Notes on Pricing with Confidence

Following are my notes on Pricing with Confidence: 10 Ways to Stop Leaving Money on the Table by Reed Holden and Mark Burton.

  1. Rule One: Replace the Discounting Habit with a Little Arrogance
  2. Rule Two: Understand the Value You Offer to Your Customer
  3. Rule Three: Apply One of Three Simple Pricing Strategies
  4. Rule Four: Play Better Poker with Customers
  5. Rule Five: Price to Increase Profits
  6. Rule Six: Add New Products and Services that Give You Negotiating Flexibility and Growth
  7. Rule Seven: Force Your Competitor to React to Your Pricing
  8. Rule Eight: Build Your Selling Backbone
  9. Rule Nine: Take Simple Steps to Move from Cost-Plus to Value-Based Pricing
  10. Rule Ten: Price with Confidence: Remember Who You Are

Value is the basis of business exchange. You provide products and services to customers so they can build their own value. In exchange, they take a part of that value you helped them build and return it to you in the form of price. That’s the way business is supposed to work. Here’s the million dollar question: Do you understand the value you provide for your customers? If you don’t, how can you set prices rationally, much less have confidence in the prices you set?

In too many cases, price is the only thing that customers can differentiate so price is the only thing salespeople sell.

Customers may not always be right, but they are always powerful. It’s important to know the difference.

The real challenge is getting salespeople and managers to have more confidence in their pricing. This requires salespeople and managers alike to resist undermining prices with short-term, panic-oriented tactics.

We got a call from a company that seemed to be interested in our services. So naturally we leapt at the opportunity and wrote a solid proposal with what we felt was fair pricing. The prospective customer responded by asking for a lower price. And when we lowered the price, he asked for a still lower price. After three cycles, we decided to change our approach. We then asked the prospect a question we should have asked in the beginning. “What do you know about us and how confident are you that we can solve your business problem?” His response was honest. “Nothing and not much.”

That exchange led to a different conversation and a different proposal. The proposal focused on our understanding of the prospect’s business pain, how our services would alleviate that pain, and how the prospect’s business would directly benefit from the value our services added. A day later, with no more talk of discounts, the prospect gave us the engagement.

If all you talk about with customers is price, there is no price that is going to be low enough. Price is important, but there are considerations that must come first. We learned to start the conversation with value.

When we started a new business four years ago, we received a call from a senior executive at a large electronics company. She wanted a quote to train and prepare a sales team for a negotiation with a tough price buyer that purchased over $1 billion of product from them. We asked what her budget was. When it was lower than our normal fee for such an activity, we did two things. First, we gave her the name of two consulting firms that could meet her budget, one in her immediate area. The second was to ask her a question. It was an important one: Was she thinking about this exercise as an expense or as an investment? She paused but answered honestly that she was thinking about it as an expense. That gave us a chance to talk about how it should be viewed as an investment and that there would be a probable payback on that investment. We booked the deal and went on to do a number of activities with that company.

When your salespeople get asked for a lower price, what is their response? We suggest it should be some variation of “What do you know about us and how confident are you that we can solve your business problem?”

Ask the question that you’re afraid to ask because it may appear stupid: Why do you use our products? Listen real well to their answers. If these customers believe in your company, then maybe you had better believe in your company, too.

The starting point in being confident in your price is being confident in your value. That starting point begins at the top of the firm with the leadership and senior managers.

The software industry is rife with examples of discounting run amok. Just before Oracle acquired PeopleSoft, both companies were offering discounts as high as 80 percent to close deals. The problem is that customers quickly figured out that it’s in their interests to hold their orders to the very end of the quarter. Subsequently all of the business gets closed at a discount. To make matters worse, Oracle, the winner in the deal, blamed the problem on their customers: “... the tendency of some of our customers to wait until the end of the fiscal quarter or our fiscal year in hope of obtaining more favorable discounts.”1 Can a company’s misfortunes in pricing ever be the customer’s fault? We don’t think so. Oracle simply trained its customers over time to expect large discounts.

The point is that you don’t want to fire your customers; you want each one to be profitable. It’s the willingness to fire them that makes the point and builds pricing power.

Within the global view of possible markets, identify which customers and markets you cannot serve at a profit. If some customers are marginally profitable, but others are significantly more profitable, is your company better off serving the former, or are you better off focusing resources on the more profitable opportunities? It’s a matter of defensive strategy. It’s simply better for you that unprofitable customers are served by your competitors.

To better highlight the problem, cost accountants have developed what they call the “20-225” rule. Professors Cooper and Kaplan at the Harvard Business School have shown that once the cost of supporting customers is taken into account, only about 20 percent of customers are profitable. In fact, these 20 percent of customers account for 225 percent of the profits.

The reality is that serving a large percentage of customers represents a loss for the business. The challenge, of course, is for a company to distinguish between the customers it can serve at a profit and those it cannot.

“The essence of strategy is the efficient allocation of scarce resources so as to achieve maximum return.”

We were recently contacted by a senior manager of a company to do consulting work. During one meeting, the client asked if we were qualified to do elasticity research. Our answer was “Yes, but elasticity research is not what you need.” We could tell the manager wasn’t used to being told that what he asked for wasn’t really what he needed.

Dell is learning what most other high-tech firms learned in the market downturn of 2000—that price cutting works if you have a cost leadership position in growth phases of market cycles. If you don’t have the cost leadership position and/or the market slows down, you need to switch from a penetration prices strategy to a neutral one.

If the company isn’t developing new products or technologies, they are going to see decreases in both sales volume and profits.

NOTE: This is how a company can "fall off a cliff " i.e., making lower margins on fewer sales results in a parabolic decrease in net income.

You can’t have confidence in your pricing until you have confidence in the financial value that your offerings create for customers. Even though many managers are convinced they can’t get this information, the reality is that most of your customers are eager to tell you. All it takes is asking the right questions and being willing to listen.

Salespeople forget that this is all just a poker game. They take the safe route and offer a discount.

The key to winning the pricing game is to (1) create a range of low-to high-value offerings, (2) provide quantifiable value propositions and sales tools that define value at the level of the individual account, and (3) create pricing strategies and price levels that capture a fair share of the value that you create. Do these things well and pricing confidence soars.

