more, but they will.  They should be paying more.

Think about your customers.  It’s very likely some have plenty of time without much money, others likely have plenty of money with little time.  You should think hard about how to charge one group more than the other.

 

Photo by Thomas S

Pricing Crossfit for Visitors

Here is a fun pricing situation shared with us from a colleague.

I do CrossFit for exercise and often drop in to CrossFit gyms (boxes they are called) when I travel. It’s a common practice in the CF community. Some boxes charge $0 for drop ins (but expect you to buy something like a logo t-shirt). Some charge something, up to $30. It’s understandable they would charge something to cover their costs.

The box I go to when in Boston is in the building next to the building where I work. It was recently bought out by a large operation and they have instituted a new drop in fee schedule. If you drop in it’s $30/visit. But if you get a t-shirt it’s $25/visit. Wait. Normally you pay extra for a t-shirt. I spoke to the GM and he explained they are trying to build a following and get the word out. So they decided to give the t-shirt away and charge less. It’s a no-brainer. I have two new t-shirts. LOL.

—D

Thanks D for the description of this unusual pricing situation.  These details give us an opportunity to talk about two pricing lessons.

First, although costs don’t drive pricing, many of us have that so ingrained in our heads we can’t let go of it.  D wrote “It’s understandable they would charge something to cover their costs.”  I would say, “It’s understandable that they would charge something because their clients are willing to pay for the service.”  I’m not an expert on their business, but it seems unlikely that their incremental costs to serve one visitor is anywhere near $30.

Second, we have a rule at Pragmatic Marketing in the Price course, “Always START with Value Based Pricing.”  Meaning, figure out what your market is willing to pay, but then for strategic reasons you may want to alter it.  This GM has put together a strategy, and clearly articulated that strategy to D, that says they are willing to charge lower prices to gain exposure with the intent of growing their business.  This is a fine strategy.

One thing good about their implementation is they aren’t lowering price.  In fact, they have set a high price to establish the value of their service, which will impact buyers future expectations of what they will need to pay.  Yet at the same time offered a special deal that will hopefully bring in more trial.  I wonder if they advertise this special in the community (which would make sense) or if they are relying on people wearing t-shirts to build their clientele.

D, thanks for sharing the story and keep buying t-shirts.  These pricing stories are fun to read and analyze for me and the readers.

 

Photo by Arctic Warrior

Pricing and Demos?

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Pragmatic Marketing’s box of the month for July is Demo’s. How can that possibly relate to pricing?  After thinking hard, I came up with one direct relationship and several ways they are similar.

First the direct relationship.  Obviously, the better the demo, the more your customer is willing to pay, the more you can charge.  This just makes sense and happens to be true with everything that is in the value creation category.  The more value you create in your buyer’s mind, the more you can charge.  Lesson: learn to give great demos to maximize the price you can achieve.

Now, for the similarities –

Timing – You must be careful with your timing on both when you give a demo and when you deliver pricing.  Bad timing on either and you can lose the deal altogether.  You want to give your demo AFTER you have created rapport with the buyers.  Something typically goes awry during a demo, or we show them the ugly admin screen.  Having rapport will help you overcome these mishaps.  You want to deliver pricing AFTER you have built up value in the buyer’s mind.  If you give it too soon, you could lose the deal because the buyer thinks the price is too high without full information.  It’s tough to overcome that once they’ve written you off.

Best done face to face – Demos over the web are hard.  You lose the ability to read your audience.  You can’t see what excites them and what bores them.  You get so much more information and may increase your rapport with the buyers during a face to face demo.  The same is true for pricing.  Delivering the price is the initial round in the upcoming negotiations.  Seeing the buyers face when you deliver it can give you valuable information about whether your price is too high or not.  Unless you are making a Take it or leave it (TIOLI) offer, you should be face to face when delivering price.

Negotiable – Both are negotiable.  Obviously prices are negotiated all the time.  How often, during a demo, does the buyer say “Can you make it do this?”  And then that becomes part of the contract.  The specials … ugh.  What’s funny is in both demos and pricing, we’d prefer they be non negotiable.

Scripted – Demos should be scripted.  The person demoing should know ahead of time exactly what they are going to do.  It may be slightly customized to match the problems of the buyer, but it shouldn’t be a random walk through the software.  Similarly, delivering prices should be scripted.  You must be sure to explain where the price came from and how it is far lower than the value the buyer will receive.  If you just drop off the price, it is more likely to appear too high and you lose without even knowing why.

Neither can win the deal, either can lose it –  I believe it is more likely you will lose the deal due to a poorly delivered demo rather than the price.  On the other hand, neither pricing nor demos are powerful enough by themselves to win the deal.  It takes many things done well to win a large deal.

Hopefully you found this constructive, comparing pricing and demos.  I sure did as I was writing it.  If you think of any other similarities or even contrasts, please feel free to share them with me and or the reader community.

