[Video] In the hot seat: Customer questions

Today I met with some of our pricing leaders to discuss some of the more pressing questions and issues that have come up lately with clients. We had 3 rules: must answer within 5 seconds, no preparation or review of the question list, and no answering with “it depends.” Below is a transcript of our conversation.

T: Okay, here we go. So we are trying something different today. So what I have is a list of questions from topics that have come up recently in coaching conversations or conversations with new clients who are learning more about pricing. Wee have not discussed or prepared at all the list of questions that I'm going to go through. What I'll do is pick questions at random, and we'll just get into it and hop around and see what opens up here.

T: Question number one: I recently saw that price equals value. Please make the case for why this is or is not true.

A: I’ll take that one.

J: We need a buzzer.

A: I would say, price does not equal value. Value is what the customer gets as a result of the product or service. That is the benefit to the customer. The price should be reflective of value, and take into account the value that the customer is getting. But, for example, if a customer is purchasing a service, and that service generates ten thousand dollars worth of value, the price can't equal that. Because that that's the company taking the full value of that service. So it has to be something below that. What that price ends up at depends on a range of factors, such as the competitive market, such as the end customer’s understanding of value, et cetera. So yeah, I wouldn't say that statement is true, although they are certainly related.

P: nothing to add. Value is the theoretical mass of price.

J: Yeah, I totally agree. I think I think that's where we start talking about that notion of fair price to set a fair price, and that, really is the understanding of how do you split that differential value between the client and their customers. If you take a hundred percent of that value, there's no incentive for that customer to actually buy your services or products. So it makes perfect sense. Point 1 to Adnan.

T: All right, well done. Next Question: Willingness to pay is the same as value. So why quantify value to set pricing?

P: I mean, that's just like a slightly different slant on the prior question where in in theory, you could quantify one or the other. But value is something that at least at Holden we look at very specifically, and we can put bounds around it with real numbers based on what it's worth to, an end customer. And, again, willingness to pay effectively is what's the willingness to pay for a price? I think part of it is that “willingness to pay” is a flexible number. Where is it? The client believes that the value is real, then their willingness to pay will be higher, and if they don't see the value, then their willingness to pay would be lower. So part of the job is, once you set the price that's according to value, the sales team needs to do the secondary part to get the price and convince a customer that it should be willing to buy it.

J: I just have one thing to add to that. For me, this is probably one of my pet peeves, and it's a frustrating topic, because a lot of clients assume willingness to pay is value. That's the value that they perceive, therefore, that should be the price that you set, and it's frustrating. Because if you think about just us as consumers even forget about the B2B context, you know, if I go to the grocery store, my willingness to pay for a bottle of water is X. If I’m running around Central Park in the middle of summer, my willingness to pay for a bottle of water from the stand guy is quite a bit different. So you know, if you do a quantification study and you throw it out there. Your willingness to pay is going to be at a certain level, but, like Pete said, that willingness to pay will change, depending on a lot of other circumstances of their understanding of value, the time, the full offer, competitive landscape, all of these things. You'll be able to change that willingness to pay. So for me, just assuming the willingness to pay is equal to the value, and then setting it at that price, it's theoretically incorrect.

A: A question I'd love to hear some perspective on is related. Can there be fluctuation in the value as well, given that variance and circumstances? So your example of buying a bottle of water while running in Central Park versus going to the grocery store, there is presumably more value in the example of running in Central Park.

J: That's exactly right. That's exactly what we're saying, and that's why we create these fences and our offer structure right? We design these offer structures and create fences, so we can take the high value segments and make sure that we get paid for it correctly. I think the other piece is, how do you communicate that value? Right? The communication of it is the key to be able to change that willingness to pay level that's out there, and I think Pete said it as well.

A: Yup really makes a lot of sense,

T: All right. Next question. First of all, the lens on these questions was like, Do I think this could be answered in three minutes or less? Which I think is a set up to fail. But let's just see about this next one: How should I gauge if my product is a candidate for subscription? 

P: Well, that that could be all day. Maybe a couple of different ways to think about it. One is, does it provide value just today? Like you experience, you buy the coke, and then you finish it, and then it's gone? Or is it something that you experience over time? So like the Netflix subscription kind of makes sense that you'd pay for it over a period of time first for that. So I think, how does value accumulate or accrue? 

J: Yeah usage is another way to say what Pete just said. Usage if you're continuously using it, and as you use it more or less, that's how much value you get from it. I think they are a prime candidate for a monthly subscription fee, or whatever that might be.

A: And the measurability plays a big part of it as well, and that's absolutely related to the usage comment you just made. Meaning, there could be a variance in usage. But is there the infrastructure to measure that on an ongoing basis? I think that's inherently why in the software world that subscription model has skyrocketed, and that was really the first candidate, because that usage is so easy to measure on a relative basis. And now you're seeing the subscription model just really take off into other industries because of the volume of usage data that you are getting in and outside of the software world.

