Ciao amici. It’s good to see you again. For those of you who have joined us for the first time, organizations in the know call me The Godfather of Growth. Each month, we get together to talk business – how to grow sales, manage your people and take your business from a small operation into one that the other capos will look at with envy. So grab a double espresso and listen up.
This month we are going to talk about pricing. Have you given enough thought to how you price your offerings? Too often I see companies take their costs and then mark up what they sell so that they are at an acceptable margin threshold. Then they publish their price list and tell their sales teams to go get orders. While thinking about what your margin target should be is important, it is only the one step toward pricing that will drive growth – and it is definitely not the first step you take. Here’s some advice: start with thinking about who buys your product. What are their realities? How do they operate? How does cash flow into their business? Is it a steady flow or seasonal? How do they do business with their customers? Are their customers paying in full with cash at the time of purchase or are they paid over time?
Next, think about your offering. Is it something that solves a pressing business problem for your prospective buyers? Is it something that they would make a real impact on their business? Can you quantify what that impact will be? Can you show them that they will get an attractive return on their investment in your offering? And perhaps the biggest question you need to answer is: is your offering considered mission critical?
Before you take any steps forward with pricing, think long and hard about these things because the answers to these questions can provide valuable insights on how you need to price in order to capture customers quickly.
Let’s look at a couple of real world examples. Two of the members of my sales family focus on the healthcare market. Both have very good products. When the first of these companies came to me, they had a collection of products they sold individually. When they spoke with a prospective customer they focused on selling them one of these products. Sometimes during the sales process, they could add another one of their products to the contract but as a general rule they sold them individually. As a result, they had a product offering and pricing model that was relatively complex. You could buy product A for $10,000 and a monthly charge of $150. Product B, which was closely related to product A and even relied on the same content management software, sold for $4500 and a monthly charge of $75. Product C, which also used the same content management software, required no upfront payment but would add an additional $40/month. The same applied to products D-F. The end result was that few customers bought more than one product and when I got involved and began talking with these customers it became apparent that they weren’t clear about what each item really cost and what their monthly charge might be. To complicate matters even further, no one considered their offerings to be mission critical. To fix this, we did two things. First, we simplified the way they priced by putting their individual products into a bundle since they all relied on the same content management software, this was easy. For a single acquisition price and on-going monthly charge, their customers would get everything they needed. This did two things for them. It made it easier to talk about their offerings as a comprehensive suite instead of a collection of products when they were selling. More importantly, it increased their average deal size because now customers could see that they were getting everything they needed in one neat little package and they saw this as attractive because they could get these products for a whole lot less than it would cost them to buy them individually. As a result, customers felt like they were getting a bargain. Once the work on the bundled suite was complete, we then focused on connecting the dots between the use of their products and the impact it could have on occupancy and resident satisfaction – two major concerns for organizations in the senior living business. They could now make the argument that their offerings were mission critical. The end result was that sales increased more than 40% in one year just by offering bundled pricing and doing a better job of communicating the real business value that their product delivered to their customers’ businesses.
Sometimes simplifying your offerings structure and being able to show that your products deliver demonstrable value and are therefore mission critical still doesn’t unlock growth. This was the case with my second client. Their product was amazing. It featured advanced technology. It solved a number of significant business problems, so it was easy to see that it was mission critical. It was expensive, in excess of $100,000 but the return on that investment was incredibly attractive. Despite all of this, they were only able to capture a hand full of customers in their first year in business. I got involved and began to look at the reasons why. In the senior living industry, organizations are paid mainly by state and federal government programs – Medicare and Medicaid. To get paid, these organizations have to submit data documenting the care they’ve provided and they are reimbursed for that care after the fact. So there is a lag between the cost of their offering and payment for that offering. Consequently, companies who focus on this market have to manage cash very closely. They work hard to preserve it. That’s why so few companies invested in my client’s product. They were not about to part with a $100,000 in cash. Once we learned this, we reformulated their pricing model to one that required a monthly payment for a 36 month term with an automatic renewal that triggered in month 37. This made it much easier to justify the investment, even though the total amount their customers eventually paid was a good bit more than $100,000, because now it was a pricing model that fit better with the business realities of their buyers. In two years, this company grew by a multiple of 88. You heard me right my friends, a multiple of 88. That’s because they were able to find a pricing sweet spot for a product that solved some very salient business problems with demonstrable and attractive return on investment. This is a killer combination and their sales numbers proved that undeniably.
These are just two examples of how to match your pricing and product offerings to your customers’ business realities. As you might imagine, there are a number of additional pricing models and approaches that other companies have found effective. If you are a business leader, I’d strongly urge you to take some time to think about what we’ve talked about today. Have you thought enough about the pricing model you use, how well it matches with your target customer’s situation and if it incents them to buy? Go back to the beginning of this article and work through the questions I posed with your team and with your customers.
Grazie mille for spending time with me today. Remember that you can always find me at dlazzari@delivering.com or if you need my help I’m only a phone call away at 412-973-8909 but be careful what you say because you never know who’s listening. Ciao for now my friends.
©Copyright 2014. Delivering Value LLC. All rights reserved. The Godfather of Growth is a trademark of Delivering Value LLC.
—————————————————————————————————–——–————————– We’d like to thank our sponsors for SBN’s involvement in New Orleans Entrepreneur Week: 365 Connect, Federated Sample, and Peer Partners. Want to be a sponsor? Email Julia@SiliconBayouNews.com! 