There are all kinds of value. We are referring exclusively to financial value. More specifically, financial value refers to profits that result when costs are subtracted from revenues. Regardless of how customers talk about the subject, in a business-to-business context, dollars that fall to the customer’s bottom line when it uses your offering is the true measure of financial value. Businesses are profit-making entities. Their actions and who they purchase goods and services from are driven by a desire to improve profits. They accomplish this by purchasing from suppliers that excel at helping them meet their profit goals. The equation is simple: Decrease your customers’ total costs and/or increase their revenues and you increase their profits. Now we’re talking about a definition of value that everyone understands.

If you lack the ability to connect what benefits your offering delivers to how it will improve profits for your customers, you are operating at a huge disadvantage. If you can’t articulate your value in dollars and cents, you won’t get paid for it.

One of the objections most frequently raised when we recommend asking customers about how they define value and how a supplier contributes to it goes something like this. Why would our customers share this kind of information with us? They’d be crazy to talk to us about how they make money and how our offerings help them make more of it. Won’t they be afraid we would use that information against them? Won’t they see this as a ruse to get them to give us the justification to raise our prices? Our experience is that these objections are not the norm. The customers, of course, have to have some basis for trust. And you must demonstrate that you are sincere in collecting the information for their ultimate benefit. In other words, if your attitude is that this information will help you help them run their own businesses more efficiently, then your customers may welcome the conversation. It turns out that most customers are eager to talk about their businesses, their goals, and their efforts to be successful. Their motivation for doing so is simple and clear. The more their suppliers understand their business issues, the better able those suppliers will be to craft solutions that are relevant and valuable.

How Does the Customer Get Financial Value from the Use of the Offering? The trick is to drive the discussion to a dollar sign. If you can’t focus on the financial value, any talk about value to the customer is just noise. You’ve got nothing to back up the talk

We were working with a company that offered a wireless infrastructure solution. During their initial internal discussions, the information technology (IT) and services people focused exclusively on the technology of the product. Now, these are fine people who make an important contribution to the solution, but their comments focused on the technology, process, design, and integration services that they delivered to their customers. These things are important, but they are not the first things the customer wants to talk about. Customers are more concerned about geographical coverage of services, uptime, and reliability of the platform. We were engaged to coach the supplier team. It took only a three-hour meeting to show the team how each of the features that the technical staff focused on aligned with the benefits that the customers wanted and what the subsequent financial results were to the customer. Once they identified a combined view, they all understood each other.

The financial connection comes from a process we call drilling down during the internal and external interview process. Drilling down is the tactic of probing to uncover the details underneath the customer’s first answer, which is often superficial. The drill down generates critical value insights because it moves well beyond the cursory answers that most customer research provides.

Figure 2.3 is an actual transcript of a series of questions we asked a client’s customer when we were training a client team on how to conduct this type of research. The respondent was the executive vice president of a $1 billion systems integration company. The initial question was “What do you really need from us?” The response: reliable messaging. When we asked the executive why reliable messaging was so important, he answered that 50 percent of the company’s technical support budget would be saved if the company had reliable messaging. The bottom line is that we were able to determine that if they had reliable messaging in their software tools, the firm would save $300 million in technical support and software development expenses. That is quite an opportunity to provide a quantifiable return on investment (ROI) for selling the right offering.

When you call customers to set up the interview, it’s a good idea to tell them that the purpose of the interview is to develop a better understanding of their business and what their real needs are. Be clear that you are there to listen and not to sell anything. Repeat that last promise. This is not a sales call. And, having made that promise, take care to honor it. Nothing will undermine the interview more than the slightest hint that it’s a sales call in disguise. Also, try not to ask for such interviews when the customer is in the middle of a request for proposal (RFP) or a sales negotiation. They’ll be too focused on posturing for a discount.

The solution is to develop sales tools that use the customer’s own data. The analysis should provide explicit consideration of competitive alternatives. The objective is to make the customer’s purchasing decision easier, not harder by hiding information from them.

If you don’t have a well-defined pricing strategy, then who, specifically, is setting your prices? Let’s look at the usual suspects. Many companies would say that their customers set prices. But we don’t agree. When customers negotiate price, what is their point of leverage? It’s your fear that if you don’t respond, you will lose the business. It always stings to lose business. But what really motivates companies is a two-headed fear monster: fear that they will lose the business and fear that they will lose the business to a competitor. In that case, not only do they lose but their competitor wins.

Customers are well aware of this fear, skillfully setting up competitors against each other. As a result, companies often make their own pricing decisions based on the perceived pricing strategies of their competitors. So, to the question of who, specifically, is setting your prices, the answer, unfortunately in too many cases, is clear. Your competition is setting your prices for you.

To break this cycle and take back control of pricing, companies must establish a well-reasoned pricing strategy. Intellectually this is not a complicated exercise. A pricing strategy is fairly simple to develop. There are only three choices: skim, neutral, and penetration. Understanding just a few pieces of information can lead you to the right choice. The trick comes in relating your business conditions and objectives to an appropriate pricing strategy. The real challenge is that everyone in the organization has to agree to it.

The three basic pricing strategies are skim, neutral, and penetration. In a skimming strategy, prices are set high relative to mainstream competitors. Use this strategy to maximize revenues generated from the high end of the market. In a neutral pricing strategy, prices are set close to those of your main competitors. Neutral pricing strategies are an important tool when you want to take the focus off of price such as a product in a mature market or in a later stage of its life cycle. Finally, companies that use a penetration pricing strategy set prices quite low relative to the competition. Their objective is to make price a driving factor in the purchase decision.

Although skim pricing might seem like the ultimate objective, when used in isolation it is a dangerous tool. Stubbornly sticking to skim pricing creates market opportunities for new competitors. History is littered with the wreckage of market leaders who carved out a position based on highly differentiated offerings and then left room at the low end of the market for second-tier competitors who ultimately unseated the leaders through a focus on moving into higher-value markets.

With a neutral pricing strategy, prices are set close to the competition with the intention of reducing the impact of price competition. Companies that use neutral pricing typically do so because they want the basis of competition for customer business to be something other than price. They understand that they can’t survive a price war. This is often the strategy of choice for second-tier competitors that must carefully compete against a strong market leader. In most cases a neutral pricing strategy is also the best choice when markets are growing slowly or not at all. In these conditions, lower prices are easily matched by competitors and the net effect of price cuts is to decrease margins and the value of the market for all competitors.

Confusion about this critical sequence (value first, prices second) leads many companies to mistakenly believe they can use penetration pricing to grab share, achieve economies of scale, and thus create a preferential low-cost position. If it were that easy, everybody would be doing it.

If you have high-value, highly differentiated offerings, all pricing strategies are open to you. Hopefully some of your offerings hold this enviable position. Others, invariably, do not.