The Second Biggest Impediment to Price Segmentation – Data

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A few weeks ago Pragmatic Pricing talked about having the quoting and invoicing systems necessary to execute price segmentation strategies.  Another fundamental capability you need is systematically collecting the right data.  In this era of “big data” this shouldn’t come as a surprise, but unless someone has consciously sat down to determine what data to collect, it’s very difficult to use this information for price segmentation.

Each of the four techniques for price segmentation requires a different set of data.

Customer characteristics – In order to charge different customers different prices, you need to know the customer types.  This information is best collected in whatever sales automation tool you are using and stored with your customer master.  The types of data you want to collect are things like region (geography), size of company, industry(ies) they serve, and type (commercial, government, non-profit, educational).  This is certainly not an exhaustive list.  You want to gather data for any characteristics of your customers that you think may indicate their willingness to pay.

Transaction characteristics – We can charge different customers different prices based on what we know at the time of the transaction.  Of course we can only do this and analyze it if we systematically collect the information.  The best place to gather this information is in your quoting and/or order entry system since you need to capture this for every transaction.  The types of data you want to collect are things like requested lead time, season, weather, budget cycle and many more.  Anything you can think of that may help indicate how much your customer is willing to pay you should collect.

Behaviors – This type of price segmentation is when you put a hurdle in place to force people to show you they are price sensitive. The typical method is a coupon, but you can consider periodic short term price discounts, or discounts for other reasons where your buyers may expect them to happen in the future.  The data you need to collect is the performance of the pricing tactic.  For example, if you are using coupons, did sales spike?  Can you determine if the customers who used the coupons were new customers or existing ones that likely would have paid full price?  The better you can decipher what happened the better decisions you can make in the future.  Can you learn how individual buyers made their decisions?

Products – Of course we can use products to drive price segmentation.  The classic technique is good, better, best.  The data you should be collecting is what are the customer and transaction characteristics of those that purchase good and best.  What you may find is there are some market segments who purchase best more than the rest of your customers.  This likely indicates the need to create a new set of products targeted at and priced for that specific market segment.

Once you have data, you can analyze it to help determine which attributes indicate how much different buyers are willing to pay.  You can then use these attributes to drive your pricing models.  However, if you don’t have the data, you’re just guessing.  In today’s world of “big data” does it really make sense to guess?

 

Photo by Ron Mader

Price Segmentation: Ice Cream in Venice

IMG_2023You can learn pricing lessons from many places.  A couple weeks ago my wife and I started an Italian trip in Venice.  After walking around the fascinating sidewalks and alleys most of the day we decided to stop for some gelato.  Most gelato shops are set up only for take away service.  However, we found one gelato shop that had tables out front.  Our tired feet could use the rest.

Imagine my surprise when I saw the sign “Prices of Ice-Creams at the table are different.”  At first I was surprised because I had to pay more to sit at a table.  Then I was pleased because I ran into an unexpected pricing strategy.  Awesome!  Let’s talk about it.

First, this is a great price segmentation technique.  Sitting at a table is more valuable to some buyers.  Maybe their feet are tired.  Maybe they want a relaxing conversation with friends.  Regardless, some people are willing to pay more to sit, so the gelato shop charges for it.

Second, notice the sign is in English.  We were in Italy.  This says to me that Italians didn’t really need the sign.  This is accepted practice in Italy.  We confirmed this as we ran into similar situations at coffee shops and restaurants throughout Italy (at least the touristy places).

I’m not sure in the US we could get away with this.  Mostly because it’s not expected so it would look like we are taking away something (the ability to sit) from customers.  However, if many companies started, it would eventually become accepted.

The takeaway for you though is what do your customers value?  Are there some things all customers receive but only some really value?  Maybe we can charge different prices.

The other lesson, look for pricing lessons everywhere.  In fact, please send me any interesting pricing situations you see.  A picture of the prices is best if possible.

 

Photo by Mark Stiving

 

The Biggest Impediment to Price Segmentation

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This blog frequently emphasizes the importance of charging different prices to different customers based on their willingness to pay.  However, it has never acknowledged the challenges to implementing this as a strategy.  Recently, I’ve run into several companies who can’t implement this extremely profitable strategy for one HUGE reason.  Their systems don’t enable it.

If you know a company in one industry will pay more than a company in another industry, do you have the ability to quote different prices to these two companies?  Then, if you get an order from both of them, can you invoice different customers the correct pricing?  These are the two biggest sticking points.

Quoting

Companies who mostly use a direct salesforce usually don’t have a problem with this.  The salespeople negotiate prices (i.e. discounts) with each customer.  The types of companies that can justify direct sales forces typically sell large deals to other businesses.

