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1. Pricing Fundamentals

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 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.

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

Pricing and Distinctive Competencies

 

Oscar_Pistorius_at_International_Paralympic_Day,_Trafalgar_Square,_London_-_20110908This month’s activity of the week is Distinctive Competency. This has a direct relationship with pricing.

A distinctive competence is a distinct core competence. In other words, it’s something you are very good and your competition isn’t. When your products take advantage of your distinctive competencies, then by definition your product are differentiated. Your products have your distinctive competencies. Your competitors don’t.

When pricing products that have competition, you start with your competitors price and then add the value of your positive differentiation and subtract the value of your competitors advantages. Your distinctive competence is one of your positive differentiators, as long as your market values it.

If your distinctive competence is so strong that it essentially makes you a monopoly in your market (i.e. your buyers only consider your products and don’t even consider any competitive products) then that directly impacts your pricing. You have created market conditions and products with no competition. In these type markets, buyers are relatively price insensitive, meaning we can often charge higher prices and barely lose any business.

Distinctive competencies are inherent competitive advantages. Create products that take advantage of your distinctive competencies and you are creating products you can charge more for.

 

Photo by Nick Webb

All Roadmaps Lead to Pricing

5849712695_1f41c8fbc2_zThis month’s activity of the month is Roadmaps.  You might be wondering how that relates to pricing.  It really depends on how you look at pricing.

The obvious relationship is that as we plan for new products, we should understand how much value they will deliver in the market and hence what price we should be able to charge.  Before committing to a new project, we should have profit estimates, which of course requires a price estimate.

However, when you look deeper into both the concepts of pricing and roadmaps, you have the opportunity to make much better future product decisions.

First, when we think about pricing early then only products that deliver a lot of value to the market make it onto the roadmap. How often do we create products and then try to figure out how much to charge?  If you understand how your market perceives value, it makes it much easier to realize what you need to build.  Pricing should directly influence future products.

Second, clearly understanding pricing strategies should at least partially drive our roadmap.  For example, do we create separate products targeted to different market segments?  Different market segments have different willingnesses to pay.  We probably should.  We can’t create them all at once.  We need to prioritize market segments and add them to the roadmap based on this priority.

Another powerful pricing strategy is good, better, best.  If we choose to use this strategy, we need to clearly articulate what each version does and where each one fits on the roadmap.

Another pricing strategy that’s clearly related to roadmaps is complements.  Once we’ve won customers in the competitive marketplace, we can often sell add-ons at much better margins.  These add-ons, or complements, are extremely valuable and profitable.  They need to be prioritized and placed on the roadmap if we want to create them.

Hopefully you see that roadmaps and pricing are tightly intertwined.  It’s foolish to create a roadmap without understanding the pricing of the items on the roadmap, and it’s powerful to use pricing concepts when deciding which products belong on the roadmap.

So the title of this article isn’t really true.  Actually, the opposite is.   Pricing should lead to all roadmaps.  Does yours?

Photo by Moyan Brenn

Interesting Pricing Scenario

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A student wrote in to ask the following question.  It was fascinating enough I want to share it with you.  All identities and industries are modified to protect the privacy of the actual situation.  Here’s the question:

Hi Mark, I’m wondering if you can assist me with something I’m struggling with. I’m working on a deal right now and trying to price it based on value but the customer is pushing back very strongly saying that it’s not worth the fee we’re trying to charge.

We’re a private B2B company. With our magic, the use of our product will allow this particular client to increase revenue in an area of their business from about $90k to $260k, without having to charge their customers any more money or to fundamentally change the way they do business; they do what they’re doing, charge their customers the same amount of money, yet they almost triple their revenue. We have built a compelling economic model, which they worked with us on, and which they agree will have a significant impact on their bottom line.

Our product is a license based service that will help them realize $180k in new annual revenue.  Using what I learned in the pragmatic marketing pricing course, I applied the 10% principal so our license fee should be $18,000 / year = $1500/month. Despite showing them a strong economic model, which they have said they agree with, they have only offered to pay us $2500 annually for a license.

I’m not really sure what to do now. They love the product, and want it.  We know the value that we add to them, but they are simply refusing to move off that number. We don’t want to walk away from the deal, but we’re also conscious that the value that we’re delivering them is substantial and they should pay a reasonable amount for it. No way we’re going to accept a $2.5k license, so we’re not really sure what to do.

Any thoughts/ideas/suggestions?  Thanks, Jason

Hi Jason,

From what you describe it seems you are spot on. Here are a few thoughts on what may be happening.

First, make sure this is a Will I? type product, meaning you have no competition. Assume for a second that your buyer decides to not purchase from you. What will he do instead? If the answer is nothing, then your thinking is correct. If the answer is purchase a competitor’s product or build something similar himself, then you’re probably not going to be able to capture 10% of the economic value you deliver.

Second, we have to make sure the customer believes the economic value we promise. You said your customer agrees with your numbers so that’s probably not the issue. But we will only get 10% of the economic value our customers believe they will get.

Third, although our costs don’t drive our pricing, often our customers think they do, or at least should. Your customer may be looking at what they think this costs you and don’t feel your price is fair. Alternatively, they may be looking at prices of similar (not competitive) products that are priced much lower. In these cases the buyer has a price he expects to pay and you are asking a much higher price. This is often very difficult to overcome. It may take a little time for the buyer to get used to your price.

