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How to put a Value Based Pricing Strategy into Action

Value Based Pricing: Scale ConceptTrying to correctly optimize pricing is among the more difficult challenges you will face in your business, especially in enterprise software, where you are already pricing in a matrix. It is definitely worth the effort, however, because once you master it sufficiently, you’ll see major gains in revenue – per McKinsey, an 8.7% increase in profitability for every 1% increase in price. To increase prices without a drop in volume, one of the most important strategies to utilize is known as value based pricing. With that in mind, let’s delve deeper into value based pricing and explore the steps you can start using today to impact your bottom line.

Value Based Pricing Strategy: the executive summary

While there is a lot I could write about value based pricing, the basic aim is to determine how much each of your clients will willingly pay for your merchandise. That allows you to maximize your revenue by charging each of your customers the exact amount they are willing to pay – no more and no less. At that point, you’re at an equilibrium for the price you are charging, supplying just the correct amount of value to your customer base. Seems quite simple, right?

Well, sort of… Figuring out exactly what the customer values is more difficult than it sounds and assigning a price elasticity coefficient to a feature set, especially so.  This is the reason why so many companies choose instead to concentrate on cost plus and competitive pricing (the paths of least resistance, but also the path of least earnings). But hey, you are smarter than that (since you are reading my site) – so let’s look at the major steps involved in value based pricing.

1: Identify your buyer characteristics and have a clear understanding of your customer personas

Developing the right customer personaPersonas are fictional characters that symbolize your ideal customer, the people whom you believe to be the perfect fit for your product. Your product will most likely fit the requirements several different classes of customers, which means you’ll need multiple buyer personas. One might be Founder Frank, the CEO of a startup who wants a service bundle that is smaller with fewer bells and whistles. Another might be Promotion Paula, the head of marketing for a large public corporation that wants an enterprise sized package.

What is important here is to define precisely who these personas are by thinking about things like their individual background, their function in the company, any challenges they might face, their bosses’ expectations, their needs and pain points, and what motivates them to use or try your product. Another critical point here is that as a company with an operating product, you should already have a good awareness of who your customer is. If not or the product is a new release, then start with step 2 and then circle back to this one once you have the data.

The purpose is really to understand them in and out because they’re the most essential part of your value based pricing strategy. Without them, you won’t be able to develop your target customer base, which lays the basis for the remainder of the steps in the procedure. Be sure you don’t skim over this step, and make certain everyone in the company knows who the buyer is.

Step 2: Survey and speak to your customer base

You talk to your customers about their pain points, favorite colors, and what they love about you, so there’s no reason you shouldn’t talk with them about the value they get from your product as well.

Value based pricing is all about information, both the qualitative as well as the quantitative. What this means is that the second step of the value based pricing process would be to gather customer data by getting information as to their price empathy and precisely what characteristics/benefits they value most in your product. There are numerous methods out there but the most fundamental is picking up the telephone and calling someone.

It’s mandatory that you target your surveys to those who match your buyer personas so you’re collecting data from individuals who you think are really interested in purchasing your merchandise, whether they’re prospects, actual customers, or marketplace panels. In addition, you wish to bear in mind that your clients are doing you a favor by filling out your survey, so be sure to value their time by keeping your surveys short and objective (hey, pay them if you have to, its worth it).

Step 3: Examine the data to figure out possible tiers or package bundles

Data AnalysisSuper. You have collected some data and spoken with a few customers. Now geek out on analyzing the patterns in attributes, advantages, and price points your different buyer personas value in your merchandise. I promise you patterns will begin to emerge that enable you to make tiers and appropriate packages for your product. Each tier should align with a specific buyer persona to make sure you are offering the correct amount of product/service to each distinct customer segment.

Going back to our earlier example, if you find the individuals who match your Founder Frank persona really value a smaller, but affordable, package with enhanced customer support, you ought to create an entry level tier with those features. Similarly, if the people who match your Promotion Paula persona are willing to pay more for a package with lots of cloud storage and unlimited user licenses, then make an enterprise tier that matches her needs.