Overall market response to price (elasticity) is not the same in each stage of the life cycle. The most important thing to understand is that markets are only elastic during one phase: growth. As Figure 3.1 shows, the growth stage is unique in that the rate of growth is high. During the growth phase, customer adoption accelerates as new technologies start to gain broader acceptance. New competitors, seeing the opportunity, also jump in. Ironically, greater competition actually serves to increase the size of the market as more conservative customers perceive that a new technology is a safe bet as it has become more widely available. Increasing customer adoption and the increased visibility brought by new players in the market often combine to accelerate growth. Let’s see why this is important and what causes it.

The pressure to cut prices can be intense. When rolling out an innovative product or service, marketers are focused on identifying and converting innovators and early adopters. These are customers that actively seek out new and innovative offerings before others do. These customers are desirable for two reasons. First, they become references for other customers. Second, they provide critical input that translates into market success later in the life cycle. Given these two very significant benefits, companies are often tempted to buy early business with low prices. This temptation is not necessary because their motivations run the gamut from the logical (exploiting the latest technologies to get ahead of the competition) to the emotional (a desire to simply be the first to use an innovation). The decision to be an early adopter is also driven by a desire to advance the company’s brand as an innovator operating on the cutting edge of its industry. Regardless of the specific motivation, early adopters are more interested in putting innovation to work than they are in price.

the best approach at the introductory phase of the life cycle is to pursue a skimming strategy. Such a strategy has some significant benefits. A high initial price sets the reference for future generations of customers and revisions of the product. Also, a skimming strategy at introduction can actually improve adoption, as early customers will use price as a proxy for value.

There are two major challenges at the introduction phase of a life cycle. The first is selecting the right customers. These are customers who are more likely to accept the risk associated with a new innovation in order to gain a competitive advantage. If salespeople target the wrong customers, chances are they will all ask for lower prices. Here, the price isn’t wrong; the customer is. The second is in proving the value of the innovation. Companies that successfully gain adoption of their innovations do a lot of work to show their value to would-be customers. Failure to address this issue will put the focus back on price as customers decide whether the opportunity to determine the value of an innovation is worth the price and associated costs.

Analysis of what drives adoption of new technologies can point marketers in the right direction. Key drivers include: • Perceptions of compelling advantages over existing technology. • The ability to observe and measure the impact of those advantages. • The complexity of the new solution. • Compatibility with existing processes and technologies. • The ability to try out an innovation before making a full commitment.

Too often, firms fail to take these drivers of adoption into account when launching an innovative new offering. Instead, the approach is “Our new offering is so innovative that it’s hard to prove value or understand risk until we get it into customers’ hands. Once they have it, they’ll see the genius of what we have created.” The consequence of this assumption is that absurdly low introductory pricing is required to get customers to understand the value of the new offering. But low introductory pricing does more harm than good. First, it results in a lot of money left on the table. Low prices also compound customer perceptions of risk. Under these conditions, customers may reasonably conclude that the low prices factor in some undetected risks, limitations, or seller’s desperation.

To avoid this trap, firms need to address the drivers of adoption, point by point, in their launch programs. Consider the case of Azul Systems. This Mountain View, California-based company manufactures server appliances that deliver computer and memory resources as a shared network service. Some years ago, Azul had the audacity to sell one of its early products for an eye-popping $799,000. This product, by the way, was not intended to replace systems provided by competitors. It represented a new platform and new value. Sounds like a hard sell? In fact, the product enjoyed a successful launch because Azul developed a launch program that specifically addressed the major drivers of innovation adoption. Here’s how Azul Systems did it.

In declining markets, diminishing demand is sustained by customers that have a strong preference for a particular technology. This preference is typically strong enough to make declining markets relatively price insensitive. In the nineteenth century, there were hundreds of buggy whip manufacturers in America. We are sure that the last buggy whip manufacturer in business made a wonderful product for customers who were happy to pay whatever the company asked. For this company, the best move was to focus exclusively on a skim-pricing strategy.

To understand how this works, let’s look at the market for another technology that many people think is dead, but surprisingly is doing quite well: vacuum tubes. The forerunners of today’s integrated circuits were once very common, powering every radio and television set. Today, vacuum tubes are still popular among audio enthusiasts and musicians who value the warm sound qualities they are thought to deliver. These loyal customers are willing to pay for that performance. Consider a commonly used preamplifier tube. A typical price for vacuum tubes is $10 to $20. By contrast, an integrated circuit that performs the exact same functions with greater control and reliability costs pennies. In a similar vein, despite the fact that it is a declining market, IBM continues to reap the rewards of being one of the few providers of mainframe computers, despite having received advice in the 1990s to leave that business because it was in decline.

For businesses with high development but low production costs such as providers of software and information products, a different set of economic issues drives pricing strategy decisions. As Carl Shapiro and Hal Varian point out in their groundbreaking article “Versioning: The Smart Way to Sell Information,” information goods (goods that can be distributed in a digital form) have always been characterized by a distinct cost structure. “Producing the first copy is often very expensive, but producing subsequent copies is very cheap,” they write, adding that the fixed costs for information products are most often sunk.4 In other words, the cost of producing that first copy often cannot quickly be recovered, while the variable costs of producing each incremental copy often do not change even with significant increases in volume. As such, producers of information products have very few, if any, capacity constraints.

What are the implications of this unique cost structure for pricing strategy? The principal difference comes during the early stages of the life cycle. Here providers of information products have to address two fundamental questions. The first question: “Is the market that we are entering going to be driven by standards?” The second: “If the market is standards-driven, will customers move quickly to award leadership in our product category?” If the answer to both of these questions is “Yes,” then the best move is to adopt a penetration pricing strategy from the very start.

With traditional products and services, the best approach is to stake a strong position at the high-value end of the market supported by skim or neutral-positive pricing strategies and work down-market to protect your flanks. In contrast, information products companies typically have to turn this approach upside-down. The best approach is often to view the low-value, penetration priced offering as the engine of growth supported by a gradual move toward the high-value, more complex services as customers become more sophisticated. In addition to increasing your chances at winning the standards game, this approach addresses another unique characteristic of information goods in that they are experience products whose quality is uncertain until the customer gets to try them out.

If you are uncertain about how competitors will respond, here’s a helpful hint to avoid destructive price competition. When facing a volatile competitor, a neutral pricing strategy is always the safest. To support your strategy, it always pays to be able to keep competitors worried that you will adopt a penetration strategy if needed to defend your market position. This reduces the likelihood that they will adopt a penetration strategy against you.

