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Price Is Meaningless Until You Establish Business Value

by David Brock on March 27th, 2013

This afternoon, I was speaking with a salesperson for a start-up company.  We were discussing one of the biggest deals they had ever gone after, both he and the company really needed this deal.  Unfortunately, he was showing me the closing presentation after he had presented it to the customer.  Two charts caught my eye.

The first was the final chart–the deal chart.  It started with the normal list price of the service being offered, then there were some other numbers culminating in a “Special Offer” that was 80% off the normal pricing of the offering!  Yes, straight out of the hopper he was offering an 80% discount.  Yes, that’s a terrible opening tactic–but I’ll come back to this.

Buried in the middle of the presentation was an estimate of the results the customer would achieve in implementing the solution.  It was $10’s of millions.  I did a quick ROI calculation based on the “list pricing” of the service.  The return was 77 time the original investment!  Yes, there’s no decimal point, 77 times!  And that’s based on list price, remember he offered a discount of 80% off that price.

I was floored, I didn’t know where to start.  I knew the sales person and the company needed the sale, but this was all wrong.

I gathered my thoughts, then asked, “Why did you offer the 80% discount?”

He eagerly replied, “When I reviewed our pricing methodology with the customer, they said it was way too high.  (This was a SaaS offering).  They are used to paying much less than our list price for these types of services.  Plus we can make money even if it is an 80% discount.”

“How did you establish the business value cited on chart XX in the deck?”  I asked.

“Oh, it was a combination of things.  We’ve benchmarked the performance of similar customers.  We reviewed that data with the customer and came up with the estimate on the chart.  The customer actually thinks it’s pretty conservative!” he replied enthusiastically.

I was really confused.  Here we had numbers the customer had established which represented $10’s of millions in business value and an extraordinary ROI.  Any business person would immediately leap at this opportunity!  If anything, the pricing of the product was far too low!  they could have priced the offering much higher and still have a business case that would cause and CEO or CFO to salivate over.

I asked, “Did you discuss the ROI and the business value with the buyer when the buyer objected to the pricing?”

“Well, we had discussed it, but all she was focused on was pricing.  They just aren’t used to paying our full price on these types of products.  She was worried about getting the budget for this.  We really didn’t talk about the business value very much.”  He replied.

I wish this was an unusual case, but it’s all too familiar–though this is the most extreme in terms of ROI and business case.  Too often we enter into pricing discussions without having established the business value of the solution.  Of if we have, we fail to keep the business value tied inseparably to the ROI, and the pricing.

We and the customer have no basis for declaring the price is too high, without understanding the business case.  We have no reason to even mention the “D- word (discount)” until we have established the business value.  In fact the corollary is that discounting is usually driven because we haven’t established the business value of the solution.

Any discussion of pricing is absolutely meaningless until, with the customer, we have determined the business value of the solution, understood the expected financial hurdle rates, and presented our solution in the context of all those.

In this particular case, had the customer continued to maintain the price was too high, I would have responded, “How many opportunities do you evaluate every year that have, conservatively, using your numbers, a return that is 77 times your original investment?  Where can you invest the same amount of money and get the equivalent return?”

We focus entirely too much on pricing.  We leave far too much money on the table because we fail to establish business value and tie our pricing to the business value!  If you have great business value, if you can create a business case that exceeds any financial hurdles your customer may have (e.g. desired payback, ROI, IRR, risk, etc.), then there is never a reason to discount!

Stop defeating yourself by focusing on price, focus on the business value!

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  1. Dave, I really enjoyed your Blog entry today (Price Is Meaningless Until You Establish Business Value) and that of yesterday (Going Beyond Cost – Benefit Analysis). Both are a great tee-up for a discussion on the topic of Benefits Management and Harvest of Benefits Post-Implementation. Both are topics which I have been recently researching.

    Based on both my own personal experience and the recent research the following three areas could be added for consideration:

    1. Engage the client Buyers and Influencers early in the life cycle of the perspective opportunity. Maybe bring them awareness! As many successful sales practitioners know, clients are generally more open to ideas and influences early in their thinking of a business opportunity or problem. Seller can have influence on solution, develop meaningful relationships while working through this with Buyers, and develop knowledge of value to Buyers; hence can price based on value. If Seller engages later in cycle, say at the Buyer’s “give me a proposal” point, then Buyers feel that they have already “solved” the problem and now it’s a matter of getting the best price. At this point as you point out in your examples seller has limited options to compete – How do you spell “discount”!