Fourth, maybe your buyer is simply a tough negotiator.

Here are my suggestions.

1. Change the structure of your offer. In conversations, offer to give him the product for free and share the upside 50-50. This looks fair and is essentially free money to your customer. However, your customer will never go for it. The purpose is to get the customer focusing on how much of the upside he wants instead of how much he’s paying. (By the way, these incremental profit sharing plans are extremely difficult to enforce. You really don’t want them to accept it so don’t push too hard.  Instead, you are using it as a tool to make the 10% number look inexpensive.)

2. Be patient and walk away. In negotiations, patience pays. If you show you are anxious to close quickly, the buyer will not budge. If you look like you’re willing to walk away the buyer will likely move his price up. It would be foolish of the buyer to walk away from the additional profit you can deliver to him just to spite you because he doesn’t like your price.  If it appears the buyer walks away (which looks like a couple of weeks of silence) then you can always go back and accept a price closer to his offer if you want.

Oh, and you probably don’t want to just hold your price.  Find a reason to give a little to show you’re not unreasonable, but don’t give much.  Maybe a 3% discount.  It looks like you’re trying, but you don’t have room to go.

3. Offer a free trial period. If the implementation isn’t too onerous, the customer may be willing to try it out and then find out if the additional profits do appear. Then, when you go to take it away the decision becomes much easier for him to make. However, if the implementation is challenging, then the company may not want to invest that much of their own resources for the test.

Good luck,
Mark

And to close the story, here was Jason’s reply:

Hi Mark,  Thanks for writing back so quickly…  I really enjoyed my 3 days with you, and I appreciate you taking the time to help me out; I owe you a steak and a beer the next time you’re in my town :)

This is definitely a “will I” product and not a “which one”. Currently, we are the only company in the market with the product/solution we have (we’re patent pending!). Truth be told, the prospect (this one and all of our other prospects) didn’t even know they had the revenue leakage problem until we brought it to their attention. We have asked the customer what other solutions they are considering and he assures us there are no other solutions and if they don’t go with our solution they’ll just continue doing things as they have been doing.
Now that I say that out-loud, you bring up a good point. Despite them agreeing with our numbers, and there being considerable upside, they may still feel that paying $18k/year in licensing fees isn’t good value. Despite the revenue increase our product offers them, the optics could be that the value isn’t there (possibly because we make it look too easy to make them that much money).  And of course, they may also just be playing hardball.
My business partners suggestion was your first suggestion.  The problem is that he’s confident that they’ll go for that option. Implementation is a bit onerous (on our part), so I’m keen to avoid the 50/50 agreement and the free trial period.  It’s true that we would make a lot more money with the revenue share model but I don’t want to be on that sort of model; it gets messy fast, and in my experience customers have a habit of thinking that they’re quasi-partners in your product then, too, which makes life difficult.
I’m going to talk with my partner…  I think being patient and “walking away” might be the answer; people never want something until they can’t have it, and when they can’t have it, it’s all they want.  Maybe playing hard-to-get will get him moving on what he’s willing to pay.
Thanks for your help Mark; I’ll let you know how it goes.  Jason

===

I think he’s on the right track.  Hopefully he will write back and let us know how it ends.

 

Photo by Leo Reynolds

Good, Better, Best – Do It Right!

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It is a great feeling when readers tell me they’ve implemented good, better, best because of what they’ve read. (Actually it’s a great feeling that people read the blog, let alone take action.) Then, when they went on to describe what they had done, it became obvious I left out an important detail.

Several times in the past couple months I’ve heard from people who implement good, better, best by creating low, medium, and high priced offerings. The low priced product had the least number of features, the medium had more and the high even more. So far so good.

Then they went on to describe what features made up each package. It almost seemed random as to how the features were assigned to which offering. As an example, the low end product had some features that were not in medium or high. This is not best practice in good, better, best.

The problem with this implementation is we force buyers to make a difficult choice.  They must choose between a lower end package that has a feature they want and higher end packages that also have other features they want.  They are trading off features between packages, trying to decide which package has the features that are most important.

The power of good, better, best comes in its simplicity. Buyers who have a hard time deciding, buy the one in the middle because it’s better than the good product and less expensive than the best. However, this only works if the product offerings build on each other.

In other words, your better product should be everything that is in good plus more. Your best product should be everything that’s in better, plus more. Don’t make your buyers think too much.

Let’s take a look at iPhones. Apple always offers 3 versions of each model of iPhone based only on the amount of memory. This is a wonderful implementation of good, better, best.  When someone buys the one with the most memory, they get everything that’s in the lower offering plus more.  It’s simply a price for feature decision.

However, Apple also gives you the choice of the iPhone 5s, the 6 or the 6+. This is NOT good, better, best. Even though they are low, medium and high priced, they do not build on each other. If you want a phone that is not “too big” you will purchase the 5s or the 6, but not the 6+.  Even “rich” people may prefer the 6 to the 6 plus.

Good, better, best is a powerful technique to structure your products and prices, but you want to be sure to do it right. One goal is to simplify the decisions your customers need to make. The only trade-off they should be making in their minds is price for features, not choosing between features.  We do this by making sure the best product has everything the better has plus more and the better has everything the good has plus more.  Good luck.