It’s not really that tough to pick a pricing strategy. The real challenge comes when the market changes and you have to change your strategy quickly. So what are some signs that conditions require a change in pricing strategy? Here are a few to keep an eye on: • Unit sales volume growth slows down: This, along with a change in customer price response, is the primary indicator of a transition from one phase of the life cycle to the next. When entering the growth phase of the market, if you grow but not as fast as the competition. It may be time to lower prices. When moving from growth to maturity, growth starts coming more and more at the expense of the competition. When this happens, it’s time to deploy multiple strategies, especially neutral prices. • Discounts fail to drive incremental volume: Look at the graphs of price discounting versus gross sales growth. When one line starts heading up (discounting) and the other starts heading down (sales growth), this is a signal that it’s time to start thinking about changing your strategy. • Competitors introduce new offerings: Time to check your value positioning. Have you gone from being a leader to being a laggard? If so, you need to move away from skim-pricing strategies. • Lower-cost competitors enter the market: Are you providing an umbrella for them? Will they come after your high-value customers? If so, you need to move to protect your flanks with a penetration priced offering. • Competitors start missing their numbers: There is nothing more dangerous than a desperate competitor. Time to try to take the focus off of price.

Defining and managing your pricing strategy is straightforward, if you focus on a few simple things. You must understand the true nature of the demand for your offerings, their value, and position in the life cycle. You must understand a little about the economics of your business and how your competitors run theirs. Most managers are aware of these issues. In many cases, they just haven’t put together what they already know in a way that helps with pricing strategy. The beauty of it all is that it can be done, and often quite quickly. The result? Increased revenues and profits. Not a bad return for a short amount of time thinking about your business.

Price buyers are very careful not to let themselves get committed to any particular supplier by making sure they have no switching costs. Perhaps the two best examples of price buyers are General Motors and the U.S. government. Both organizations focus on price, using these tactics to the detriment of many suppliers.

NOTE: Reminds me of higher Ed as well

Some customers are willing to switch from one supplier to another based on their ability to improve their financial picture or impact for their clients. These customers have recognized the flaws of price-only purchasing and often have very sophisticated technical and business process people who regularly evaluate the value that alternative vendors offer.

These customers rely on close relationships with suppliers. Relationship buyers trust that their vendor partners will provide solutions and services the customers need to win market share against their own competitors. A surprising result of understanding the drivers of relationship buying is that many companies see their customers as being price-oriented yet they actually have customers that want stronger relationships.

Unfortunately, the reason the customers seem like price buyers is because the salespeople are calling on the wrong individuals in the buying companies or because the salespeople cave on price so quickly that customers know they can negotiate. Believe it or not, one of the biggest distinctions that relationship buyers have versus price buyers is their level of trust in their supplier. That’s an important distinction since the activities that companies need to do to develop trust are different than many of the relationship building exercises that we see in many sales programs.

With price buyers, the decision is almost always controlled by a purchasing agent. That purchasing agent will have experience in negotiating and purchasing that particular product. He will qualify quite a few suppliers that can meet the specifications. Those specs define the commodity solution in the marketplace. Their approach to dealing with suppliers can be cold and, in extreme cases, can be abusive. At the opposite end of the spectrum, relationship customers tend to be mid-sized and smaller companies relying on suppliers to give them the skills in the product or service area. Here, the decision is likely driven by someone senior in the organization. For smaller companies, it may even be the president or owner. Their style in dealing with suppliers is very open. They’re glad to have trusted partners, and in return will be as helpful to you as possible in defining their needs. Because of their loyalty, they often have only one vendor qualified for a particular area. Value buyers want clear demonstrable value from suppliers. Accordingly, they have the internal expertise to evaluate that value to the organization or to their clients. The evaluator has technical expertise or specific experience to understand the value differences between different suppliers’ offerings. Their style in dealing with vendors is open but somewhat controlling. They want to know what the vendor can offer but also want to control the process. Here, while the buying process may be supported or fronted by a purchasing agent, the real control lies with a department manager or someone on the technical staff, from IT, production, or engineering. Since value buyers need the resources to do this, they are typically mid-sized to larger companies. Poker players frustrate most suppliers. These are the customers who want the relationship and acknowledge the real value of the offering, but know that if they put the seller up against a bunch of low-value vendors, the price will drop. Perhaps the clearest signal in dealing with a poker player is when the decision is being handled by a third-party consultant or a buyer who is relatively new to the company or the buying team. In either case, their basic premise is “Watch me make your suppliers roll over and cut price.” They will often do this with a very well defined RFP. But, you need to watch the vendor list since it often includes providers who do not have the capabilities to meet the requirements of the bid. Such companies are on the list just to put downward pressure on prices.

We recently had a situation with a prospective client interested in retaining our consulting services. The negotiation involved submitting and refining bids through a number of RFP cycles. Our strategy was to use these RFP cycles to gradually encourage value buying behavior. So at each cycle, our bid did not directly respond to the RFP. Rather, we used the opportunity to present a series of questions to qualify the prospective client and sharpen its thinking about what it wanted to accomplish. We recognized that we could use the RFP cycles to take the prospect to a deeper level of thinking about value and price. We won the project. Terrific. But then, the purchasing agent showed up and tried to extract further price concessions. But we were ready for him. We conceded that, yes, it would be possible to lower the price. Of course, that would mean either reducing the number of research interviews in the scope of work or conducting more over the phone. We told him this would sacrifice the quality and reliability of the results on which the client was about to base a strategic, multimillion-dollar decision. The purchasing agent retreated, revealing the company’s true identity as a value buyer. They wanted—and were willing to pay for—the extra value we offered. The purchasing agent eventually signed off on a purchase order for significantly more dollars than we originally quoted.

Value buyers are those customers who understand and are willing to pay for value. In fact, these buyers often will turn down a vendor just because they don’t offer choices with different ranges of value. When we researched this issue, we found that many value and relationship buyers were disappointed when salespeople didn’t know how to present options to them. We advise you to invest in understanding the value buyer’s business. Conduct the depth interviews. Do the ROI calculations. Take ownership of the customer’s results. Call beyond the purchasing agent to other members of the buying center. When putting together the offering package, make sure it gives them choices, especially when the high-value choice is going to be over budget. Give them an option that meets their budget. And, provide the necessary analysis to help them make the best choice.

