Human nature and software pricing (#2) – let sales do their job

25 06 2009

Deep in the process of pricing, in the midst of the miasma of spreadsheets, whiteboards, and scenario development, the pricing master will teeter on the edge of sanity.  Combinations of customer situations, past corporate agreements, and product development plans will swirl and form into transient clusters of pricing policy and licensing metrics that must be analyzed and evaluated.

Let’s talk about that for a second because it sounds like I’m out of my mind.  But we’ve been there… the vortex of information that surrounds pricing can overwhelm the senses and make good ideas indistinguishable from disastrous ones.

While I do believe that to know pricing is to know madness at times, pricing will always drive you to that point if you forget this simple rule:

Let sales people do their job.

Sales can be your ally, but you have to involve them in a specific way in order to bring about the best results for you, the company, and their commission.

Sales people were hired for a reason

No, that reason is not to take you to the bar.  Though, those “organizational development meetings” are often productive and required in order to bring perspective back to your life.

Sales people are the customer’s interface to your pricelist.  The pricelist is supposed to capture the anticipated value of your product to the customer, but you cannot possibly quantify that value across all your customers.  Sales people map your company’s value perception of your product to the the customer’s wallet at a single point in time.

Listening to buyer scenarios and war stories from sales people can help create a matrix of plausible pricelist situations to quantify.  It’s up to you to enable the sales force by establishing rules and boundaries.

The making of pricing, like politics and sausage, should not be witnessed

The reason sales people should not create pricing (or be intimately involved with it) is simple:  pricelists serve as both the common ground and the common enemy they share with the customer.  If the pricelist isn’t controlled by the faceless establishment, sales has lost the customer’s sympathy and trust.  Sales people have to personalize the pricelist and map it to the customer through a shared sense of purpose.

The pricelist is also an escape clause for the sales person.  Like saying to your kid “go ask your mother / father”, they can shift the decision and blame on touchy subjects to management without having to be the bad cop.

So, sales people need a bucket of tools to help match the customer to your product.  Your job is to find the balance between infinite pricing complexity and sacrificing product revenue in the pricelist.

Knobs

If you ask 30 sales people to describe their ideal licensing metrics, you will get 900 answers.  That’s because each customer account is different.  We’ll talk about licensing metrics and the effect they have on customers soon.

Licensing metrics are like fitting a curve through experimental data points.  You can get an exact match between your data and an equation if you put in enough variables.

The reason you should prefer a less accurate curve fit to your data is stability.  The more knobs you have in your curve fit, the more likely it is to blow up catastrophically and misrepresent your data when it’s extrapolated.

Pricing metrics are no different.  By trying to represent ALL customer situations in your pricing model, you are building in too many untestable scenarios (and you can’t spell “untestable” without “unstable”).

Don’t try to replace your sales person with a spreadsheet.

Legislating intent

By concentrating on minimizing your licensing metrics, you accomplish two very important tasks: you give your sales people flexibility and you minimize the risk of introducing situations where the pricelist will collapse on itself (a pricing singularity).

Sales people create a detailed pricing topography in their head when a new pricelist is released.  They interpret the “sales policies” (the manual to your pricelist), and the pricelist itself to come up with individualized practices for their customer’s situation.  Sales people will exploit your pricelist and policies in order to find loopholes.

By minimizing the possible combinations, sales people can create a better picture of how their customer base will map to the pricelist and their subsequent commissions.

You can’t build “intention” into a pricelist or sales policy.  Even commission structures will eventually fail to encourage your best intentions.  If you find yourself saying words like “sales should use it this way” or “it should be obvious that…” – you’re digging your own loopholes.

You cannot govern or account for the sales or customer’s perception of your pricelist.  At best, concrete rules can get misinterpreted.  So if you make something ambiguous, it will certainly get used in a way you hadn’t envisioned (good or bad).

You have been warned.

Testing

While you can’t account for every scenario, in the end, pricing is a balance between acceptable risk (e.g. money left on the table or strategically ceding a market segment) and fitting customer patterns (i.e. allowing sales to map a customer to your product).

Sales can help you test both the structure of your pricing and the interpretation of the rules you establish.  You have to listen objectively and carefully to your internal customer (sales, the business, etc.).  Each piece of feedback should be matched with the scenario’s likelihood and precedence so you can establish an acceptable risk profile.

You are giving sales a set of tools to do their job.  By keeping that set of tools simpler, sales can adapt your product’s strengths to their customer’s needs.  Making it simpler can reduce sales negotiations, minimize unintentional discounts, and reduce headaches when you have to revisit those sales contracts in the future.

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6 08 2009
Pricing metrics and the customers that suboptimize them « Spackle

[…] no means exhaustive, but it did have a “salesy focus”.  That’s because your sales people play a vital role in your pricing and licensing scheme both before it is rolled out and when their boots hit the […]

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