After all, you wouldn’t want to charge a large public enterprise the same cost for your service as a small startup, particularly if the big firm is prepared to pay more. Understand, that it is not simply squeezing more money out of a client who may be willing to pay – it’s making sure that your offerings maximize the value gained by each target persona. Then they are happy to pay more because it is worth it for them.

Measure 4: Test and Review

Just remember that pricing is a process not an achievement. Customer valuations are always evolving due to things like changing consumer trends along with the developments in technology. These changing customer preferences and market conditions means your pricing strategy and tiers should be examined often to stay fresh. Don’t be stuck with a fixed server pricing strategy in an Amazon Web Services world. You have to continuously gather data and assess worth and cost sensitivity in order to be sure that what you’re offering is applicable to what your clients are searching for in your products.

Remember, also, to constantly validate your customer personas and their respective tiers. They ought to match up to your expectations, meaning that your enterprise tier should be mostly subscribed to by large enterprise customers. If, as an example, small businesses are flocking to your enterprise tier, then it might be wise to reevaluate and expand your service offerings so that you will have a package to target the biggest customers, and the additional revenue they are willing to spend for the feature set they want.

The old adage, “The customer is always right” is particularly true for value based pricing models. No matter what you want to charge for your service and no matter how you think it may be justified, it’s the customer who has to actually be willing to pay it. So it’s incumbent on you to make sure that the value created for the customer and the price they pay for it matches up.

Business is a healthy balance, and pricing is among the best representations of that belief. Everyone can win, from the customer getting exactly what they need at a fair price they are willing to pay – to your company developing a fantastic pricing strategy that optimizes revenue by aligning everything correctly.

Lessons in Leadership from Sacred Harp singing

sacred_harp leadershipLike many people, I enjoy listening to different kinds of music – in fact, my tastes run the gamut. Some are great for exercise, others for relaxing and some music even helps me get in the creative mood. Occasionally, I like to delve into music from my Southern heritage, from well known ballads and bluegrass to the more esoteric. The first time I heard “I’m Going Home“, as shown in the movie Cold Mountain, it is hard to describe the deep pull I felt from the overwhelming, transcendent power of those voices in unison. When I discovered that the style of singing was called Sacred Harp, I wanted to find out what made the music have such resonance. While doing a little research on the background and history of the practice of Sacred Harp singing, it struck me that there were some useful insights that could apply to organizational leadership.

Sacred Harp is a traditional sacred choral music that originates in the South and is also called “shape note” singing.  It is traditionally performed a cappella by singers arranged in a hollow square and participants take turns leading a song by standing in the center. Often heard is the claim by Sacred Harp singers that they sing for themselves and each other instead of just putting on a performance for an audience, yet so powerful is the music that it often literally shakes the walls of the venue and can be heard a half mile away. 

Don’t worry if it all sounds like gibberish during the warm-up period

In shaped note singing, the first part of every song starts with a warm up of sorts where the only thing sung are the notes fa, so, la and mi. As everyone starts in, the sound is more cacophony than harmony and it hardly sounds like a song at all for the first minute or two. Gradually, through iterative repetitions of the few notes, participants get into sync with the pitch and tempo established by the leader. Once the song leader determines that everyone is in alignment, they signal that the real production is to begin and the next verse starts the song with earth shaking harmony. Similarly, most of the early effort on any project is getting the team into sync with each other and the vision that the leader has set out. The beginning is often chaotic and real progress seems slow. The key is to have a leader who can set the tempo and a consistent, iterative process that reliably gets everyone on the same page so that the real work can begin.

Everyone is expected to participate

Hollow Square seating for Sacred HarpSacred Harp singing has no separate seats for an audience because everyone attending is expected to participate.  The singers sit in a hollow square formation with one voice part (Treble, Alto, Tenor, Bass) on each side, all facing inwards so they can see and hear each other. In your organization, everyone should be there to participate to the fullest, both contributing and enjoying the results, with no place for people who are there just to observe or “get by”. Its when everyone is passionately joining in that the real music begins to happen. To grow and survive as a business, there can be no dead weight and those who are not participating should be weeded out ASAP.

