A Warning to Finance Directors…


Occasionally we get approached by the CFO rather than the CEO. What is usually on their mind is a need to ‘tidy-up’ pricing in their business. You see hundreds of different prices for different products to different customers seems unnecessary and confusing to them.

It is true that the price file in most mature companies is a deal more complex than it needs to be and could stand some sorting out. However, the CFO is usually forgetting something. They seem to think that the tidy up is an administrative exercise performed by someone sitting at a computer staring at a spreadsheet.

We sometimes have fun shattering this illusion by asking a simple question: “If we are going to harmonise the prices for you, would you like us to harmonise them up or down?”

It takes a mere moment of thought before they say “Up please”. Whereupon, we say “Then someone is going to have to tell some customers they are going to get a price increase… hadn’t we better talk to the Sales Director?”

It had not occurred to them that generally speaking (but not always) customers notice price movements.

A price file filled with lots of different prices might be a sign that someone has carefully assessed the sensitivity of each customer and each product and priced it accordingly. If this were true, the more price combinations the better in theory. However in our experience much of the untidiness comes from poor attempts to price by badly trained salespeople and then negotiated down by customers. Often the deal was done years ago against a promise of mind-boggling volumes that never materialised in a marketplace with different dynamics and a different competitive landscape…. just nobody has had the gumption to go back to the customer and re-negotiate an up-to-date appropriate price.

Tidying up a complex price file can make you a fortune. But our advice is let’s get the Sales Director in on the project at the outset… because sooner or later we are going to need him.

…unless of course you really want to harmonise prices to the lowest common denominator. In which case you probably don’t need our help.

 

 

 

 

Tech firms and the obsession with pricing in a spreadsheet


Perhaps it is because I am getting old, perhaps it is because I am a pricing consultant and I don’t like giving things away, but there is something about the word ‘Freemium‘ that triggers a little retch in my oesophagus every time I hear it.

We work with quite a lot of tech companies, helping to price their offering and the conversation usually starts like this “We want your advice… here is our first stab at pricing… what do you think?”

We are then presented with what we describe as an ‘open grid pricing schedule‘. You have all seen one; a table with features down the left hand side and price packages across the top. The packages are either boringly called ‘Freemium’ ‘Silver’ ‘Gold’ and ‘Platinum’ or ‘Basic’ ‘SME’ ‘Enterprise’. Then someone has helpfully filled all the boxes with little ticks to show you what you get in each case. The list of ticks gets longer the further you go to the right.

This is fine if you are selling a standardised piece of consumer software or access to an online service for £20 a month or so. However we keep on coming across clients who are trying to sell sophisticated bespoke B2B software and service packages this way.

My theory is that being techies, their starting point was the ever-present Excel spreadsheet. Whilst setting out some rough segmentation and price positioning in a spreadsheet is OK, publishing it to the whole wide world is another matter. Those mesmerising little rows of boxes force you to think in a certain way… a way that is not necessarily helpful when setting prices.

Although it might seem open and friendly to plonk all of your prices on your website, we tend to start with the question: Do you really need to tell everybody what everybody else pays?

Open-grids work when you think people will be initially tempted with the cheapest option and then either at the point of purchase of subsequently, trade up to a better package. If you are pricing to the value the product delivers to them as a customer you will find a very much wider range is needed than would look sensible set out in one of these grids.

The golden (or should I say platinum) rule is that your web prices are the highest you will ever charge. What happens if your software or service package is worth millions to a really big client and stretching your Platinum package beyond £99 a month would look silly in the context of the grid?

The moral of the story is: By all means use excel to record your prices for internal purposes, but segment your market first before deciding to show your knickers to all and sundry.

 

 

Price Elasticity… Wrong Question


It is a bit of a common theme… about a third of new clients come to us and ask us to measure their price elasticity of demand… the amount their volume would drop or increase if they changed their price.

Bless them, they don’t know any better. It is the only thing they remember about price from their economics GCSE. But it is the wrong question to ask. Sure, if you put your price up some customers would probably (but not always) go away. The right question is ‘which would stay?’

I am afraid I struggle with neo-classical economics. Our experience of customer behaviour is never as simple as they would make out. Decisions are seldom based on all available information; seldom logical, rational or driven by utility value. If they were, vast swathes of the economy would have to shut down overnight.

Nobody would buy a Dolce and Gabana handbag, you would see the womenfolk of Knightsbridge carrying their belongings in 5p Tesco carrier bags.

Households would switch their electricity and gas suppliers every four to six weeks and British Gas would be on its knees.

Everyone employed in marketing or sales would find themselves on the dole and Apple would not be the most successful brand in the world.