J: Yes, the other thing I'll also say on top of that is your overall price currently. So if you’re pricing per product or per service, or whatever it might be, if your price point is enormously high, and it could be relative to the value that you're actually bringing, you're kind of tuning your market to a certain segment, right? You're going after a certain segment that can afford that type of an investment. And a subscription model might help you get to lower end segments to try your brand or to try your product. Things like that to bring it down on a monthly basis or a sixty day basis or ninety day basis. It gives your brand the opportunity to go after “lower end” market segments, but people that can actually afford a smaller price tag to get used to the value, to experience the value, and then they can move up.

P: Or even the same customer who wants to spend to opex instead of capex.

T: All right. Next question. We often hear that pricing is a black box. How do we resolve this issue?

J: I think pricing relative to value is the key here, because your pricing - if you set it correctly, and you set it relative to value, then what you really need to focus on is the value. So, what are the value drivers, and how are you quantifying the value? If you can get your head around that, it's easy, simple for people to understand, then it makes it really conversational to take it from the value and quantification level, to the price level. I think it's just a natural fit. For us, with the clients that we work on, that takes the mystery out of it.

P: I was struggling to think of an answer there because it's fundamentally the opposite of what we try to do. If you can't understand pricing internally, and you can't get the commercial team to buy in, they won't communicate it with any degree of effectiveness either.

J: I worked with a SaaS company one time, I might have told you guys this story. But they brought us in. And he was like this really really smart engineering guy who built this beautiful product, and they were getting a lot of traction, and it was self driven off the web, and the customer feedback was always, “I don't know how you guys are calculating my price.” He had it set up where he's calculating over thirty different variables to come up with a price, and their customers were having a really tough time understanding what the heck is going on, and they love the product. And so he just didn't understand it. And we went through, and we kind of looked at all these things and this individual that created the price model, he was kind of going after every corner case you can imagine, to build this very, very intricate and detailed price model. And it kind of over complicated it, and created this black box environment for their top customer when he could have just said, “Here are the two, three key value drivers, and we're going to base the pricing off of this.” And you're probably you know, ninety percent there, ninety five percent there, you know. I don't think it needs to be much more complicated than that.

A: That complexity, I think, is a massive factor. What I often say when we're trying to come up with pricing and packaging for our clients is that your pricing should be complex enough to reflect the variance in use cases of your customer segments and buyer types, but at the same time, it has to be simple enough for your sales team to explain by jotting down some notes on the back of a piece of paper. Because otherwise you are going to get in that situation where it's so inherently complex that it is perceived to be as a black box, and like an example that you just shared Jeet, that's almost a scenario where you're having a custom price with that many variables for every single customer. And that's really kind of antithetical to what we communicate in terms of simplicity for the approach to pricing.

T: Next up. How can I execute a price increase without opening the door for competitors to gain market share?

P Well, first of all I'd say it's probably not the case, at least recently, that anybody's thinking about a price increase where competitors aren't also thinking about a price increase. So it's likely you're not the first out of the gate. And if you are, and you may just be the leader, and then you'll have some followers that are close on your tails. I'd say a more nuanced answer is, you shouldn't just increase price on all products. You should probably think pretty carefully about what are the ones that matter more to your customers? They're less likely to churn on, and then you can maintain some affordable prices in other categories as well.

A: Meeting with the understanding where you are differentiated is the lowest risk way to do that. So that gets back to that segmentation comment that you were just making Pete because you want to identify the right customer segments for you that execute on. It relates directly back to where we initially started the conversation around aligning price to value. You just have to be careful in the way that you're doing it.

J: Obviously, I agree with both of you. The only context I'll add a little bit more around is, a lot of it also depends on market lifecycle, and where you are. If you're in a mature market, if your competitors are increasing prices but you are, obviously that's a high target for share shifts. Because the market's not expanding, it's a mature market. It's not really growing, but you're moving your share from one company to the other, and those tend to be typically price buyers. So if you are raising prices for whatever reason, inflation, or other reasons, think of it this way. You're giving this business to your competitors, and you probably want your competitors to have that business because they're going to be unprofitable pretty soon. 

J: Again, you can always buy them back because they're typically price buyers at the end of the day. If you want that revenue back again, so you can pay for it. If they're in the growth market, your market is expanding. So typically, if they're not going to follow suit with the price increase, you're still growing at a healthy clip and a healthy margin, because the market itself is growing. You may lose relative share to your competitors, but overall you're still growing very profitably if you're choosing to increase prices and your competitors aren’t at that stage of the lifecycle.

T: Allright. Next question. Your client just adjusted prices. If you can choose only one KPI to measure the pricing effectiveness, what do you choose?

A: The single KPI that I would lean towards is going to be the impact on profitability. Ultimately, that's what we're after. And that gets back to the price buyers that you want to steer clear of.