We were in a situation with a prospective client that was working with a $50,000 training budget. What they were really asking for was $80,000 worth of work. Rather than just give them the higher-priced bid and probably price ourselves out of the engagement, we gave the prospect two solutions. The first option was for $45,000 and the other was for $80,000. The decision maker felt that we had done our job and, after reflecting on his company’s true training needs, decided on the higher-value offering. If we hadn’t offered the choice, he would have thought that we were just too expensive.

Services are not a commodity. One more time, because this is the reality—Services are not a commodity. Why don’t customers tell you that? Because it’s not in their best interests to do so. Their negotiating power is much enhanced if you accept their bluff that services are commodities. They’re not, and if you call their bluff, nine times out of ten they will fold.

Let’s go back to Orion Electronics. Knowing what you know now, what’s your advice for Paul Warren? Should he agree to give up $6,000 in profits for the sake of $3,500 in revenue? Of course not. Yet, managers make these kinds of decisions all the time and will routinely sacrifice profits for revenue. How do we change that? One solution is to change compensation systems. At some level, managers need to be evaluated on their ability to increase profits. One way is by developing metrics and analytics around contribution dollars that go toward the fixed expenses of the company.

Revenue management has been massaged by quant jocks that fine-tuned the initial lessons of Delta and American into sophisticated software tools used to extract every possible penny per sale of a seat. For the rest of us, there are some basic lessons about how the airlines and hotels run their pricing that are important for marketing, pricing, and sales managers to understand. They are good lessons on how to run a business that has relatively fixed capacity and variable demand such as manufacturing, professional services, transportation, lodging, and hospitality. These lessons fit into a great conceptual structure for how we should think of using price to increase both capacity utilization and profits. The net result is to increase company returns.

Let’s say that airlines have, in effect, three classes of products: first class, business class, and tourist fares. In fact, they actually have dozens for each flight. With at least two weeks’ notice, a first class seat from Boston to San Francisco is approximately $1,600. A passenger can buy a refundable ticket in the economy section for about $800. And if the passenger is willing to take the risk of buying a restricted (nonrefundable) fare, the cost might be $300 or even less.

Businesspeople are willing to pay $800 for an unrestricted economy class seat when the same seat can be obtained for $300. That’s because the average businessperson is less price sensitive than the casual flier. But there is another reason. The airlines exploit pricing by erecting barriers or fences to the lower-cost seats that makes them less preferable to travelers who pay the higher fares. Businesspeople are willing to pay more to make last-minute changes, to not have to stay over on a Saturday night, and to get priority rebooking if their flight is canceled.

number of years ago, we were working with a technology company that had a wide range of products, some of them custom high-value products, others rock bottom commodities. These were the products they were losing money on and that were being sold by 20 other competitors. The marketing manager for the product told us how one of their major customers had sent the company jet to pick up their monthly allocation of the product. Wow, something was going on in this business, and a commodity was suddenly a high-value product. We suggested that they raise their prices, but they said they couldn’t because most of the purchases were under contract. Fortunately, the delivery time wasn’t under contract. The company introduced a new product that was available from stock at a 60 percent premium over the ones that were taking 16 weeks to deliver. The customer’s response was “We wondered when you were going to figure out what was going on in this business.” No complaints, just gratitude for having parts available. The real punch line was that these customers were the automobile companies—companies that use aggressive price negotiations.

Zone 1 in Figure 5.5 represents the period when there is ample capacity. What many companies do during these periods is reduce the price of their high-value products. By doing so, they undermine the value structure of the company and their credibility with customers when the business cycle improves. Instead, the company should introduce low-value products or reduce service levels from the high-value package. Good examples would be to add clauses into marginal customer contracts that include unpredictable lead times, limited or fee-based technical support, and bulk packaging. The point is that there has to be something that fences or insulates the low-value customers from high-value customers. Guaranteed delivery is often a good fence for both products and services. This is critical to put in place prior to the upswing. The job of the fence is to protect the high-value offering. The job of the low-value offering is to improve the utilization of business resources, which should go away when those resources are fully used.

One industry that should use opportunity costing to control utilization is the professional services business. Managers in the professional services industry tend to look at their labor as a high variable cost when, in many cases, their costs are really fixed. To the extent that they are willing to separate employees if there is a downturn, the employees represent a variable cost. However, the core group of people who are protected from separation are a fixed cost and should therefore be viewed that way in both the costing and the pricing process. For those companies, traditional costing approaches can lead to a number of severe strategic problems. First, they tend to drop prices on high-value services and lose money on them. The trick is to offer lower prices but to make sure some level of service and support is taken out of the offering. The second problem is that they permit customers to focus on costs in a world where increased globalization has caused plenty of high-value professional resources to be available from traditionally low-cost cultures like India and China. Companies that use those resources are able to compete effectively on a cost basis with companies that do not. For companies that don’t have access to those resources and perhaps even some that do, cost-based competition misses the point. Most professional resources provide value to clients. By focusing on the value that professional resources bring to clients and learning to improve that value, professional services companies are able to move out of the cost-based meat grinder of customer negotiations and into the value-based discussion with higher-level client executives that provides more benefit to everyone involved.

To break the cycle you need to innovate for growth and price for profits. Here’s what we mean. If you want to improve your pricing leverage, some element of your offerings must be differentiated. If your offerings aren’t differentiated, they are commodities and the lowest price gets the business. The challenge for many firms is that their core offerings are commodities—or close to it. That’s fine. There are customers that have basic needs. For the rest of your markets, you need something more to differentiate yourself from the competition. In addition to high-value products, much of this differentiation will come from services.

To create high-impact offerings, set out some basic objectives. These should include: • Matching offerings with the high-value needs of target customer segments. • Offering low-value flanking products that appeal to pricesensitive customers and reduce the effects of price negotiations on high-value offerings. • Meeting or beating competitive performance on core customer needs. • Building strong fences between high- and low-value offerings that prevent customers from negotiating for high-value offerings at low prices. • Enabling sales to have clear discussions with customers to define price-value trade-offs during negotiations. • Arming sales with well-defined value levers to alter offering value and price by adding or removing specific features.

Results show there is a pot of gold out there for those firms that can execute a multilevel offering strategy that includes products, services, and software or data and analytics.

An easy way to start is to put your services into one of two categories. The first category is enabling services such as maintenance and support, postdelivery training, or predelivery design support. These types of services are often expected to be available and that expectation is often misinterpreted as an unwillingness to pay for them. The rationalization to give them away is almost always the same: “We have to include those services to ensure that the product performs.” But customers will pay for them, and, accordingly, they should be an explicit part of the offering and price menus.