There are no rehearsals

Every singing is a unique and self-sufficient event with a different group of assembled participants. There are no do-overs and everyone has to be focused because there is only one chance to perform a song per event. The same goes with your business.  Each project, often comprised of different participants, is a unique opportunity to make something special happen, so don’t waste it. The good thing is, even those events that don’t go quite as planned can be part of the learning process. Singers of every talent level learn how to transition from the clamor of the warm-up into the powerfully unified harmony more quickly with each event. Your team or organization also should learn by doing and can develop the ability to get into sync faster and be productive across projects and teams. Training does have value but people are most fully engaged when actually performing.

The power of many

Most musical performances try to highlight the most talented or those with the strongest voice. Even in a large traditional choir, a bad performance by one or two can significantly distract from the overall work. In sacred harp, however, there are no soloists and a single loud or discordant voice cannot easily sway those around them. It is rather the strength in unison that gives the music its power. No matter your lack of vocal talent, with sacred harp, if you are able to get in sync with your sector, you can meaningfully contribute to the performance. Certainly a very talented group will sound better than one that is comprised of people of mixed or average talent, yet even the lesser talented group can produce moving music once they learn the basic notes.

So often, it can be a great temptation of many leaders to focus only on the most talented (or the loudest) voices in the room. Every manager wants their team comprised of only A players but all too often, you have to work with the human resources that you already have or can scavenge from somewhere else. The Biblical King David started out with “all those who were in distress or in debt or discontented” and THAT was the group later called “David’s Mighty Men”. So it’s essential to inspire and derive the maximum ability from the talent that you already have in order to get A level performances from B level talent. That requires your focus as a leader to be on helping everyone learn their part.



Strategy, its not just for fun!

One of my passions is the study of strategy and leadership. Whether military, business, sports or political, I have always been fascinated by the thinking and decision making that goes into out-thinking your opponent and getting people to follow you, especially in chaotic times. I have read untold number of books and treatises on the subject and have been fortunate to discuss strategic concepts with many different types of leaders who are at the top of their field.

Chess piece in playWhen I was younger, my preferred outlet for strategy engagement was playing chess. I ended up being the junior high school state champion and later, when playing speed chess, obtained a draw with a Grandmaster. In the early days of World of Warcraft, I organized raids and led PvP teams. I have studied a number of martial art styles, eastern as well as western sword fighting and the philosophies behind them.

More recently I find tournament poker more closely estimates the right kind of mind set for strategy. My take is that unlike chess, where there is almost no element of chance involved, poker consists of 33% playing your cards and position, 33% knowing the habits and psychology of the opponents and 33% blind chance – all with the ticking time clock of continuously increasing ante (burn rate for all you startups). It is worth noting that sometimes the very best hands, played perfectly simply don’t win – but as the saying goes, the better you can play your hand and the people at the table, the luckier you become.

So now, while I like to play poker now and again, I note that the world’s greatest chess player, Gary Kasparov, quit chess to enter politics. Like him, I have found that the most meaningful strategic wins are not from cloistered study nor are they merely games. That is why I seek my strategic fix elsewhere these days. I discovered that the real joy for me is in using those skills to create organizations that matter and advocating policies that I care about. Having founded a dotcom startup and later working as an advisor to two Prime Ministers and as a political operative, I have been fortunate to be able to apply the theory I learned to many real world issues. I tell myself that my motivations are to make a difference in this world, but I have come to acknowledge that I also enjoy the game.

Market your message to move the naked lady

Water Nymph in pondAn old story about a farmer that went out with a large bucket to pick some fruit in his back fields. On his way he passed a lovely pond filled with lily pads where he was surprised to find a beautiful young woman swimming. She was completely naked and her clothes were neatly folded on the bank under a large tree. The equally surprised woman watched as the handsome farmer calmly put down his bucket with a bemused look and sat down beneath the tree to wait till she came to retrieve her clothes. “I hope you don’t think I am coming out of the water while you are there to watch me!”, said the young lady, as she laughed and slid into the deeper water. “Oh, no Ma’am,” said the quick thinking fellow with a big smile, “I just came here to feed the alligator”.

