How to Establish the Optimal Price for Your B2B Offering

pricing b2b marketingRecently we wrote a blog post, “Don’t Make This Mistake When Value Pricing,” about the mistake of using a value calculator to set price. Interestingly, the ideas in this post sparked a spirited discussion in one LinkedIn group about all kinds of issues related to pricing. One of those issues was how exactly pricing should be set (another issue was who should set price, sales or marketing, which we will address in another post).

First, let’s examine some of the negative effects of both high and low pricing.

Pricing Too High

Pricing too high has at least four negative effects.

  1. You might discourage customers who are on the fence from buying from you because your price is extracting too much of the value you created.
  2. You might encourage competitors to undercut your price.
  3. You’ll fail to gain market penetration.
  4. Your sales cycle will get lengthier and closing deals will become more difficult, which means the cost of serving your customers will go up.

Pricing Too Low

Pricing too low also has negative effects, for different reasons. When you price too low you trade whatever market share you gain for lower margins, which means you’ll have less money available to serve the customer and also less money to develop new features and capabilities. Although you might grow your total sales with lower pricing, you’re not optimizing profitability because you’re limiting your ability to improve your offering and sustain growth over the long term. (For some related thoughts on this topic, see our previous post, “How to Stop the Price Discounting Spiral”).

The Goal of Pricing: Maximizing Profitability

The goal of pricing is not to achieve target market share, obtain a desired margin above your costs, or follow the price set by competitors. The goal is to maximize the long-term profit of your offering, based on whatever value your offering provides to customers.

In other words, pricing should not be driven by any constraint except one and that is: what is the price that will deliver the highest profit over the life of the offering? If that price is in the middle of the pack, then that’s the best price for you. Similarly, the highest or lowest price might be the right answer.

Of course, that is easier said than done. To predict the price that will deliver maximum profitability, you need to take into account such factors as:

  • How differentiated is your offering?
  • How sustainable is your differentiation?
  • What alternatives do your customers have to solve the problem?
  • Do you really deliver as much value as you believe you do?
  • How price sensitive are customers (how steep is the demand curve)?
  • How will competitors react to your price?
  • Will your price cause competitors to enter or exit the market?
  • Will your price encourage customers to find new, alternative approaches to solve the problem?

Of course, the answers to these questions are not always readily available. Even though your goal should be to maximize long-term profitability, it’s often hard to do since the required information is sometimes imperfect. I’d argue that the answers to the first two questions above (how differentiated and how sustainable is your offering) are the most important and should be the focus of your analysis. If you get those right and fill in the rest with the best information available, you will be well on your way to setting the “right” price.

How do you set price? Share your thoughts in the comments section.

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[Image via Flickr / David Muir]

What is the Value of Your Reputation in B2B?

value reputation B2B

Years ago, people used to say that, “No one ever got fired for buying IBM.” Because IBM had such a strong brand and reputation, it was considered a no-brainer to purchase their offerings — if you were the purchasing manager, an IBM product would always make you look good to your colleagues and managers. Whether or not that was actually true, the belief existed that IBM was the best. Therefore, IBM enjoyed great sales and strong customer loyalty.

If you’re like most sellers and marketers, you truly believe in your company and your offering. You might also believe that customers buy from you on the strength of your reputation. Clearly, having a great reputation is a good thing. But we always encourage marketers to push deeper and talk with customers to find out what defines your reputation. Sometimes that requires asking customers several times, in several ways, what they value about your company and your offering. For example, the dialogue could go something like this.

Marketer: Why do you buy from us?

Customer: Because you have great reputation. 

Marketer: What does that word, “reputation,” mean to you?

Customer: We trust you.

Marketer: What specifically do we do that you trust?

Customer: You always deliver on time.  

Marketer: And how does that impact your business? What would happen if we did NOT deliver on time?

Customer: We’d have to carry more inventory or we’d have to delay production of our product. Both of those options would create more expense for us.

As you can see, in this case “reputation” is another way of talking about this company’s ability to help a customer save the expense of carrying more inventory or delaying production. That’s a measurable business impact. Here are some other examples of business impacts that might be code for “reputation.”

  • Your company has a global footprint so you can support the customer wherever they are.
  • Your company has a good support network so you can reduce the customer’s downtime.
  • Your offering lowers the risk that the customer’s product will fail.
  • Your company can offer services that help the customer perform faster or more efficiently.

Why do marketers need to define the business impact of “reputation?” What happens if, one day, a competitor calls one of your longstanding customers and offers to deliver a product of equal value for twenty percent less than what the customer is currently paying you? For a twenty percent price cut, the customer is probably going to take a meeting to learn more. In this case, knowing the business impact of “reputation” will probably help you make a convincing case to the customer to keep their business with you.

