Day 5 Afternoon - Dixon, Pricing and Delivery

Lead to Win

Lead to Win

Pricing and DeliveryJune 25, 2009

Fred Dixon, CEO Blindside Networks

Lead to WinJune 25, 2009

Fred’s background in sales

• Co-founded three software companies– Databeacon Inc (sold to Cognos 2004)

– OpenLava Inc

– Blindside Networks Inc

• My sales experience– Large deals (> $10k) with professional services (PS) component

– OEM sales (largest was $250k)

• I have– Raised 4.7M in venture financing

– Hired a US/Cdn sales force (VP of Sales + 4 reports)

– Sold primarily to private/public companies

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Learning objectives

You will know about:• Price strategy and generic pricing approaches• Price attacks

And you will be able to:• Contribute to price decisions• Present, justify, and defend your pricing

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In the beginning ...

• In the early stages, your goal is to create satisfied customers that you can use as references

• Price is a key component of a satisfied customer– Subscription based pricing

• Usually tied to consumption over time

– License based pricing• One time license + support + professional services

• Let’s break down pricing into three phases– Before the sale: Create a pricing model that makes sense

– During the sale: Justify the pricing to the customer

– After the sale: Deliver on the value at the agreed price

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Pricing: The Big Picture

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Research your price

• Factors that affect pricing strategy– Example

• Three generic approaches• Price to capture fair share of value• Drill down into their costs• Fit with the customer’s pricing logic• Take advantage of environmental differentiators

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Factors that affect pricing strategy

Price strategy

BU’s P&L• Revenue growth• Impact of discounts• Cost structure

Competitors’ responses• Price wars• New entrants• New products

• New price strategy

Health of industry

Stage in life cycle

Organizational consensus

Value of offer relative to competitors

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Example

• License• Support• Professional Services

• Example: $10k base with 15 days of PS– Year 1

– Year 2

– Year 3

(Three Generic Approaches)

20% of license/year

$1500/day

$10k + $15k + $2k = $27k

$2k

$2k

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Three generic price approaches

Emerging Growth Mature Decline

Extract

• Premium price

• Differentiated offer

• Creates opportunities for rivals

Yes Yes Yes Yes

Neutral

• Price close to competition

• Prevents price wars

• Compete other than price

Yes Yes Yes Yes

Penetrate

• Low price is primary driver

• Price wars

• Low customer loyalty

• Leads to confusion

No Yes No No

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Price to capture fair share of value

1. Value segment

2. Value levels

3. Segment offers

4. Financial value demonstrated

5. Price

Level1 Offer1 Value1 C1 x Value1

Level2 Offer2 Vaue2 C1 x Value1

… … … …

Leveln Offern Valuen Cn x Valuen

1. Identify targeted value segment

2. Define value levels

3. Determine offer (product, services, delivery etc.) that delivers value for each level

4. Demonstrate value each offer creates

5. Price to reflect value created

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How to determine what customers are willing to pay?

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Drill down into their costs

Supplier’s view of proposed solution

• Advanced HW• IP technology• System integration……

Solution to save 60% of SW budget

Financial value = Save $252 M per

year

Integrate (i) drilled down customer answer and (ii) internal view

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Supplier Question Customer Answer

What do you need? Reliable XYZ

Why? Save SW Budget

How much is SW budget? 70% of project cost

How large is average project costs?

$3 M/project

How many projects/year 200 projects/year


Fit with customer’s price logic

• What each customer is willing to pay

• Relative to competitors• Combination pricing• Foot in door pricing• Transparent pricing• Cost plus

Focus on logic of approaches your customers and you use to set prices, not on absolute price numbers

Show how your price logic supports customer’s price logic

• Other approaches (not covered)• Dynamic pricing

• Variable pricing

• Auction

• Group

• Based on an index

• Regulated pricing

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Take advantage of environment differentiators

Ability to price discriminate increase when:

• Markets are very different from each other

• Customers can’t resell products bought in one market into another market

• Competitors can’t undersell where prices are higher

• Cost of overseeing discriminatory pricing is low

Price discriminate based on:

• Image

• Customer segment

• Location

• Timing

• Channel

• Packaging

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During the sale

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Pricing during sales

• Explore your customer’s pain• Justify your price in terms of their pain• Incorporate price sensitivity• Present you price early!

– Low price sensitivity: take advantage– High price sensitivity: differentiate

• Prevent and be prepared to respond to price attacks

• Defend your price

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Explore your prospect’s pain

Slide 17

Manager

Director

VP $ Impact

$ Impact

$ Impact

$$$Total impact of problem =


Justify your price in terms of their pain

• Focus on the current costs incurred by your customer (as opposed to your features)– You want to show that the status quo (no sale) is not an option

• If possible, describe your solution in terms of reducing their costs– Decisions are easier when it’s cost reduction rather than taking a

risk for a future benefit

• When should you talk about price?

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Present your price early!