The other problem with this request is that it requires at least three data points to plot from empirical data in order to draw a curve (two would be a straight line). Although some high volume online businesses can flex their price on a daily basis, for most firms this is simply not possible…. the number transactions is too small or you would simply annoy customers by moving the price all the time.

Our advice is to start from the other end of the thought process and ask the question how far can we move price without losing any customers. Then look at the type of customers you think would be first to go and price them separately…. and keep doing this until you have segmented you customer base.

Keep in mind our motto at Burgin Associates:

Some of your customers would have been perfectly happy to pay higher prices… the trick is to know which ones!

We will offer a modest reward and some online kudos to anyone who can accurately translate this into Latin for our coat of arms.

 

 

 

 

 

 

 

Getting a Grip of Pricing in an International Group


Often clients come to us determined to enforce some sort of central pricing discipline on their overseas subsidiaries, convinced that they are leaving money on the table. Anyone who has ever run an international group (that’s what I was doing ten years ago before I set up Burgin Associates), knows that controlling policy on anything is like keeping a gang of frogs in a wheelbarrow.

A client with just such ambitions approached us the other day and I put together a short paper for them offering advice on the potential pitfalls. I thought you might like to see it.

 

Autonomy and Profit Centres: You expect General Managers to deliver profit. Price is one of their key levers although often badly used. Simply taking responsibility for pricing away from them back to the centre would stir howls of dissent if they are worth their salt as managers. Bringing them alongside the process and helping them understand how it works and what it can deliver for them is the key. Initiatives in the first instance should be advisory rather than mandatory. Any subsequent shortfall in their profit performance can then be used to drive the policy in place …”If you had done what we suggested on price in the first place….”.

 

“It is different here”: At least one overseas operation will tell you that their market is fundamentally different in some way. All markets are slightly different and the central marketing function ignores this at its peril. We have seen product launch initiatives fail because the sub-pack size did not work with the peculiar conditions in retail in a territory. However, more often than not this is a political signal to ‘stay out of my business’. A subtle, more advisory approach, often lower down the subsidiary’s organisation will overcome this so long as the General Manager is kept in the loop.

 

KPIs and Incentives: We have seen the way that salespeople and management are measured completely undermine pricing initiatives. The obvious toxic combination is; discretion to set price but measured on sales volume or value. Aligning KPIs with profit objectives combined with modelling the effect price has on profit performance is a key driver of appropriate behaviour…. “Look how much money you can make if you get it right…”

 

Cognitive Bias: There is an inherent cognitive bias relating to pricing that hampers almost all organisations. There is a belief that the market is more price-sensitive than it actually is. The primary reason for this is nobody tells you when you are too cheap, so the groundswell of anecdotal feedback from the market is that you are price positioned higher than you should be. This leads to a belief that the market is more price elastic and that a cut in price will drive volume. For a variety of reasons this is nearly always wrong. For instance it assumes that competitors will not cut price in response (see Sweezy’s kinked duopoly model 1939). Price is the leading excuse for poor sales performance and the desperation manifests itself in calls for cost to be stripped out of the upstream operations. This is exacerbated by a panic at senior level about sales volumes.

 

Rule of Thumb and No Science: Price setting in smaller organisations like local profit-centres is seen as a black art only based on experience. We seldom see subsidiaries deploying market tests or careful measurement to determine accurate price positions. Some will avidly collect competitor price information but forget that the consumer does not see this level of detail. If you have 15 competitors in a territory but stockists only stock one manufacturer’s range, then the share decision is not made by the consumer (unless they choose a store based on the product in question). In this instance a higher RRP makes the retailer or distributor more money.

 

The Retailer or Distributor as the Customer: Smaller operations particularly with a limited share of retail presence, will regard the retailer as the customer rather than the channel to the customer. As you know, the mindset of a brand is that they own the consumer and this strength should make retailers hungry to stock their wares. Limited marketing budgets in smaller territories mean that building brand awareness is a luxury they cannot afford. Support from the centre, a strong brand-driven culture will help change this perspective.

Footnote: Strong brands, no matter how nice their people are, will always be considered as arrogant by retailers and distributors. This is simply an expression of their limited power to negotiate with you. Calling the shots on RRPs (in a legal way) is sometimes seen as arrogance. This has to be assuaged by demonstrating the superior profit opportunity it offers.

 

The moral of the story is: Tread carefully lest you give your subsidiaries the very best of excuses for not selling enough.