Companies (or the portions of companies) without a direct salesforce need a systematic method to quote different customers different prices.  SaaS and eCommerce companies often publish their prices on their websites.  Yet many of these companies still find ways to segment their pricing.  Sometimes they segment by geography, some offer coupon codes, some create different versions of their product for different market segments and charge appropriately.

Companies that sell through distribution often have published price lists, yet many are able to publish different price lists for different types of customers.  They have the systems in place to manage and monitor these price lists.

No matter how you think you might want to segment your pricing, you need the ability in your system to implement it.  Are your systems capable?

Invoicing

A less common impediment is the ability to invoice.  However, some older accounting software packages don’t make it easy to charge different prices for the same product.  They require a price for a product.  You will want to check with your accounting organization to see that this is feasible.

Action items

Here is what you should do – Check to see whether or not your systems, both quoting and invoicing, enable price segmentation.  You will find one of three possible answers:

1.  They are fully flexible and enable any type of price segmentation (Customer characteristics, transaction characteristics, and behaviors).  If you are lucky enough to find this is the case, then you should focus on determining which segmentation methods will give you the most return and go implement them.

2. They enable some types but not others.  Any accounting system will allow you to segment based on product since you are simply creating a new part number for essentially the same thing as another product.  Instead, focus on the ability to price segment on customer characteristics, transaction characteristics and behaviors.  You should learn what types you can implement and do your best to take advantage of them.  Consider pushing for better systems (see 3 below).

3. They don’t enable price segmentation at all (or very limited).  Consider taking this on as a project inside your company.   Convince your own company that profits will increase as you implement price segmentation.  It won’t be an easy transition, but it is almost always worth it.  If you are able to drive the transition, and you can measure the results, you will look like a hero.

 

Photo by Patrick Finnegan

How to Price Golf … Dynamically

Troon_North_Golf_Club_-_Scottsdale_Golf_Course_-_Arizona_Tee_Times_-_Online_Tee_TimesEvery once in a while, a company in a traditional industry uses a new pricing model.  Troon North Golf is one of these companies.

Typically when you go to a golf course, there is a flat fee.  Sometimes their weekend price is more than their weekday price, but that’s about as far as it goes.  Troon has taken price segmentation to the next level.

If you check out their website, you’ll find they put different prices based on the time of day.  They are in Arizona, so the morning tee times are more expensive than mid day.  But in truth, it’s based on demand.  More people want to play in the morning in Arizona.  It’s worth more.

Play around with their site and you’ll find that different days have different prices.  My favorite though is that as a tee time approaches and hasn’t yet been booked, the price goes down.

If they are using demand to drive pricing, which I believe they are, then they also probably change prices based on weather.  I’ll bet on cool days in Scottsdale (are there any?) the prices are higher in the afternoon.  Do they use the weather forecast to drive their pricing?  If I were leading their pricing effort they would be.

OK, so what should you learn from this?  Think about how golf has had the same pricing model for a very long time, and here this course has rethought it.  They found a new pricing model that more closely correlates with how much golfers are willing to pay.  That’s the lesson.  Just because you’ve used the same pricing model for a long time doesn’t mean there isn’t a better one out there.

Think new.  Look for ways to segment your pricing based on how much your buyers are willing to pay.

Is Slack Rewriting SaaS Pricing Rules?

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Steven Forth, a fellow pricing expert that I enjoy reading, shared and interpreted an awesome story about a new pricing strategy for Saas in a blog titled Slack Is Rewriting The Rulebook on Saas Pricing.  The key point of the story is that Steven was elated when he received an email from Slack saying Steven’s company didn’t use all that they purchased so there would be a credit provided to them.  Wow.

First, imagine the elation whenever any company surprises you by giving you money you didn’t expect.  That is incredible.

In Steven’s article, he went on to describe the history of software pricing models.  A very good article you should read.  The only minor disagreement I have with his article is he stated that he believes this pricing tactic is a transition to pricing based on value delivered.  In other words, this is the future of SaaS pricing.

I’ve made many wrong predictions in this blog, and this may be another, but here is my prediction for the success of this new pricing tactic. It depends. In some markets this will drive competitiveness.  In others, it is simply giving money back to your customer at the cost of your profits.

Think about cell phones.  AT&T used to offer rollover minutes.  If you didn’t use them they stayed on your account.  That’s very similar to Slack’s pricing tactic, only pay for what you use.  AT&T advertised this a lot as a differentiator, as more value to their customers.  And yet, the other carriers didn’t follow suit. They didn’t see it as a big enough differentiator to mimic. AT&T eventually cancelled the program.

However, it’s very likely that markets with low switching costs and minimal differentiation will gravitate to pricing tactics like this.  The cell phone industry does not have low switching costs, which may be why this tactic didn’t work for AT&T.

The lesson for you, if you offer SaaS products, is be aware.  This may become a competitive sledgehammer in your industry.  Maybe you should be the one to wield it first.

 

Photo by Gary Lerude