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Low price sensitivity:take advantage

Customers’ price sensitivity decreases when:

• Product is perceived to be better

• Product fits well with assets bought previously

• Conditioned to buy from the supplier

• Costs and time required to search for and compare with alternatives are high

• Cost is small compared to total cost

• Cost is small relative to income

• Cost is paid by others

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High price sensitivity: differentiate

• You have many opportunities to differentiate– Educate the customer based on your experience working with

other companies

– Reduce their effort to implement your solution by improving your product and project management skills

– Anticipate and solve problems (reduce risk) for the customer during planning and delivery

– Enable customers to map their position or benchmark their performance relative to others

– Makes sense of information and predict in ways that customers cannot do on their own

• Take every opportunity to strengthen the relationship– Your motto: “We will not permit you to fail”

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Price attack (you or yourcompetitors)

To prevent price attacks:

• Make money for customers, suppliers and resellers

• Avoid encouraging rivals’ price attacks• Alert customers to risks of poor price

quality• Make public your intentions and

capabilities to deal with various types of price attacks:

– Low function, low convenience offer– Same function with large distributor as partner– Unbundled into high-low functionality and high-

low convenience that can be ordered online or phone

– New functionality– Discriminatory, high prices in certain places and

low in others

To respond to price attacks:

• Increase benefits of existing offer, maintain price

• Increase price and improve quality• Ignore those unlikely to gain large

market share• If discriminatory, inform customers in

both segments• Strengthen value chain, enforce laws

and patents • Offer volume discounts with bundled

prices• Reduce price• Retreat from segments and strengthen

offer in others

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Defend your price

• Have three “stands” ready– They are going to squeeze you until

you stop dripping (this is a good thing).

• After three stands, if they still ask for a deal, then say

“If we do _____ would you be willing to do ______?” – For example: they agree to be a reference customer

• Do not reduce your daily rate!– Instead: provide some free days of professional services

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(*) Reprinted from http://www.flickr.com/photos/tico24/57517238/ under Creative Commons Attribution License.

*


Summary

• Always rationalize your price from the customer’s perspective– Determine who is impacted by the current problem you are trying to

solve

– Drill down into the cost of the status quo

• Present your price early– Add value (from the customer’s point of view) to differentiate and

support your price

• Be ready justify and defend your price from– Price attacks, or

– Being squeezed by your customer

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Pricing exercise

• Let’s try applying the pricing strategy to your opportunity

• For each opportunity1. Explain your pricing logic

2. Justify your pricing

3. Defend your pricing

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After the sale

Slide 26


After the sale

Now it’s time to deliver on the value you promised.

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Learning objectives

You will know about:• The importance of project management• Breaking down large projects into two main phases

And you will be able to:• How to manage customer expectations for delivery• Keep a project on track

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Ensuring successful delivery

• Observations:1. A successful reference is created during the implementation, not

the sale

2. Most companies don’t have good project management skills

3. The more you are involved in implementation, the higher the chance this will be a success

• During delivery you can add (significant) value to justify your price now and in the future

• But wait, I’m not a project manager …

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Have an implementation process

• There are lots of processes– Waterfall (good for first project with a new customer)

– Agile development (need a lot of trust)

• Goal: Deliver to customer a high-quality solution on time and within budget.

• Your process should– Clear definition of roles and responsibilities

– Clear phases of delivery with accurate milestones

• Example: Microsoft Solutions Framework (MSF)

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Roles and responsibilities

• Program Manager– Delivery of solution within project constraints

• Product Management– Ensure solution matches customer needs

• User Experience– Enhanced user experience

• Development– Develop to product specifications

• Test– Release after addressing all issues

• Release Management– Smooth deployment and ongoing management

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You Lead

They Lead

They Lead

Shared

Shared

Shared


Two phases

• Split the implementation process into two phases:– Phase I: Planning and design: determine what needs to be

done by whom • 25-40% of overall project effort

– Phase II: Implementation

• If you get pushback from the customer– Say: “Based on our experience, this process is the most cost-

effective way to implement this solution.”

– Analogy of building a house: No builder would is going to start building a house without the architectural plans

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Phase I: Determine what needs to be done by who

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Vision Scope

• Vision/Scope document (short as possible)– Identify the long-term vision

– Define expectations for first implementation (scope)• Capture how the customer measure success

– Identify people for each role

– Capture high-level requirements (attach as a spreadsheet)• Business

• User

• Functional

• Security

• Risk management– Identify risks and plan for management of them (few companies

do this themselves)

Slide 34


Create a project plan

• Take the requirements spreadsheet1. Add a new column (days of effort)

2. Estimate the days for each requirement

• This part is always a challenge for a company– But it’s a very important activity as your company must become

good at making time estimates ASAP

• Before you present the milestones to your customer– Build-in time for internal slippage

• If you are a day early on each milestone: You’re a hero

• If you a day late on each milestone: You are unreliable

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Signoff

• Before you start phase II– The customer can add/remove features and modify the

price/timeline

– Say: “You control the costs by adding/removing features from the spreadsheet”

• Be ready to defend your time estimates

• Get signoff– E-mail is fine

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Phase II: Implement the solution

• Phase II is really “follow the project plan”– Implementation

– Testing

– Delivery

• After you start Phase II– Expect the customer to request changes

– Say: “That’s a good idea, do you want us to add that to this release?”

– If so,• Always discuss costs directly (use e-mail for summaries)

• Spec and bill as a change requests (more revenue!!)

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Account management

• Account management– Your project management skills ensure development remains on

track and risks are properly managed

– Hold weekly meetings and updates with the customer

• Invoicing– Invoice against milestones

– Never invoice for something that you don’t have approval for

• Your motto: “We will not permit you to fail”

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Delivery summary

• Capturing the requirements, user scenarios, and specs will ensure you build what the want

• Having your own implementation process enables you to – Lower the risk for your customer

– Manage the deployment

– Protect against feature creep

– Legitimately charge for changes

– Setup for deployment of your next release

• Successful delivery = successful reference

Slide 39


References

• Bosworth, M.T. (1994). Solution Selling: Creating Buyers in Difficult Selling Markets, McGraw-Hill.ISBN: 978-0786303151

• Microsoft Solutions Framework 3.1 (microsoft.com)

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