 

Should Salespeople Set Prices? …The Eternal Debate


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We often get stuck in the middle of a heated discussion across the boardroom table about whether salespeople should be allowed to either set prices or offer discounts. I find myself sitting there, sage-like, until the fury has died down and both sides turn to me for the ‘expert’s view’. I thought I would save you the angst and give it to you up front.

There have been quite a few studies (mainly in the USA) that indicate that companies in the same sector that do not allow salespeople discretion to discount make more money. However it is not quite as black and white as that…it sort of depends on the nature of the business, the mindset of the sales team and how you manage them.

A good starting point is to distinguish between two rejections on price which are sometimes difficult to tell apart:

  1. “I have a price from your competitor that is lower than yours and I cannot see a reason to pay a premium to you.”
  2. “I like your product and am intending to buy from you, but I am going to have a crack at getting a discount because you look scared and I want some of your profit.”

It takes takes a deep understanding of the context of the purchase and the needs of the company behind the somewhat aggressive buyer, to call his or her bluff and stand your ground. There are many reasons why front-line salespeople won’t do this:

Deals are binary for them... In their world, sitting in front of a customer, they are faced with a choice: Give the customer the 5% discount that they are asking for or lose the deal (and the associated bonus).

At the centre of the organisation we aggregate the swings and roundabouts to get our market view. The salesperson’s market view is the customer across the table from them right now.

Nobody ever tells you that you are too cheap… This is an inherent cognitive bias that afflicts almost all companies. Unless properly measured, your view of your price position is almost always inflated.

Field Salespeople are unfamiliar with the maths… There is seldom anywhere in career path of the average salesperson where someone sits them down with a P&L and shows them the disastrous effect dropping price has on the bottom line.

There is an assumption that the competition will not react… They may not get a chance on this deal, but the next time they come up against you they will have learned their lesson and launch a pre-emptive strike…. (don’t get me started on the whole price war metaphor thing).

5% doesn’t sound like much… Who hasn’t heard salespeople round to the nearest 5%… after all it is only a 20th…. not if it is another 5% discount from list and the discount is already 65%… then it is a 14% drop in price. A 5% drop in price will put a 4.9% EBIT business into the red.

Negotiating is different from Selling…. a salesperson will go out of their way to delight a customer, after all that their job! Delighting the customer when negotiating price is not usually a good idea.

The ability to discount is a badge of rank… It is like the company car grade or the title on the business card (do you have anyone who is still a Sales Representative? …or are they all Area Managers now). The more senior you are the more of the company’s money you are allowed to give away. The discretion to set or discount prices will have to be wrestled from their cold, dead hands.

Having said all that…

If you cannot generalise at the centre about the price sensitivity of the market and you do not have the time feed the decision up the management chain, then perhaps the salesperson does need to make the judgement whilst sat in front of the customer. If this is the case this is what you have to do:

Train the hell out of them… teach them the maths until they can do it in their head without thinking (some won’t make it). Teach them to understand benchmarks, context and value so they can judge price sensitivity. Teach them to negotiate (needless to say we can help with this).

Measure them and reward them to drive good pricing behaviour… We still see some companies where salespeople are measured on volume or value yet allowed to discount. We tend to put the CEO straight fairly quickly (we find a baseball bat helps). Even bonus paid on profit or contribution doesn’t always crack it.

Give them permission to lose customers on price… this is an anathema to most companies, but if you always win you are not pushing the envelope on price.

HERE’S A WACKY IDEA… to start down this path, give them the discretion to increase prices but not discount. Measure and celebrate those that get the best price for the value your company offers.

 

 

 

 

Increasing Prices and Crossing the Line of Rationality…


Steam From Ears

Nobody likes a price increase and nobody likes a nasty surprise. So why is it that most companies insist on delivering their price increases as a nasty surprise.

The trouble with increasing prices to regular existing customers is that they have the strongest of benchmarks upon which to base their judgement of your new price…. namely the price you used to charge them. The issue then becomes, not whether the product constitutes value at the new price (in reality a few percent difference in the price is unlikely to fundamentally make the value unappealing), rather that you have had the temerity to move the price.

So logically what you want the customer to do is make a rational evaluation of your product at the new price and say to him or herself  ‘It is not worth risking moving my business for a couple of percent’. The closer you can get to ambivalence the better. We call this Staying the right side of the line of rationality.

What many companies manage to do is drive their customers across to the wrong side of the line of rationality by making a price increase a nasty surprise and bouncing it on the customer at the last minute. Remember those emails or letters that start ‘Dear Customer…. due to cost pressures beyond our control…. with effect from the first of next month…’ You can almost imagine the supplier sending them out then taking the phone off the hook and hiding under the desk.