Here’s another example. Let’s say a customer tells you repeatedly that they “trust you,” and you never dig any deeper to find out what that means. One day the customer decides to move operations to Canada and they call to tell you they’ll be using a local distributor instead of your services. When you ask what happened to trust, they say, “We trust you to ship locally — you’ve always done a great job with that, but now that we’re moving, we want a local supplier.”

If you can’t get to the business impact of “reputation,” you’re always at risk to an uncontrollable shift in operations or a competitor’s lower price. If you want to figure out what your reputation means to customers, start with a hypothesis. Ask yourself what value you deliver. If you were not around to supply your product or service, how would the customer be able to perform for his customers? Talk with customers and continue to ask, “Why?” or “What does that mean to you?” until you have a clear sense of the value you deliver.

Do you understand the value of your reputation? Share your thoughts in the comments section.

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[Image via Flickr / Raymond Bryson]

How to Stop the Price Discounting Spiral

spiral price discounting

One of the oldest tugs of war between salespeople and customers is price objections. A moderate level of back-and-forth on price is to be expected. But in some companies, a rampant culture of price discounting takes hold and starts to create other, bigger challenges.

Let’s first look at some examples of common circumstances that often lead to price discounting.

  • It’s the end of the quarter and the sales team is not going to meet sales goals.
  • There’s an economic dip in your industry and sales have been sluggish for an extended period.
  • There’s a structural component to the compensation plan that rewards discounting.
  • Some element of your pricing plan is confusing for reps and/or prospects.
  • You have a surplus of inventory that’s about to become obsolete or otherwise unmarketable.
  • Your competitor is offering endless discounts and you feel you have to match those discounts to keep from losing new and existing customers.

No matter what your reasoning is, continual price discounting is going to end up creating two major problems for you.

PROBLEM #1: You will trade a temporary uptick in revenue for a substantial reduction in profit.

Almost all sales leaders are evaluated on their ability to post revenue gains each quarter. However, the more sales reps discount on price, the more units they need to sell to achieve those revenue gains. This can create an endless cycle of sales reps chasing long-shot prospects in lieu of finding high-value customers. Also, lower margin per deal. A lack of profits is going to ultimately affect other critical areas, such as research and development (R&D) and marketing.

PROBLEM #2: You will move your offering towards a commodity.

Most companies want to avoid competing on price alone. When you do this, your business becomes a ruthless race to produce products cheaper and faster. For many B2B companies, it’s nearly impossible to produce a quality product at extremely low margins. If your offering gets cheaper but shoddy, your brand will take a beating.

The other problem with selling in a commoditized market is that you are now courting and creating relationships with customers who have a transactional mindset and want short-term gain. In general, these are not the kind of customers who will remain loyal to you for years or offer much in the way of upselling or cross-selling opportunities. Key accounts and anyone willing to pay a premium for higher value will go elsewhere.

How can you avoid the pitfalls associated with price discounting? Here are three tips to get started.

1) Align your compensation plan and any incentives programs with strategic goals.

If you reward sellers purely on volume, it’s only logical for your reps to offer discounts. This is a sign of a price discounting culture, which means it’s up to leaders to take the reins and steer the company in a more balanced direction. Perform an audit of your incentives programs and compensation plan and make sure to encourage behaviors that will help you meet your strategic initiatives.

2) Train reps to talk about value.

When reps get hammered on price frequently, they need a bigger toolbox than the standard role plays on how to overcome price objections. Teach them how to strategically and systematically move their customer conversations away from price and in the direction of value. They should be able to uncover the measurable financial benefits that this customer cares about. This can then open a discussion about what the customer would be willing to pay for those benefits.

3) Invest in an ROI tool.

An ROI tool can be of invaluable service when it comes to having conversations around value. Even the act of making an ROI tool available on your website for prospects can be transformative. How so? Any prospect that takes the time to interact with an ROI tool online is already thinking beyond price and about value. This is an organic way to help your sales team center the conversation on value and sidestep common objections about price. In addition, a discussion about ROI is just more compelling than a flat price negotiation.

Use these tips and eliminate price discounting or at least keep it to a reasonable level in your organization. Your sales reps shouldn’t feel they have to offer constant discounts in order to make sales. Support them properly with the right tools and training, and you’ll soon start to see the payoff.

Do you discount price? How do you respond when customers ask for discounts? Share your thoughts in the comments section.

[Image via Flickr / luke chan]

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Don’t Make this Mistake When Value Pricing

price setting

“Can I use a value calculator to set my price for my customer?”

