I’ve talked about pricing before.  Pricing your product or service is extremely tricky. Expect to revisit
your pricing continually throughout the life of whatever it is you are
selling.

This post attempts to provide some useful background that, if nothing else, will help explain why
the process is so tricky. What follows applies to products or services,
but for ease of typing, I’ll just refer to everything as products.

Pricing is the art of finding a dollar amount that your customer is
willing to pay for your product. A customer’s willingness to pay is
dictated by whether or not they see your product as being a “good
price”, a “fair price” or a “bad price”.

In other words, there is the actual dollar amount you charge and an intangible perceived price that reflects what the customer feels that they are paying.

Pricing isn’t simply about dollars (or any other type of currency).
And this is fundamentally what makes pricing a tricky process.

But lets define some terms.

Perceived Price:  Does the customer see your product as cheap, reasonable or expensive?

Willingness to Pay:  Willingness to pay is inversely proportional to the perceived price.  As the perceived price goes down, willingness to pay increases.  As the perceived price goes up, willingness to pay decreases.

Dollar Amount: The amount you are charging for the product.

Perceived Value: The value the customer sees in your product.

The relationship between these three factors is something like this:

Perceived Price ↔   1 / Willingness to Pay

and:

                        Perceived Price  = Dollar Amount / Perceived Value

or if you prefer:

Willingness to Pay = Perceived Value / Dollar Amount

In other words, a customer’s willingness to pay the dollar amount you are asking for has everything to do with the perceived value of your product.

The chart shows increasing dollar amount versus increasing perceived
value. If the Dollar Amount is high and the value low, the product is
seen as too expensive. If the Dollar Amount is low and the Perceived
Value is low, it is a fair price, but probably a commodity product. If
the Dollar Amount is high, but the Perceived Value is also high, your
pricing is still perceived as reasonable, although you are selling a
“premium” product (more on that later). Finally, if your Dollar Amount
is low but your Value is high, you are priced too cheaply.

Lets explore this some more. 

Imagine two products with identical features and identical dollar pricing.  Product A has a high perceived value, while Product B has a low perceived value.  Customers will be more willing to pay for Product A than Product B, even though the dollar amount is identical.   

The higher the value to the customer, the lower the dollar amount will seem, increasing the willingness to pay. In other words, higher value lowers the perceived price.

Here’s an example: coca-cola and coffee. Assuming you drink both,
would you willingly pay $6 for a can of coke? What about $6 for a
Starbucks coffee? In general, both are normally priced at between $1
and $2. But what the customer is willing to pay for Starbucks Coffee is significantly higher than what they would pay for a coke.  And that’s because of the perceived value of a Starbucks coffee.

Don’t confuse value with features. Customers
don’t flock to Starbucks because they provide a unique blend of warm
water, caffeine, milk and sugar in a transportable package and throw in
a free stirring utensil. They choose Starbucks because of the ambiance,
the perceived quality of the products, and the overall “experience”.

For another example, visit the grocery store. Every category is
filled with “premium” items. Haagen-Daz ice-cream is 6 to 8 times more
expensive than Blue Ribbon, but it sells extremely well because the
customer perceives additional value in the product and is therefore
willing to pay the premium dollar amount.

Perceived value can be so high that customers (a) don’t perceive that they are paying a premium and (b) may even place the product in it’s own separate category.
It’s not just coffee, it’s Starbucks. It’s not just a car, it’s a BMW.
It’s not just a play, it’s a Broadway play. It’s not just perfume, it’s
Chanel.

Every product or service category you can think of has premium
products that have higher dollar amount prices than their competition.
The successful ones survive because the value of the product makes the
perceived price acceptable in the mind of the customer. Being a premium
product is a fantastic market position to have, but your product better
be good enough to maintain its premium status.

Would you pay $30,000 for a Kia car? Probably not. But you would pay
$30,000 for a BMW. The difference between the products is a lot more
than a feature list. BMWs have high perceived value based on
desirability, product quality, associated prestige etc. Conversely, if
you were offered a brand new BMW for $11,000 (the price of a base model
Kia), you might buy, but you would be very suspicious about the product
being sold.

“Too good to be true” can be as big a barrier to sales as too high a
price. And both are driven by the perceived value in the mind of your
customer.

Going back to the relationship between Perceived Price, Willingness to Pay, Dollar Amount and Perceived Value, it is a pretty obvious conclusion that if the dollar amount increases and the value stays the same, the willingness to pay goes down (the perceived price has gone up). 

That’s why an established dollar amount puts an upper limit on what
customers are willing to pay. Once you charge $299 for something, it is
pretty hard to then convince your customers to pay $499.