On the wrong side of the line of rationality lies anger, a desire for revenge, retribution and rash decision making. We have seen customers cut their noses off to spite their faces by shifting their business hastily to an unsuitable alternative supplier.

The trick to implementing an increase is to do it slowly and gently. Drop hints well in advance that the price in on the move without saying when and by how much. Use the passive voice to depersonalise the action “Price changes are likely to happen in the new year”. Use all communication channels open to you to lodge the notion of an increase in the customer’s head without giving them a chance to argue the detail.

If you place a sufficient time between announcement of the intention and final confirmation, then even those customers who were furious at the outset will have had time to let the steam out of their ears.

People worry about competitors hearing about the increase and taking advantage. In most markets your increase will go unnoticed. In any case any sensible competitor would take the hint and raise their prices too. (PS Don’t call them and suggest this. Collusion is illegal)

 

 

Pricing like you don’t care…


The price someone is prepared to pay resides in their mind, not in your desk calculator and not in your head. This little story shows how when your mind is free from the angst of winning the business you can often get a better price.

Yesterday I was with some customer-facing staff from one of our clients talking about real-life situations where they had managed to get a customer to pay a little bit more.

One of the women described an enquiry that had come in from a customer she had dealt with in the past. She didn’t like him. He was always brusque with her and whenever he had a technical question he demanded to talk to a man as he assumed that her gender precluded her from understanding the technical products she had been selling for years. You can imagine how annoyed this would make a strong and capable woman like our friend.

His second mistake (the first; being rude to her previously) was the barrage he let fly at her to make her understand how just how urgently he needed the product. Having made his point he put the phone down without so much as a please or thank you.

The enquiry was for a product she knew well and could acquire for him quickly and cheaply. All she had to do was to decide how much he should pay.

She added her usual mark-up and looked at the figure. She remembered how rude he was to her… and she added a bit more… then she remembered how desperate he was… and she added a bit more… then with a smile, she pictured him with steam coming out of his ears when he realised that he had no choice but to buy from her…. and she added a bit more.

After letting him stew for ten minutes or so, she called him back. Putting on her best telephone voice and a knowing smile, she told him that she had managed to track down a supply of the product he needed so desperately and she would pull out all the stops to get it to him the same afternoon… then she told him the price (now about four times as much as she would have normally charged). It was still a relatively small amount in his scheme of things and the value of getting the parts to him the same afternoon was that he could get on and finish the job. He didn’t flinch. He placed the order and for once actually thanked her.

There are several morals to this story:

Firstly, don’t be rude to suppliers’ staff if they have discretion to set prices.

Secondly, for people in a hurry time is money and they will pay to save it.

Thirdly, and most importantly, becuase she really didn’t care whether he bought from her or not, her desire to make the sale was taken out of the equation…. all that was left was his desire to buy. It turned out that his desire to buy could be measured in a price that was four times what she would have charged to a customer whose business she really wanted. This means that you should concentrate on what is in the customer’s head not yours… how is he or she benchmarking your price, what are the circumstances of the purchase, what value will he or she derive from the product (including the service you can give), does he or she know where else to go?

I am not saying that you should price customers based on their attitude, although I have a sneaking admiration for her approach. However what this does show is that a polite customer asking for the same product in the same circumstances would have also probably paid four times more than the normal mark-up. It is only when you are genuinely ambivalent about winning the business do you actually push the envelope on price.

Have you ever priced a customer to go away only to find they didn’t?

 

 

 

 

 

 

 

 

A Definition of Small Print… and how it wrecks customer relationships.


Whilst font size could be used as a measure, a more workable definition of what constitutes ‘small print’ is the stuff you hope the customer doesn’t read until you point it out to them.

“It is there…in writing… you cannot say I didn’t tell you”

This kind of discussion nearly always happens when the customer is looking at a copy of your invoice and has steam coming out of his or her ears. Pointing out the reason for the misunderstanding hidden in the small print may force the customer to settle the bill, but is almost guaranteed to send them looking for another supplier. All you are actually saying to your customer is “See.. you are too lazy or stupid to read everything I send you”. Insulting customers is never a good strategy.

We work on the principle that an invoice should not contain any nasty surprises for the customer… if it does, this is a failure in your communication. The golden rule of communication is: If someone hasn’t understood something it is not that they are thick, it is that you have not communicated properly.

Sales and marketing people like to live in ‘large print’ world… i.e. the stuff you hope the customer does read. Stuff about how wonderful your product is, how nice and clever your firm is and what fantastic value they will recoup by spending money with you.

In between the worlds of ‘large print’ and ‘small print’ we believe there is a much underused form of communication. For want of a better term, we call it Nuanced Large Print.