    2. Use a Benefits Management methodology to deploy in assisting Buyers and Influences to define the business outcomes they expect in addressing their opportunity or solving their problem. Such methodologies are available and one technique is to assist the Buyers in developing a network or chain of actions, assumptions, and subsequent outcomes that lead to their ultimate outcomes (business value). This should include many of the things that you identified in your Blog topic today. This approach is very supportive in getting company approval for the initiative.

    3. An organization usually only harvests their expected benefits when the required business change (usually driving most business initiatives) is adopted by the users of the new business system (i.e., this means a change in user’s behavior). Seller’s credibility to Buyers may be seriously impacted if Buyers buy but the value does not appear! Most organizations do the cost-benefit thing up front, get approval, then put it in a drawer and move on with build and implementation. The required change does not happen by magic (if only!), and this is particularly the case with Knowledge Worker business systems. If Buyers wait 6 to 18 months to check the “bank” for value they will be likely disappointed, and it may be too late. Buyers need to track adoption of the required change as an early indicator of success, and take corrective action if necessary. If adoption is poor, results will likely be poor. The challenge here is to identify a few key leading indicators of user adoption (remember – behavior change), and track same thru the business system itself (i.e., a bi-product of doing the business – don’t burden the user with extra data entry).

    My thoughts for your consideration.

    • Dean, its’ always such a pleasure to have you join the discussion. Outstanding insights. To your first point, a lot of what you are talking about is really the underlying principles to Insight Based Selling, where in fact you may create the awareness and drive to change (That’s about as early as you can think).

      On your second point, this is so critical, but so neglected. There are some interesting tools emerging in this space, but there are simple templates, justification guides and other things that can be leveraged to develop this methodology and engage the customers. This is an extremely important discussion, and needs to be elevated in these discussion communities.

      On your third point, again this is critical. “Did you get what you expected?” This is a problem both with customer and sellers. Sales can provide a lot of leadership in helping customer make sure this is in place. It’s also a great source of cases studies and data that sellers can use (with permission) to grow their sales.

      Thanks for the great ideas! They’re spot on, and we need to be talking much more about these.

  2. shalini permalink

    Good blog on importance of business value than price.

  3. Great information discussed here. The one thing that was left out of the discussion was what the competition is charging for their solution and are they willing to provide a discount for a very similar offering. Today’s economy seems to be buyer driven and companies are scrambling for any sale and profit, however small, that they can get. If today’s buyers feel that the quality of the product and service are similar, then the only deciding factor is going to be price. So much of our products and services have been comoditized and a huge amount of effort MUST be put in to make the entire chain of decision makers understand to difference in quality and outcome if the company is going to choose the more expensive option. Many purchasing managers are not willing to go down this road when the only thing that they get reviewed on is the BOTTOM LINE.

    • Steve: You bring up a critical issue, in fact I will be writing next week on this. It’s critical for us to make sure the customer understands and values our differentiation. If they don’t, all alternatives are perceived as equal, and the lowest price should/must win. If the customer sees everything as undifferentiated, then we haven’t done our jobs. Thanks for the great observation. Regards, Dave

  4. Julia Nelson permalink

    This is so true. We are a training company and allow our customers to “upgrade” to unlimited training for as low as $50.00. When they don’t see value in training and what it can do for their organization they won’t buy it, no matter how inexpensive it is. Great article that I will be sure to share with my team.

  5. The impact of your story is embodied in this exchange:

    I asked, “Did you discuss the ROI and the business value with the buyer when the buyer objected to the pricing?”
    He replied, “We really didn’t talk about the business value very much.”

    Was everyone in the room embarrassed and mortified, when this admission was made?

  6. Interesting, David. We just spoke about this in our sales meeting yesterday. Value is all about perception, the customer’s perception. Our job as salespeople is to create the value so it is perceived at our price point.

    • Thanks for the comment Susan. You are right on, it’s our job to focus on what the customers value and how we deliver it, positioning our price in the context of that value. Thanks for joining the discussion!

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