What you can do is add more value
to the product and then charge more. You can also reduce the dollar
amount while proportionally reducing the value, hence all those “Lite”
versions of products.

Under certain circumstances you can temporarily lower the dollar
amount, for example during a sale, or with a coupon. But the longer you
maintain the discounted dollar price, the more established it will
become in the mind of your customer. If you continually run sales and
special offers, your customers will just wait for the next good deal to
make their purchase.

Okay, so why not just slash the advertised price? In principal that
drives the perceived price down and the customer’s willingness to buy
goes up. Sounds like a good plan, right?

Nope.  Generally speaking, it is always a bad idea to compete on price.  There are three fundamental  problems with slashing dollar amounts:

1. It’s hard to raise a price again once it has been lowered (see the previous paragraph)
2. There is always someone somewhere that will undercut you
3. There is a limit to how low you can go while maintaining a viable business

No matter what the lowest price is that you can afford to sell
something at, someone else can sell it cheaper. Or at least they think
they can. You can compete with them all the way down to zero and
beyond, but you will most likely destroy your business in the process.
Companies with deep pockets, alternative business models or excess
stupidity can and will undercut you on price. But remember, if your
perceived value is high, your customers will still be more willing to
pay even if the dollar amount is actually higher.

You can offer products for free if you still have some kind of revenue
source. What you can’t do is offer products for free if your business
is built on the expectation of revenues from that product. But that’s a
whole different topic…

And lastly, just because you decide to offer something for free
doesn’t mean you can’t be undercut on price. There are always companies
that are willing, even if only for a short time, to pay customers to
use their products. In other words, the price becomes less than zero.  Think of free trials, mail in rebates and “buy X get Y free” coupons.

So remember, it is almost always a bad idea to compete on price. The only way to win the game is to have high perceived value.

There is only one occasion on which you should compete on price, and that is when your product fundamentally changes the game.  What does that mean? If an existing market charges $100 for a product and you have an innovative way to profitably
sell it for $20 or less, you may be on to something. But usually an 80%
(or greater) drop in price means that your product takes advantage of a
fundamental change in thinking.

For an example, let’s roll back the clock and look at Autodesk,
makers of AutoCAD. Prior to the arrival of AutoCAD, Computer Aided
Design software cost anywhere from $100,000 to well over $1M per copy!
AutoCAD arrived and was priced at less than $3000. They offered 90% of
the functionality of the other systems for less than 10% of the price.
How did they do it? They created CAD software for the PC. Every other
system used proprietary hardware, or expensive mini-computers. At the
time, the PC was just beginning to be accepted for business use. John
Walker, the founder of Autodesk, made the perceptive leap that a PC
could be used for CAD and that the software could therefore be
dramatically cheaper than anything else currently available. Of course,
since then various other companies have created CAD products that have
90% of the functionality for 10% of the price, resulting in AutoCAD now
being the expensive end of the market and good CAD tools being
available for less than $100.

Okay. So they competed on price.  Or did they?  Not exactly.  Price was a factor, but they also offered mind-blowing perceived value.  So willingness to buy skyrocketed the company to success.

Don’t believe me?  Would you spend $3000 on something that didn’t have much value to you?  No, of course not.

So if you are fundamentally changing the game you can offer a
dramatically lower price, but at the end of the day, always remember: a customer’s willingness to buy will always be driven by perceived value

Another BarCampRDU bit for your reading pleasure…

There are plenty of “sales theories” out there. In my experience most
of them are bogus. My all time favorite stupid theory is The Yes Curve, which I’ve blogged about before .

Before we get in to theory, lets look at two basic subjects: why people buy and how they choose what they buy.

Fundamentally, people buy products because they need or want them.  There is a key difference between the two.

Purchases made based on needs are for things people cannot avoid buying.
These are purchases that are in some way genuinely critical to the
continuance of their every day life. Examples include car repair (if
you rely on your car), chemotherapy, and anniversary presents .  Some sales veterans will also refer to this as a "hard sell".

Purchases made based on wants are for things people like to buy, but they are not essential.  This is referred to as a "soft sell".

The vast majority of purchases made by consumers are wants not needs.
If you are lucky enough to be selling a product that people genuinely
need, your game is radically different from the sales game played by
the rest of us.

The rest of this piece targets wants and not needs.

This is simple.  People choose products that have value to them.  Value is not the same thing as features.

While a Rolex may have some impressive features, it is still just a watch.  People buy Rolex’s because the value
of a Rolex is important to them. A Rolex’s value comes primarily from
the perception that it is a status symbol and an indicator of success.

Louis Vuitton purses sell for hundreds of dollars because of the perceived value in the Vuitton brand. 