Whether in proposals, emails, website copy or literature, this is where you manage the customers expectations. This is where you subtly point out under what circumstances the invoice might be more than the headline figure in the large print. This is where you sow a few gentle seeds telling them what is included in the price and what will be extra. It contains phrases like:

“The cost for the standard product is £X. We can of course provide many kinds of bespoke packaging and will be happy to work out a cost for you.”

or

Assuming that we are looking at a single division of the group, phase 1 of the project will cost £X”

or

Based on the current specification we can complete the work for £X. We can usually accommodate minor changes in the layout. If you want to alter anything, please let us know as soon as possible so we can see if there is a cost implication before proceeding”.

These are not hidden away in the small print, they are there right next to the large print price. They are couched in open and honest terms and crafted to sound professional and positive.

There may be people in your organisation who get on their high horse when a customer complains about something they should have spotted in the small print….’It’s their own fault… they should have read the terms and conditions!!”. These are usually people who are not responsible for next years sales to the customer in question.

I am not saying you don’t need terms and conditions…. but you should work on the assumption that their only practical use is as something to give to your lawyer to argue over with their lawyer.

 

 

The Difference Between a Brand and a Label…. a pricing guy’s persepctive.


There is a difference between a brand and a label.

Dog in a bag

A brand comes with a reassurance of quality. Put simply; the consumer subconsciously realises that it is too dangerous for a company with a long standing reputation to produce anything that might trash that reputation.

A label is a way for simpletons to show other simpletons that they have more money than sense.

It is easy to tell the difference: Whilst a brand may be visible at the point of sale, it is not necessary for it to be visible after the purchase is made. In other words if it is emblazoned on the outside of the goods in letters four inches high, it is a good indicator that the item is intended for simpletons (and may be fake anyway).

PS …Just been out and measured the size of the letters on my Mercedes and thankfully they are not four inches high!

How to overcome the tyranny of tenders


The tender is a devilish device designed to cynically negate all the carefully crafted embellishments of the salesperson and all the wonderfully concocted unique propositions of the marketing department. However they are about as much use in choosing a supplier who will give you long term value, as a beauty pageant is as a means of choosing a life partner.

In the eyes of a procurement professional, a tender makes all other things equal so that the suppliers can be focused on sharpening their pricing pencil until it is little more than a well-chewed stub… so short it can barely be clenched twixt finger and thumb.

So how do you win business is in the face of such a soulless adversary?….

The first thing to say about tenders is, that if the first time you hear about one is when the request arrives on your desk, then you should assume that you have already lost (Sorry if this sounds rather like the old joke about the lost tourists who stop to ask a farmer for directions and get the reply ‘If I were you I wouldn’t start from here’)

You need to consider how a tender comes about to understand how to tackle it. In instances where there is already an incumbent supplier, the technical part of the tender document will be written based on the product or service they are already getting. Unless they have a burning desire for change, what in effect they are asking for is more of the same please… but cheaper’.

Because the document assumes there is only one way to provide the product or service, you have no way of registering that yours has an advantage and that they will need to accept some risk or cost of change….Also I have never seen a box in tender documents asking you to put in why they should pay more.

So, turning hindsight into foresight this is how you go about it:

  1. Identify all the potential customers that you think could especially benefit from your product or service….regardless of where they are in the tender cycle.
  2. Research them like hell and set about building contacts at as many levels as possible. If there is not a tender in the offing they should be more inclined to talk to you.
  3. If you are successful in making contact, use your very best discovery skills to understand the world from their point of view…How they make their money, what’s important to them, what makes the individual decision-makers tick, what gets them worked up.
  4. Gently and subtly, without being rude, point out what they are missing by using the incumbent supplier and make sure that you are on the next tender list. If they can see that you have invested time in them it would be mean to exclude you.
  5. Turn up the volume a tad just before they start to draft the technical section of the next tender. The aim is to have it written it in such a way that only you can fulfill its requirements.
  6. Make sure that they see value in doing things differently and expect to pay more for this approach.

A tender is not the time to do your selling, it is a time to remind them of the (very subtle) selling you did months if not, years ago.

If you are going to have to undergo the somewhat degrading spectacle of appearing in a beauty pageant, it probably helps if the judges already know you and you have been out on a few dates together.

I know this doesn’t help you win the tender sat on your desk today, but it should help you win some a couple of years hence.

The Moral of the Story is simple…. be proactive not reactive. Put the first step in place today. If you want a rich seam of business to mine in the future, make it someone’s job to find and engage targets now.

Believe me, you will thank yourself (and possibly me) in 2-3 years time!

…of course we can help, if you need to build this capability.