If you hear the tired old story about “We have to include those services,” ask yourself two basic questions. First, “At what level should our services perform?” Second, “What is the financial impact for customers of different levels of performance?” The answers to these questions do two things. They force a definition of the boundaries between the expected and value-added levels for services, and they enable identification of your customers who are seeking high and low value.

The second category of services are high-value adds and are often components of solutions to specific customer business problems. Companies such as Deluxe and John Harland that sell checks to banks and consumers have come up with an interesting way to drive new revenues as their core check printing business continues to decline. They offer outsourced order management. Each provides a special call-in number to help new banking customers select and order their checks and accompanying accessories.

Consider General Electric and its design of the GE90 aircraft engine. Introduced in the late 1980s for the then-promising market for twin-engine, long-haul passenger jets such as the Boeing 777, the GE90 was a completely new design competing against older offerings from Pratt & Whitney and Rolls-Royce. Using new, exotic materials and engineering advances, the GE90 was a technological marvel. In its early days, it was also a commercial failure. What happened? It turns out that GE hadn’t done its homework in the area of customer value. While its engines were technically superior, GE, to its surprise, lost deal after deal to Pratt & Whitney and Rolls-Royce. GE finally got around to asking the right questions. What it found was that customers were reluctant to take the risk of change. They chose a product they knew over a product they didn’t because with experience came predictable total costs of ownership. The GE90 had no track record, and its application of advanced technology and materials, the very attributes GE managers saw as benefits, were what many customers regarded as financial risks.

How did GE respond? First GE created an entire solution around the GE90 that simultaneously addressed customers’ financial concerns (their value needs) and thereby demonstrated significant competitive advantage. The new solution called “Power by the Hour” tapped into the old practice of leasing capital equipment so that customers could pay for a fully maintained and operational engine. Furthermore, they could elect to pay GE by aircraft operating hour. In this way, GE aligned the way customers pay for value with how they accumulate value. (Customers, of course, could do business the traditional way by buying engines.)

Can your customers see this logic in your offerings? If not, you are eroding their trust. You are also encouraging them to play poker with your sales teams and negotiate more vigorously. If customers don’t see logic and integrity in the price-value trade-offs you ask them to make, your business is seriously underperforming relative to its potential. Think about it. Any measure that you choose to look at—net promoter score, customer longevity, lifetime value, net price realization, average order size—every one of them will suffer because of poor fences.

The Final Piece: Bundling A central goal of this rule was to recognize the power of tightening up your offering structure to improve the ability of your sales teams to manage tricky price negotiations. You’ve gotten to work on defining a low-value flanking offering. You’re defining your core, expected, value-added levels of your offering. You’re defining high-, medium-, and low-value services, and you are committed to getting fairly paid for them. There are two challenges that still need to be addressed. The first is the recognition that most businesses sell offerings to different customer segments that place different value on these offerings. The second challenge is the recognition that, within segments, individual customers also value the same offerings differently. Without a well-thought-out plan for managing these two realities, a business’s prices will naturally drift downward to accommodate the most price-sensitive customers. To be sure, accepting this downward drift is one way to ensure a business is covering its entire market. But it certainly is not the most profitable approach, as it leaves money on the table with those customers that value and are willing to pay more for your offerings. The way to solve this problem is to use bundles. The logic of bundling is straightforward. The idea is to package two or more products, services, or attributes to create fixed-price variable-value packages. This is done in order to: 1. Get customers to buy more than they ordinarily would by offering a financial incentive—a bundled price—that is lower than the sum of the component prices. The key here is to make the savings on the bundle attractive enough that customers will buy the bundle. 2. Create opportunities to earn more for your value when you have groups of customers that place different levels of value on the individual components of a potential bundle. Pricing to reach the whole market often means setting prices low enough that even those customers that value your offering the least would be willing to purchase it. It’s the lowest common denominator approach. Bundling provides a means of getting more revenues from individual elements of the offering than if they were priced to reach the whole market. It allows you to serve those customers while still getting paid more from those customers that place a higher value on your offerings. Let’s look at how this works. Imagine that you are a product manager for a software company providing solutions for tracking customer usage and predicting future behaviors. You are currently focused on two markets. The first is intercity rail and bus travel. The second is casinos. You’ve interviewed a number of customers and gained some great insights. Casinos place a higher value on the ability to track usage patterns of high rollers because it allows them to set triggers to provide complimentary services (comps) real time, while the high rollers are still on the floor of the casino. The goal, of course, is to keep these high-value customers gambling. The casinos value the ability to predict future spending behaviors of these high rollers so they can cultivate relationships with them. On the other hand, passenger rail companies are interested in encouraging more people to take the train. With this focus, these companies place more value on use tracking as a means to coordinate simple promotional campaigns. They place some value on trend analysis, but only for some simple collaborative promotions that they perform for local hotels. Figure 6.5 demonstrates the price sensitivity that two different types of customers have for two different software products. A gambling casino will be willing to pay $600 for use tracking software but $1,200 for the trend analysis software, since it will help them determine how to “comp” their loyal customers. The passenger rail company has a higher value ($1,000) for the use tracking software but would only be willing to pay $400 for the trend analysis package. One question Figure 6.5 can help resolve is What should the individual...

When reviewing your own bundles, ask a simple question. Are these items bundled together because they logically go together in the minds of your salespeople and customers, or because you hope that by putting them together you can create some sort of black magic alchemy that will miraculously make customers want to spend large sums of money with you? If it is the latter, customers will not be fooled by bundling offerings that are not relevant to their needs.

If Intuit went head-to-head with Microsoft, it would lose.The goal is to keep Microsoft in catch-up mode. And they do it not with price but with relentless innovations of their products and services. Nimbleness and innovation limit Microsoft’s ability to use price to elbow its way into the market. That’s the trick in dealing with competitors. And it’s a great example of how to use product and service innovations to stay ahead of competitors you can’t beat in a price-driven conflict. If you do have to use price to deal with competitors, don’t react to their moves. Think about ways to get them to react to you instead. When action is taken, make sure it is not a reaction but a well thought through game plan that will focus not on beating competitors but on getting them off your back. That’s an important difference.

Value-based pricing is about more than keeping prices high; it’s also about learning to deal with competitors who want to use low price to gain market share from you.