Apple Macs appeal to certain types of customers because of the lifestyle the Mac represents.

What Starbucks sells is still more or less just coffee. But Starbucks
does better than Joe’s Anonymous Coffee Shop because of the perceived
value inherent in their products. They have value to their target customers.

Many companies confuse value with features. This
is why you will see companies release a product with identical features
to a market-leading product. These products almost always fail because
they only capture the features and not the values of the market leading product.  Need an example?  Look at MP3
players. How many iPod clones or killers have been released only to
fail dismally? Many had bigger screens, more storage and more features
than the iPod, but they didn’t have more value, so the
customer didn’t buy them. They stuck with the iPod. By the million.
Even though the iPod had problems (batteries dying, less play time,
higher price etc).

Customers buy based on perceived value. That’s why figuring out
the value of your product or service should be your primary concern.

It is a very common misconception among salespeople that they can make
someone buy something. Short of holding a gun to someone’s head, this
is simply not true. Occasionally people can be herded or goaded into
buying something (absolutely not a practice I recommend or endorse in any way whatsoever), but almost no-one is every made to buy a product.

Unless that product fills a critical (critical like life-threateningly important) need.  But that’s another topic.

In other words, a good salesperson is incapable of making someone buy a product.  What they do well is guide a customer through a controlled Sales Process.

In fact, there is a simple set of milestones that any controlled sale follows.

And again, by controlled, I do not mean that the salesperson is making someone buy something.  Perhaps a better phrase would be a disciplined sales process.

So lets get to it and tour this cosmic marvel.

Definitions:

Population Base: The Population Base contains all of your
target customers. Or to put it another way, this group contains
everyone who might, in any way, be interested in what you are selling

Suspect: Otherwise known as a lead. A Suspect is someone from your Population Base
that has in some way expressed preliminary interest in what you are
selling but has made no commitment whatsoever. This is the “Hmm, sounds
interesting. I might need that.” stage, and it usually ends with the Suspect contacting you in some way.  Contact might include visiting your website or in some way requesting information.

Qualified Suspect: The Suspect’s initial questions have been answered and they are still interested in your product.  In other words they are a qualified lead.  The key difference between a Suspect and a Qualified Suspect is a commitment to purchase, however vague, from someone with the authority to make such a commitment.  This is the “Hmm.  I’ll need one sometime” stage.

Prospect: The difference between a Qualified Suspect and a Prospect is direct contact and interaction.  Regardless of whether you have called, emailed or met with this potential customer, a Qualified Suspect becomes a Prospect when
there has been direct interaction with a salesperson. This is also the
point where you should establish the current status of the 5 keys that I blogged about before. 

Qualified Prospect: A Prospect becomes a Qualified Prospect once you have firmly established positive answers to the 5 keys.

Not all Qualified Prospects will turn in to sales, but if you’ve reached this point, as a salesperson, you have done everything within your power to line up the sale. 

Sale: The whole point of the process. You made the sale.
Just don’t forget to keep looking after
your customer from here.

Now that you have a way to establish where a customer is on the route to a Sale, you should begin tracking your sales process.

Remember, there are two components to being a good salesperson (a)
being able to close sales and (b) being able to learn from sales that
didn’t close.

If you don’t learn from every potential sale, regardless of the outcome, you will never become a better salesperson.

Here are some items you should be tracking:

• How long does it take to get from Suspect to Qualified Prospect?
• How many Suspects do you need to generate one Qualified Prospect?
• How long does it take to get from Qualified Suspect (when the salesperson gets involved) to Qualified Prospect?
• How many Qualified Suspects do you need to generate one Qualified Prospect?
• How long does it take to get from Qualified Prospect to Sale?
• How many Qualified Prospects do you need to get one Sale
• How many Suspects do you need to get one Sale

Other information you need includes:

• Is there a common cause behind lost sales?
• Is there a common point in [the five keys] where the sale is lost

Hopefully the usefulness of the last two is obvious. But what about
the other numbers? Why track those? It’s for two simple reasons

1. Estimating future sales based on potential customers already in your sales pipeline
2. Figuring out how many Suspects your company’s marketing needs to generate in order for you to meet your sales goals.

Lets look at (1) first. If you know that it takes 45 days on average
to go from Suspect to Qualified Prospect and 15 days to go from
Qualified Suspect to Sale, you have a total sales cycle of 60 days. If
you have potential customers that are 30 days in to the process, you
know they are probably 30 days away from a sale.

Now look at how many Suspects typically lead to one Sale. Lets say 100
Suspects usually product one sale. If you have 200 Suspects you can
reasonably expect at least two sales.