Knowing the right message that will motivate your target prospect is key to eliciting desired behavior. Most of your potential customers are swimming about in a large market pool, with data noise and a desire for privacy muddying the water, keeping you from getting a clear view of your target market prospects. Today’s advances in big data can at least partially uncover their behavior profile and give you a glimpse of their desirability.  But even when you are in the right pond and the prospect sees your company in an attractive (or at least neutral) light, chasing after customers is usually a losing (or very expensive) proposition. It is far better to have them gladly come to you.

Make sure your Unique Value Proposition meets an URGENT NEED

Many people think that to have a great business all you need is a great product that people want and you are pretty much set.  Unfortunately, for farmers and startup founders alike, things don’t work that way. Getting customers or users requires more than just a great product, it also requires a 1) business model built on a unique value proposition (UVP) and 2. the ability to communicate that UVP to a target market who has a strong need or desire for it. Even when you discover what your potential customer needs and have it in hand, either through happenstance like our lucky farmer or through diligent research and experimentation, it is often not enough to overcome their reluctance and inertia to get them to move.

Hopefully, you have been practicing iterative product development with tools such as lean canvas and lean startup experiment board. During this process, you will flesh out your target user personas, develop meaningful user stories for how they will be using your product to solve their problem and above all, understand how important they think the problem is. Remember that what is what is important to your customer/user is not your product…it is the problem that your product solves for them. While they may indeed want or need your product, like the lady in the water, they can delay action indefinitely unless you are marketing your product to an urgent need. That is where focusing your messaging on the need becomes important.

Sell the sizzle

Too often, entrepreneurs are great at focusing on the solution…to a problem that no one really cares about. Yet, even when you do identify a significant pain point and develop a great solution for it, if you aren’t careful, you can spend your energy focused on selling the product, rather than the problem. Any sales book 101 will tell you to “sell the sizzle” not the steak. Neil Rackman, in the influential book, SPIN Selling, explains that the sales process goes through a process of questions elicited from the customer, from situational->problem->implication->need/payoff. The end result being that if you can get a prospect to acknowledge there is a problem that needs to be fixed, they’re far more likely to give you the attention you need to convert them into a customer. Just being aware of the problem, though, is not enough. There also has to be an implication that your product or service will solve that pain point for them – and that’s where the payoff is, both for your and your customer. Too many marketers try to sell prospects on the benefits (or even worse, on the features) of their product without properly tying it into the strong pain point it solves. If the customer doesn’t make that association, then they are less likely to take action.

Our farmer understood that he was unlikely to convince the girl of the importance of the product (her clothes) and instead focused his message on illuminating her problem (the alligator). He also understood that he did not need to explicitly spell out the benefits but that once aware of the problem and the implication of the solution, she would recognize the value of his solution and act on it immediately. Look for similar opportunities in your own products.

Tips on Improving Team Performance

I was writing a checklist on improving team performance and thought it would be useful to expand on it. Bruce Tuckman first proposed the team development model of Forming-Storming-Norming-Performing and it is a core principle of management theory. What I have found is that many teams really never get out of the storming stage, where team members are engaged in unproductive behaviors that limit their potential. This can have many causes but it’s mostly from faulty personal leadership and the failure to inculcate, by example and instruction, the values that make winners. Whether it’s an operations group, a multi-year project team or an ad-hoc team for short term projects, it is crucial to grow into the fully performing stage ASAP. This may take a fair amount of effort, some budget and frustration but if you think it costs a lot to improve team performance to the level of their potential, you should understand what it costs you when they don’t.

Tuckman on improving Team Performance

Developing a team through the initial forming and storming conflict phases and into more productive norming and performing stages is a critical job of any leader.