The only way to make money playing the game is to have both competitors keep their prices high. That takes determination, patience, and a willingness to avoid short-term opportunistic gains in order to achieve long-term market stability. That should be the real objective in a mature market: market stability. The bottom line in mature markets is that price competition really makes no sense. Every competitor can play the pricing game and is likely to do so if it doesn’t think through the implications. Customers who came to you for low prices are now going to be the first to leave when a competitor offers lower prices. Low prices provide the least sustainable competitive advantage. Just ask the managers of AT&T. In 2004, AT&T, once one of the strongest brands in the world, saw close to a 50 percent decline in profitability as cost-effective regional competitors hammered them with still lower prices. Despite offering lower prices, AT&T continued to lose customers to other service providers. Though there were many reasons, price competition in a mature market was probably one of the most important elements in the downfall of the once mighty AT&T.

Protecting share fails to deal with the real objective: a stable competitive environment. A better approach is to talk about the concern for the industry and the company’s willingness to respond if necessary. This sends a more balanced message.

Anyone who expects the system to be perfect at the start is in for a rude awakening.

In the end, selling is a tactical job. Salespeople are in the trenches trying to land every deal they can. The job of managers is to tell salespeople who the desirable customers are and to warn the pricing people away from customers who cannot be served at a profit. Customers who cannot be served at a profit aren’t bad people. They just cannot be served at a profit. At least not by your company. If such customers can be served at a profit by someone else, then everyone is better off.

In order to price with confidence, companies need to know they are targeting the right customers and the right segments. Strategy is required to do that. Strategy is required to help people meet their objectives.

Successful companies have a good understanding of who their competitors are, what they are good at, and what they are bad at. Managers take those insights and instead of reacting directly to a competitor’s moves, they determine strategically where and when to respond to those moves. And, they understand how to best respond in a way that doesn’t turn the interaction into a customer or industry-level price war. When those insights and actions are turned into effective competitive information systems, they provide long-term competitive advantage that stops leaving money on the table in ineffective price battles with competitors.

We learned a long time ago that we can’t afford to get rattled by price-oriented clients. We learned a long time ago that if we don’t have confidence in the value of our services to our clients, we have no business doing what we do. We know that if we don’t understand how much value we’re going to add to an engagement, we have no business making a presentation about how we are going to add value. We began to ask the tough questions at the start of an engagement and if a customer wasn’t willing to answer them, we took a deep breath and invited them to go with another vendor. We believe that we’re a good solution for our clients. We know we have to act on that confidence if we’re going to be successful.

Customers want you to focus on how you are the same as your competitors to level the playing field on price. But you have to focus on how you are different, and feel confident about the services you provide to make your solution better. Understand how that difference provides a better solution to customers and start acting like you are a solution. Stop acting like a commodity vendor. Instead, take that understanding of how you create value, add a dash of arrogance, and build the confidence you need to be successful in today’s tough world of customer negotiations. Make your customers respect you and want to do business with you. Put some backbone into your selling process.

Drill down on how your offerings drive financial value for your customer. If you don’t have the answers, ask the customer. Ask them how important services like delivery and technical support are to them. Ask what keeps them up at night and ask how you might be able to help.

Purchasing in most organizations is not an event; it is a process.

The final step is to determine the walk-away price. This is the price that you decided was the price below which you shouldn’t go. This is the price that assures you some level of reasonable profit. It’s also the threshold of walking away. Everyone on the team must agree, or at least respect, the number prior to the negotiations. There can be no senior people panicking at the last moment and dropping the price. The entire firm’s credibility is at stake. Buyers know this. Yes, it does take courage.

We know of one services company that adopted this approach in a dramatic way. At the price negotiation, the prospective customer insisted on a price that crossed the company’s walk-away threshold. So, at a signal from the lead negotiator, the entire team got up and, without a word, left the meeting and the building. The team got in their vehicle and drove to the airport. They were at the gate, waiting to board their plane back to the home office, when the call came. The prospective customer caved. It sent a limo to pick up the negotiating team and inked the deal on favorable terms to both parties. Sometimes confidence calls for a little brinksmanship.

An RFP is often a sign that a customer is not a relationship buyer and is likely not going to be a value buyer, either. Especially if they don’t have identified selection criteria, which provide higher-value suppliers a chance to win. That means that RFPs come, for the most part, from price buyers or poker players.

What percentage of your RFPs do you win? You would be surprised at how many managers don’t know! The next question is How much time do your people spend on responding to each RFP? If it’s more than an hour and your close rate is low, you are wasting resources responding to RFPs.

The worst thing that a dominant incumbent can do is to respond to the RFP. When they do, they are either going to have to drop their price significantly to win the business or they are going to have to lose the bid to a low-value vendor. If this marks the customer’s move from a value buyer to a price buyer, you need to have a low-value offering such as we talked about in Rule Four, “Play Better Poker with Customers.” If the customer is becoming a poker player, not responding to the bid is an excellent way to call their bluff. The nice thing about this approach is that it undermines the buyer’s credibility with the rest of the buying center. If you are going to lose the business anyway to price, you might as well do everything you can to maintain your credibility too.

Any time a seller responds to a bid or an RFP, they need to stop, ask questions, and get answers to a number of quite basic questions. They need to assess whether or not this is going to be a fair bid among equals or whether a potential customer is just conducting a fishing expedition. We recommend that companies get answers from prospects to a number of basic questions before they agree to participate in the process: 1. What specific business problem are you trying to solve? 2. Who and/or what does that involve? 3. What is the likely return if you fix the problem? 4. What are the criteria for selecting a vendor to help? 5. What is the process for selecting a vendor to help? 6. What is the final process for approval of the project? 7. Who is the final sign-off and what is that person’s position? 8. Is there a budget approved? 9. What is it? 10. If there is no budget, what is your sense of what this should cost?

The next time a buyer tries to tell you that you’re a commodity, take a deep breath and tell him or her that if they want commodities, there are six other competitors in your business they can buy from. Talk about all the things you do to help them that add value to the things they do. Talk about the things your company does to improve the quality of your products and services to them. Talk about the things your company does for the industry.

Value-based pricing is an ideal. It requires sophisticated internal skills and systems. The trick to value-based pricing is to evolve pricing as the discipline and skills of your people improve. Start gradually. There is nothing wrong with cost-plus pricing as long as it does a good job of leveraging the financial value you create for customers.

Even though most managers are familiar with cost-plus pricing, it may be useful to review the model’s advantages and disadvantages. Here are some of the advantages of cost-plus pricing: 1. Easy to calculate. 2. Simple to administer. 3. Requires minimal information. 4. Tends to stabilize markets. 5. Protects supplier from unexpected cost increases. 6. Believable to salespeople and customers. But there are also significant disadvantages to cost-plus pricing: 1. Ignores demand, image, and market positioning. 2. Favors historical accounting costs rather than replacement value. 3. Applies standard output level to allocate fixed costs. 4. Offers few incentives for efficiency, as costs are passed off to customers. 5. Ignores the role of customers and the value they derive. 6. Creates a competitive disadvantage using average costs (as discussed in Rule 5).