I hear this question a little bit less frequently than I used to. But at times people still come to me and say, “I want a value calculator so I can figure out how much to charge the customer.” I then ask, “Why?” and they say, “Well, because we are implementing a value pricing strategy and we want to know how much value the customer receives so that we can charge as close to that value as we can.” Because I know this isn’t going to end well for them, and despite the fact that I am in the business of selling value calculators and ROI tools, we never do these deals.

Here’s what’s wrong with that mindset. Customers will see through the ruse and resent you for not being forthcoming. And even if it worked one time with one customer, it’s not going to work a second time with that same customer. So now you have customers that don’t trust you and won’t spend another penny with you. (By the way, this ugliness then gets reflected back on us and is why we don’t do these deals.)

How to Set Your Price

We all want to maximize our pricing. However, pricing has to be done within the constraints of marketplace competition and competing alternatives, which include the customer doing nothing. Ideally, before you go to market you would perform a strategic analysis of your offering’s value and take into account the constraints just mentioned. However, you can conduct this exercise at any point during the product’s lifecycle. What you are trying to uncover is 1) where your offering’s value is unique, and 2) at what point your offering’s net value exceeds the net value delivered by your competition and competing alternatives. For more detail, read my earlier post The Value Lifecycle: Establishing Your Value in the Market.

When a Value Calculator Can Help You Set Price

If the customer answered my “Why?” question above with, “Well, we want to implement gain-sharing contracts and share the risk and reward with our customers,” that’s a different story. In this case, a value calculator or ROI tool can be very helpful in establishing the value of the shared risk and pricing. A gain-sharing contract can’t even get off the ground if the value dimensions and measurements can’t even be agreed upon. This is where a value calculator can come in handy – to define what’s being measured and how it’s being measured. An ROI calculator can be used to model various pricing scenarios. In general, the greater the price agreed to by both parties, the less the vendor’s upside is.

How do you set your price? What challenges do you face? Are you using gain-sharing agreements?

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[Image via Flickr / JD Hancock]

When Demos Sabotage the Sale

sales demo

Demos are a fundamental part of the sales process. Not only are they a great way to engage prospects, they frequently open the door to a deeper conversation about how you can collaborate to solve the prospect’s most pressing business challenges.

That said, the demo can definitely sabotage sales — particularly for anyone selling complex offerings with long sales cycles. Specifically, the number one mistake I see is showing the demo too early in the buying cycle. Sometimes it’s the sales professional who pushes too soon for a demo. Other times, the prospect asks to see the demo, and the salesperson takes the request as a good sign and leaps at the request. Based on my experience, however, you always want to pace yourself when it comes to the demo. Here are two reasons why.

1) You might not be dealing with a decision maker.

Generally, decision-makers tend to care less about demos and more about how you can solve a business problem. In many cases (particularly in the software world), the person who wants to see the demo is the person who will actually be using your offering. If that’s the case, they’re just curious to see how it works and whether they like it.

2) You become trapped by objections about features or superficial aspects of your offering.

When prospects watch demos, you want them to be in the right frame of mind. Show them a demo too early, and they’re highly likely to focus on the aspects of your offering that they don’t like or perceive as imperfections. This is how you get caught in a web of such silly objections as, “This tool won’t work for us because that button is green and our standard is blue.”

Before you do the demo, you want to be sure you’ve laid the proper groundwork for a collaborative mindset. That means waiting until prospects are 1) aware of their business problem and how much it’s costing them and 2) are committed to solving that business problem. At this stage, they’re much more likely to focus on why your tool is a compelling solution to help them solve their challenges.

One metric I favor looking at is the demo-to-close ratio. The desired value varies quite a bit by industry but you can always measure it against other salespeople in your organization. I’d bet that top performers have lower ratios. Salespeople who throw demos around like candy at a parade are wasting their time and maybe even turning prospects off.

So, when is the right time to show a demo? Obviously it depends a bit on the nature of your solution and the sophistication of the buyer. For complex sales, I generally say that anyone who asks for a demo is likely not a decision maker and should be treated accordingly. The right time to show a demo is when you know you’re talking with someone who is interested in business outcomes rather than the features of your offering. If that’s not the case, use the right questions (for example, “Who will be involved in the decision to move forward with this? Can we set up a meeting with the team?”) to bump the conversation up the decision food chain.

What are your thoughts on the right time to show a prospect your demo? Share your thoughts in the comments section.

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Is the ROI of Your Offering “Too Good to Be True?”

ROI believability

Do you ever downplay the value of your offering because you’re afraid prospects or customers won’t find the estimated ROI believable?

I’ve had many discussions with B2B salespeople who say they tone down value as soon as ROI calculations start to become “too high.” For example, let’s say a salesperson’s solution costs $1,000, and their ROI calculations show that the prospect will receive $100,000 worth of value. Feeling that the resulting 9,900% ROI is unbelievable, the salesperson will say, “We don’t really deliver $100,000 of value. We actually deliver $10,000 of value.” The salesperson believes that a 900% ROI sounds more believable to the prospect.