Now lets look at (2). Continuing the previous example, lets say you
need to make 10 sales. That implies that you need to have 1000 (or
10×100) Suspects in your sales pipeline. If your current marketing
efforts are only reaching 500 Suspects, the odds are pretty low that
you can make your quota. In other words, the scale of your marketing
efforts and the number of sales you can expect to make are closely
related.

Sales is a process. Like any other process it can be tracked and quantified and that data can be used to improve the process the next time around.

The more data you have, the more productive your sales and marketing
efforts will be. The more productive those efforts are, the more
successful your company.

You can make sales without such a process in place, but you’ll
always be relying on sales closing by luck. You can’t become a more
productive salesperson unless you’re working smarter, and the only way
to get smarter is with a properly tracked sales process.

In the mid-nineties, I had the good fortune to work with a graduate
of IBM’s legendary sales training program. Back in the early 80’s they
had spent a lot of time and money figuring this stuff out and he was
happy to share some information.

While there is no “magic bullet” to make anyone buy anything, there is a process that helps eliminate the “why did that sale go away” factor.

Basically, you need to have five key things in place for a sale to
be able to close. If you don’t have all five covered you don’t have
control of the sale. If you don’t have control, you really don’t know
what’s going on and can easily have a “where did that sale go”
experience… The sale can still close, but it will be due to blind luck and not good sales technique.

The Five Keys fits rather nicely in to a Sales Process, something I’ll blog about another time.

Have you established what the customer’s needs are? Does your
product or service meet those needs? Most sales people are so absorbed
in the product they’re selling that they assume it is a fit for the
customer’s needs. You need to explore what the customer is actually
looking for and whether your product fits the bill. The critical thing
is that your product must fit the bill as far as the customer is concerned.

If the customer is unaware that your product meets their needs, or worse, if they don’t believe that it meets their needs, there will be no sale.

You also need to consider if the customer’s need is critical or non-critical.  If a customer’s world ends without your product, it’s a critical need.  In other words, do they have to have your product in order to function?  Or would they just like to have your product.  Most sales are non-critical.

If you are lucky enough to have a product that meets a critical need, it will be much simpler to establish a firm timeline for your sale.

Have you really discussed budget? Not just price, budget.
Yes, the customer needs to like the price, but do they actually have
the budget to do this? If so, when do they have it? Are there other
items competing for the same budget dollars? Are there other
constraints on spending money in the budget? Who signs off on the item?
The customer can love your price, but if they don’t have the budget you
don’t have a sale.

A lot of folks either forget about the competition or they ignore
them. Has the customer considered any competing products? If so, which
ones? In the mind of the customer, are your features and overall value
superior to the competition? Many sales people are reluctant to mention
the competition on the grounds that it may put the idea into a
customer’s head. This is just plain stupid thinking. Given how much
information is easily available online, no customer in their right mind
makes any kind of purchase without looking at their options, including
your competition. You have to eliminate the competition by delivering
superior value (notice I said superior value not better price), and again, it’s the customer’s opinion that counts, not yours.

What is the customer’s timeline for the purchase When do they need
the product delivered by? Are they ready to purchase now? Will it need
to be next month, next quarter, next year (see Budget, above)? If the
customer says the timeline is “in the next few months” that usually
means they don’t have a timeline. And that means you don’t have a sale.

Beware: Most people don’t like saying “no” to anyone, even a
salesperson. The easiest way to not commit to a sale is to avoid a firm
timeline. As a sales person, it is your job to fish for the real
answer to this question (and all of the others). “Within the next few
months” is not a real answer. “Definitely by July 31” is.

Finally, a little sales jargon. UDM = Ultimate Decision Maker. In
many cases the customer you are dealing with is NOT the one to approve
the purchase. Is the UDM aware of your proposal? Have they approved the
purchase? If possible, it is always best to have actually spoken with
the UDM, have them confirm the status and answer any questions they
might have directly. If your customer is wary of having a sales person
call their boss, offer to do a joint call (10 minutes or less) with
them and their boss, or to communicate by email. Most UDMs don’t mind
being involved in such a way – it makes them feel like they earn their
paycheck

That’s all there is to it. If you have those five things under
control, you’ve done everything you can to get the sale to closure.

The next step is to track your sales and see if there is a regular spot
where things go awry – maybe your competition are stepping up their
value, perhaps your sales guy (or gal) doesn’t lock down the timeline.
Maybe your customers have a really long buying cycle (like schools or
the government)?

It can also be valuable to go back and look at sales that failed
before you started working this way and see if any patterns emerge.
You’ll be surprised at how often one of these simple things has been
overlooked…