If you try to move too quickly to a value-based approach to pricing, more than likely your efforts will backfire. Customers will rightly be confused and concerned. As a consequence, they will negotiate even harder or, worse, abandon you. Competitors may see your efforts to price differently as an opening to take market share. They’ll start undercutting you on deals and put enormous pressure on your sales teams to react. And without the proper training and tools, your sales teams will be defenseless and frustrated by new pricing approaches that don’t make any sense to them. Failure to anticipate and manage these forces before they become problems invariably causes pricing initiatives to fail. Your journey will be over before you even get the car out of the driveway.

it isn’t necessary to achieve some elusive ideal state in pricing in order to see big improvements in financial performance. In fact, that’s the beauty of tackling pricing. Small steps forward can produce big results.

Successful initiatives to improve pricing are rarely pricing-driven. Our client understood that their vision of improving pricing was going to be enabled by better offering definition, cost management, sales skills, and data.

The next step in better cost-plus pricing is to start using data on your capacity and bottlenecks to drive decisions on when to raise or lower prices to control utilization of key resources. One pricing manager earned an extra $60 million for her company in a single quarter by applying this concept. She started indexing prices according to available plant capacity. During times of constrained capacity, the pricing manager fully allocated all costs and took a further markup to set prices. During off-peak times, she looked at incremental costs only and added a markup to this lower cost basis. If customers absolutely needed their products during times of peak demand, they paid the highest prices. If they shifted their delivery to off-peak times, their costs and prices were much lower. By better understanding incremental costs, the manager used differential pricing to effectively optimize the utilization of plant capacity.

Parker Hannifin is the world’s largest manufacturer of motion control technologies systems. It recently upgraded its pricing model. Parker abandoned its old cost-based pricing model. What did Parker replace it with? Another model that is also cost-based. But Parker Hannifin adjusted its pricing formulas based on the incremental value of the products based on their degree of commoditization. “A” products are pure commodity. “D” products are all specialized or otherwise customized. Products marked “B” and “C” fall somewhere between those extremes, incorporating elements of both commodity and specialization. Parker Hannifin discovered that it could realize more margin from the “D” products than the “A to C” products. There is nothing surprising about this. Customers are typically more accepting of higher prices as the level of specialization or customization increases. The difficulty, when you have 20,000 products, is distinguishing them in terms of differentiated margin opportunity. Parker Hannifin improved net income by over 500 percent and return on net income by 300 percent.

What’s the next step for firms like Parker Hannifin? We predict it will be making the move from qualitative to quantitative measures of customer value. As we mentioned in Rule Two. “Understand Your Value to Your Customer,” developing data on customer value is often just a matter of asking your customers the right questions. The real challenge is putting the insights gleaned from that data to work. This involves linking pricing and value in a way that is credible with customers and your own sales team. Sales professionals require the right tools, training, and skills to successfully sell with value-based pricing. This final step in the evolution is a big one.

salespeople need to understand how the prices were arrived at. What process was used? What criteria were used to evaluate pricing options? Why are the options being presented to the best customers? Without compelling answers to these questions, the sales professionals will be put on the defensive—and hard-grinding customers will sense weakness.

The president or CEO is the best person in the company to force those changes because changes like these need a champion at the very top.

Kudos to Accenture, and its CEO, William Green, for focusing on how consultants can share risk with clients while adding to the bottom line results of their clients. And those results are impressive. Accenture increased the number of employees by 25 percent in the past year, a time when many professional services firms are still struggling to use the people they have. Over 30 percent of Accenture’s contracts include some type of performance measures, and more are expected to include these types of provisions in the future. Financial measures include internal cost cutting and improved customer satisfaction. By focusing on client results, Accenture has been able to provide clients with measures of value which help justify fees and create follow-on work—the lifeblood of professional services firms. They price with confidence.

It’s important that the customer meeting be about the customer’s issues. Unless the customer brings up questions about sales or service, we counsel our clients to leave the company’s sales or support issues and/or agendas back at the company. Request in-person meetings with a variety of customers to gain the best understanding of how your products and services impact the customer’s business in bottom line dollar results. Ask what you are doing well and what you can be doing even better. Ask for ways to improve and then listen. This is not the time for defensiveness. Ask for the painful anecdotes. The customer surely has some. Let the customer know that its candor you want. Managers who stay highly connected with customers have a much clearer vision of what needs to be done in the firm.

We remember one senior manager, a vice president of sales, who had just learned this technique. Regrettably, his company hadn’t had time to roll out flanking products. This manager found himself in the middle of a tough negotiation with a division of General Motors. Car manufacturers have the reputation for being some of the toughest poker players in business. When GM’s purchasing agent demanded a lower price for a critical component, the sales manager responded, “No problem, we already have a cost-reduced version of this product. Here is the catalog number.” After a conversation about the differences between the lower- and higher-cost products, the purchasing agent concluded that the lower-cost product would cause problems in the exhaust system that could eventually lead to a product recall. He didn’t want to risk that, so the purchasing agent approved the use of the higher-priced product. That one tactic not only closed the order but it also bluffed a very difficult purchasing agent and dropped close to a million dollars to the bottom line of the business.

When customers are served with high-, medium-, and low-value product choices, both revenue and profits increase. We saw one company employ this high-, medium-, and low-value product approach several years ago. The senior leadership team was highly involved with the initiative. When it was rolled out with a training program to the field sales force, the president of the company introduced very aggressive sales and profit objectives for the year. The following year, after talking about the results with the VP of sales who led the effort, he advised us that not only had they exceeded their sales objectives by a wide margin, but they had doubled their profit from pricing improvements over objectives for the year—an increase of over $6 million.

Ask them what they think your company does well, and what they think your company does poorly. Ask them why they think that. Ask them a question we often ask in a customer engagement: How do you feel about the company? Simple questions lead to complex answers.

Your people are down in the trenches. They deal with and know about the real problems of the company. Managers, especially senior managers, are often isolated from those problems. They are wearing rose-colored glasses. They believe their own rhetoric about how great the firm is. Confidence in pricing means moving beyond the rhetoric. It means removing the rose-colored glasses and getting real about what your company does for your customers. Good leaders understand the problems, fix them, and get their people to move beyond the problems and gain some real confidence in the value of the things their firm does for its customers.

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