To me, that’s ridiculous. If you charge $1,000 for an offering that delivers $100,000 of value, yes, the ROI is certainly huge … but that doesn’t mean the ROI is wrong or unbelievable.

There is no such thing as “too high” of an ROI. If you’re delivering very high value for very little price, there are one or more factors at play.

  1. Your solution is underpriced (and you should be charging more).
  2. Pressure from competitors keeps you from charging more.
  3. Competing alternatives (other than direct competitors) keep your price down.

For example, in our business of selling ROI tools, we often promise a very, very high ROI. But one of the limiting factors in setting our price is that prospects believe that they can always build a spreadsheet of their own. In other words, a homegrown spreadsheet is usually their next-best alternative to investing in a professional ROI tool. Of course, we know their homegrown solutions won’t be as good, but that’s typically something our price will be compared against. So even though the ROI on our offering is extremely high, we can’t set our price based on ROI alone, because that likely will drive customers to pursue cheaper alternatives.

If you’re truly worried about the believability of your ROI, remember that ROI is simply a calculated number, which means that you can and should show your math to the customer. Walk the customer through the numbers, step by step, using a good ROI tool. At each step, you can ask the customer, “Does this look realistic? Is this value real and do you believe that it can be achieved?” That way, the customer can see exactly how you arrived at such a seemingly “unbelievable” number. Bear in mind that this is the customer’s business case — not yours. You’ll be more persuasive if use the customer’s own numbers (not generic numbers or examples). Also, make sure customers believe in their own numbers; that way, they’ll also believe in the value you’re estimating.

Remember, too, that your ultimate decision maker is very likely the CFO (or another individual with fiscal responsibilities). If you downplay the value of your offering to make it seem “believable” to one stakeholder, you still might get shot down when your proposal reaches the CFO’s desk, because he or she will be looking at the larger picture. Specifically, the CFO will be comparing the business case (including ROI, net-present value, and payback period) to that of other projects and making a decision on which projects to fund. If there are other projects with stronger business cases, your project may not get funding approval.

If you believe in the value of your solution, you should be selling that all day long. Don’t discount based on what you think the customer’s reaction will be. Don’t even discount if the customer comes back to you and actually says, “That’s too high of an ROI.” Do the analysis with the customer and then let the customer tell you whether or not the value is realistic.

Has your ROI ever seemed “too high?” If so, how did you deal with it?

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Value-Based Content Marketing Improves Lead Conversion Rates

the best

Why do B2B marketers invest in producing blog posts, white papers, reports, articles, and videos? The general aim is to attract an audience to their website so they can engage them and (hopefully) turn them into customers over time.

As I wrote last week, I believe that marketers often don’t consider ROI tools and value calculators when planning their content marketing mix, and I think this is a missed opportunity. If marketers want a high volumes of well-qualified leads, then my view is that value calculators and ROI tools can often pack a much bigger punch than other forms of digital content.

I’m not saying that traditional modes of content marketing aren’t important. But I don’t believe blogs, articles, and white papers have the power to deliver well-qualified leads in the same way that a targeted value calculator can. Someone who engages with a value calculator is demonstrating an interest in understanding the problem that you can solve for them and evaluating the economics of your solution to their business. To me, that indicates a serious buyer. Someone who wants to read a white paper might be a serious buyer — on the other hand she might just be looking for general information about that topic.

When you make a value calculator available on your site, you typically want to allow them to use it to evaluate the economics of your offering in an open fashion (not gated). In order to download the business value report generated by the calculator, though, you typically want to capture their contact information before providing the report. Someone who is interested enough in the analysis to provide their contact information to get the report is more likely to be thinking about how your offering will impact his or her business and is a more serious prospect. By definition, this person is probably a better and more qualified lead for you than someone who downloads a white paper or visits your site to read general content.

Of course value calculators are just one piece of an overall content marketing strategy. Blog posts, articles, and white papers, etc. help establish your brand and position you as an authority. (Those assets are also likely to drive more general traffic to your site.) However, I do think ROI tools and value calculators can help companies capture better-qualified leads than other types of content. If you can deliver better qualified leads to sales, then salespeople naturally spend less time chasing leads who have little or no intention of actually making a purchase. The more time salespeople can spend in conversations with serious prospects, the more likely they are to close more deals. Who wouldn’t want that?

What types of content do you include in your marketing mix? Do you use value calculators or ROI tools? Share your thoughts in the comments section.

[Image via Stuart Miles / FreeDigitalPhotos.net]