Commentary by Ellen Quackenbush
From: “The Neuroscience of Trust,”hbr.org
You know it’s quarter-end when the internal price negotiations get into full-swing. Sales teams plead for price concessions to retain a deal that is going sour. “The account is threatening to put the deal out to bid.” “A competitor just offered a lower price.” Pricing tries to hold the line by talking about target prices, account profitability, or volume tiers. In the end, pricing folds and offers a price concession. No one is happy—except procurement.
This is how the slippery slope of margin erosion begins.
But there is a better way. It involves getting ahead of quarter-end, desperation pricing by selling value—not just to the customer, but to the sales team.
Pricing should take the lead and collaborate with the sales team, way ahead of contract renewal or year-end, to communicate the value delivered to the customer’s business. Here are three steps to protecting price by communicating value more effectively:
- Sell value early. Identify accounts up for renewal in 6-9 months and begin the value conversation. Summarize the value your solution has delivered, in terms of cost saving or revenue improvement, and work with sales to identify opportunities to expand this value.
- Provide value report in the customer’s language. Create a “value file” that documents the value delivered to the account. Use the business impact language the sales team used to win the business and link to account KPIs.
- Pivot around procurement. Keep close tabs on those stakeholders that have really benefited from your offerings. Provide “value cards” that customize the value proposition to that person. When procurement demands a discount, play this value card by bringing that stakeholder into the conversation.
Build trust with the sales team by enabling them to communicate value to their accounts in terms that resonate with the customer. Debates with procurement around “what’s my price” will get replaced by conversations with key stakeholders about “how can I get more value for my business.” Sales will come to pricing for value solutions, not price concessions. This way, pricing and sales can work together to build profitable accounts.
Fences and Communication Are Key to Managing Capacity—Even in the Airline Industry
Commentary by Richard Harrington
The furor following United Airlines last week as a passenger was forcibly removed from his assigned seat has sharply brought the idea of capacity management in to the public eye. Airlines are often seen as the kings of using individualized pricing to manage capacity and maximize revenue, so what went wrong?
After viewing the incident, many outlets lamented that consumers demanding ever low prices have led to the decay of service quality as airlines are forced to cut costs and see overbooking as a symptom of this dynamic—a way for a struggling industry to make a little extra money. This line of thinking confuses the recent ability to easily compare airline prices with the concept that everyone buys with price as their primary concern. This is not true. I recently ran an afternoon value workshop with a client, flying in in the morning and out the same evening. For the morning flight, I was much less price sensitive; I had to be on site with the client that afternoon; if I couldn’t get there by the beginning of the session, I may as well stay home (the Doctor in the United video was in a similar situation). For the return flight, while I wanted to be home at a reasonable hour, timing wasn’t as critical, reducing price sensitivity.
So how does this help us deal with the constraints of capacity? In our book Pricing with Confidence, Reed Holden and Mark Burton discuss tactics for using price to manage capacity. At times of low utilization, it’s fine to sell to price buyers to keep things ticking along, but as more sales come in and capacity becomes tight, it is imperative that you have the option to bump the price buyers in favor of customers paying higher prices for higher-value offerings. How do you do this? Write it into the contract: for the lower price, lead times may vary. Fencing in this way is a great give-get as price buyers will quickly accept the concession while poker players will scream.
So how does United fit into this framework? Overbooking is reasonable when faced with the high prevalence of no shows and the perishable nature of an airline seat, so why not sell a few ultra-low price tickets for each flight with the clear stipulation that in the case of overbooking, they will be the ones bumped and will be booked on the next flight. State this very clearly as the purchase is made, not hidden in the 46-page contract of carriage. That way, price buyers can self-identify and not be surprised when their service is interrupted, leaving higher paying value and relationship buyers to focus on the journey, safe in the knowledge they will not be “bumped.”
The QBR—Proving Value from the Outside-In
By Tannis Ashworth and Chris Mitchell
I was working with a team of Account Managers who were preparing for an upcoming customer Quarterly Business Review (QBR). This organization had a rigid two-step process for QBRs:
- Step 1 - present to internal executives how well the team’s account was progressing
- Step 2 - present a rehearsed version to the customer
The meetings would often spiral downhill quickly due to the inside-out focus of the Account Team. The intended Customer Value Review was instead presented as how good their own company was and how well the team had taken care of business for the customer. One presentation had three slides dedicated to the “Customer Issues Log” at the outset of the presentation! Did I mention some of the presentations had over 100 hundred slides?
So, why is this inside-out focus a problem? Customers today are expecting more from suppliers. They are hungry for industry insights and business peer benchmarking. Furthermore, senior leaders know that customers don’t really care what you do within your organization to get the job done. What customers really care about is the extent to which your solution has impacted their business. They want your value message up front and personal; expressed in tangible, monetized terms to reinforce the decision they made to award the business to your organization in the first place. Don’t expect your customer to do your work for you. It is the responsibility of the Account Manager to connect the dots, track, measure, and prove the value stated in the original proposal.
You might be asking, “How did you turn the ship around?” We started by building business acumen across the team and developing the skill to express value in meaningful terms. This process went far beyond having a cursory knowledge of products. The team learned about market forces impacting the customer, including competitive changes, regulatory requirements, and environmental concerns. We took a deep dive into the business problems the customer was initially trying to resolve and how their business was affected, placing the focus on the outside first. Equipped with this preparation, the team gathered the data they needed to demonstrate how well their solution was addressing the customer’s business needs. Expectations for these meetings, which the customer soon welcomed, were set pre-contract and documented in a Service Level Agreement or SLA. Re-shuffling the presentation deck became a logical step toward communicating the solution’s proven value to the customer—putting the focus where it needed to be…on the customer! The Customer Value Review process became a clear, concise, and compelling claim of evidence to support the customer’s decision and sustain the business relationship.
Is Your Pricing Model Limiting Growth?
By Saad Shahzad
Every industry faces its own set of challenges; a pricing model should help manage these challenges, helping boost a business’s growth and profitability. Many firms nowadays chose a subscription based pricing model which gives them a predictable stream of revenue. This model works well with Wall Street as investors love a predictable revenue stream. But if you compete in a high-growth industry, a subscription pricing model might not be the best pricing model for your company. The main advantage of a subscription model is to help level off any fluctuations in demand by charging a fixed fee despite customer usage. However, as revenue does not grow with customer usage, a subscription model could limit your growth in a high-growth industry.
Increased customer usage means that the value derived from your offering is also growing. If the value delivered to the customer is growing, pricing should correlate to that. A subscription model might eliminate the risk in demand fluctuations, but it also limits the upside a business can make by locking in a fixed fee structure. There are different pricing models out there that could be better suited to capture growing usage, such as a pay-as-you-go model or, if you have limited capacity, a price-bidding model might be the best way to extract value.
It is the role of the sales professional to dig in and understand what the best pricing model is to adopt with their customers. Below are a few things to think about when deciding on a pricing model:
- Is the use of your products and services continuous or discrete?
- Will usage within a customer grow or remain stagnant?
- How limited is the product inventory? Can all customer demand be met or is supply restricted?
- Do you need to drive adoption before you can charge customers?
Choosing a pricing model is a critical decision for any business; choosing the wrong pricing model can seriously limit growth. Has your business thought about its pricing model lately?