P: Yeah, And I think that that probably can go down to… you can get a little more esoteric. What's the goal of your pricing strategy? Is it to maximize profitability? (Which is typically what we'd endorse.) Is it to grow revenues? Is it to increase your market share? So, you might have a different objective for your business if you’re trying to grow really quickly, and maybe profitability is less important in a growth stage B2B SaaS company, for example, Maybe you want to just measure growth. So that that's going to the only other nuance.

J: Totally agree.

T: Great. Next up. How can I price based on value when competitors with offering similar to mine, offer low prices?

P: Undisciplined competitors.

J: I want to be careful here because we can take it down the road of talking about undisciplined competitors like Pete just brought up. But you said value and not differential value. So if you're quantifying value and you're pricing it, it should be off of differential values. So how are you better than your competitor? Right, then you can have higher prices than your competitor, because you're delivering unique benefit that your competitors are not delivering. Your price point should be higher, and you can justify it based on that value calculation, and that value conversation. Now, if you're offering equal value, and your prices are not equal, and your competitors are not thinking about taking your lead at a price point, and they're going below you, or they're going at a different price level than you. Then, yeah, you could come into scenarios where they are undisciplined, and they're trying to gain share, they’re trying to gain your customers. And that is a problem that we see quite a bit that's out there. But I will tell you

that people make this mistake of thinking that all products are the same, and all customers consume the products the same way. And that's typically not true, because theoretically, if you're all selling the same product, then your market share should all be there. If there are four competitors in a market, and they sell the same thing, the market share theoretically should be twenty-five, twenty-five percent, twenty five and twenty five right? And most of the time the environment is not set up that way. You have a market leader most of the time. You have a laggard most of the time, and our job is to find out why the leaders are the leader, and where those value elements are, so they can get paid for that value.

P: Jeet even in the case that you do have like the theoretical, even competitors same value, I think this might be one of those cases where you think about price metric as a competitive advantage, where you can actually differentiate on the commercial model, even if the product were exactly the same. And you'd still have an ability to capture a different price.

J: Yeah, that's a great point. I love that point because you can look at distributors as an example. They all sell the same SKU for manufacturers, right multiple distributors, but they can differentiate themselves on service levels, and they can get paid for those service levels. So they're making money from different lines of revenue. It's not necessarily that product markup that they have to worry about.

A: Find out how and where you're differentiated and pursue that market segment 

J: That’s right. And protect it. Defend your value.

T: Defend that value! Ok. How can I communicate value when most of my business is done through RFP’s?

P: Well, first of all, I kind of take a contrarian view to say: know where you don't want to compete. It may be that there's the section of those are these you don't even want to go after, because they're a waste of time, and you might not be able to differentiate yourself. So kind of look at the structure of: What are they asking about? You know you can get down to a government business pretty quickly in terms of RFPs. It's a very common thing, and if you're kind of at the RFP stage, you're probably too late. You should have communicated the best contract structure or your inputs on the requirements. If it's a specific request that will advantage you before you would get to the RFP stage, you might be too late by the point. 

J: I think most of our clients when they think about RFP or RFQ, they think about that one thing that's happening that's due in four weeks, and they're trying to do like a customer lifetime worth of work in the next four weeks to put it into their RFQ. Your account needs to be developed over time. Those value conversations need to happen nine months ago, ten months ago, a year ago. If you're trying to have value conversations at the point of an RFQ, you're very late to the game. Not that it can't be done, but it's very, very difficult to do.

T: All right, last one for today. What are some of the common roadblocks that companies have to realizing a fair price for their products or services?

A: They tend to lack the understanding of the value that they're bringing to the table for their customers. It's difficult to know how your customers are specifically using your product, using your service and the ultimate impact it has on their bottom line. The number one thing that we say is: talk to your customers. Get an understanding of specifically how they're using the product, and where it is adding value in their organization. That's going to put push you down the right path.

P: That's a great question, because I was just going to make fun of Tracy for asking a question that took up half of the two minutes we had for the answer.

J: That's right.

T: Don't hate the question, hate the game. Okay?

P: Allright.

J: I think that's the understanding of value. That's one thing Adnan just said. I think the second thing that prevents a lot of our clients is the ability to communicate back to the client. The big question is: are the sales folks that are actually the face of your price, the administrator of price, are they armed with all the tools necessary, all the talking points? Do they know what to say, to whom, when, to really be able to defend that value and to communicate that value? That piece of it is oftentimes missing with a lot of our clients. They spend a lot of time, energy, money, and getting and producing fancy math to get to a price point, and they kind of fall short of empowering their sales people to go out there and really go get as much of that price as possible, because they just don't have the tool skill sets ability to go do that, and that's definitely a gap that we see.

T: Alright. I think we pause there for today. I still have tons of questions on the list, so we'll do a part two soon.