As a leader, you often can’t control the parameters you are given to perform under (limited resources, inept bosses, bad corporate strategy, and unreasonable customers) but you CAN always control what you do about it. Having your team members performing at their best, both individually and as a team is one of those factors under your control. Here are some tips on how to do that:

  1. Make the team’s common goals and purposes clear.
    It’s pretty hard to hit your target if you have no idea where you are aiming at. You need to establish sufficiently clear goals for the team. The reason for only “sufficiently clear” is because targets can change rapidly in today’s ever-changing economy, markets and technologies. Still, the most frequent complaint many employees make about their company is “We’re all over the map. I need clarification on my priorities.” It’s difficult to focus the attention and direct the energy of a team without clear goals and the context of that goal in the larger plan. Even a group or team that has been together for some time may never have done this.  It is so much easier for people to be motivated to get work done when they are clear on what they are supposed to do and why it’s important to the team and to the company as a whole. So take the time to articulate the team’s performance goals and how the team contributes to the company’s success.
  2. Establish group norms or a code of conduct.
    Engaging in a conversation about the behaviors and attitudes team members want to abide by helps corral and focus their energy and builds trust. When people know the rules of the road and, most importantly, abide by them, they learn to trust each other and they’re more inclined to take risks. In addition, it’s important to recognize and accept that conflict will happen and that it’s not necessarily a sign of something going wrong. Indeed, conflict can often lead to very positive outcomes but only if it is managed effectively. By establishing a group code of conduct, you can proactively plan for how people should and can behave when conflict happens.
  3. Show you have trust in your team and each team member.
    People need to be able to fail and make mistakes in front of others to be able to take risks. Allow them to make those mistakes as a form of learning. Show that it is really ok to make mistakes because if you really want to be creative you have to allow for failure. There are plenty of research studies on creative thinking that show that while highly creative people come up with many, many ideas, only a few are useful. Let them know you really support their decisions. The trick is to seek the root cause of a problem rather than to assign blame when things go wrong. Otherwise, they will always fear that someone is looking over their shoulder to make sure they do things right. Take risks, fail, figure out what went wrong and then keep learning and trying other options until you get it right.
  4. Give Recognition and Celebrate incremental successes.
    Almost every team I’ve ever worked with has said, “We don’t celebrate enough.” They get so busy planning, doing and reviewing that they overlook this important human need. No matter how talented or experienced you are you’re still human. Everyone needs the occasional “atta boy” so it’s important to recognize people when they do something extraordinary. It not only gives people a sense of accomplishment, it inspires others to make efforts to go above and beyond their normal duties as well. Even small efforts can make your employees feel appreciated and inspire them to do even more.
  5. Once the team decides on a plan of action, everyone must support it.
    Debate the issues beforehand and once the team decides to go with a plan… no one should passive aggressively or overtly subvert the plan. Too often, in organizations where there is little trust, people will focus more energy in planning to escape blame for the results of a team decision they didn’t agree with than helping the team to succeed. You can agree or disagree about directions, issues and opportunities – sometimes very forcefully! But once everyone has really been heard and understood, each team member should fully commit to the outcome.
  6. Enforce accountability.
    Stay on top of individual performances because often the actions of just one or a few team members will drag down the performance of the entire team and waste a lot of your time. Address performance issues immediately rather than waiting till a performance review or even a weekly meeting. If you don’t enforce the code of conduct and hold people accountable, there will be the natural tendency to ignore the rules when it suits the needs of the individual. Executives need to know that they will lose their job if they transgress too much.
  7. Expect that everyone on the team should and will act like a leader.
    On high performing teams, people don’t wait for their boss or other team members to speak up. Team members should challenge each other, offer their opinions, hold each other accountable, and, most importantly, praise each other. Mazlow’s theory of needs identifies self-actualization as the apogee of human performance and satisfaction. For team members to reach that place, it’s your job to give them the opportunity and encouragement to step up and lead and often to see in them qualities that they were not even aware that they had.
  8. Be a leader yourself.
    The best way to lead employees is not to manage them. Don’t just TELL them about success, SHOW them what success looks like. Leadership is not about pushing from the back but rather beckoning from the front. After all, if you are not leading, your team cannot be following. This is a process of developing their skills and providing them specific feedback to meet high standards. By improving the team’s performance, you are also improving your own. Too many places have employees who feel as if their managers treat them like children rather than being on the same team with their bosses. Be their coach and lead the team to success!
  9. Encourage employees to propose better ways of getting their jobs done.
    If you are a brand new manager, you will often want to put your own stamp on the group’s common goal. One mistake that many executives make, however, is to think that they personally must come up with the goals for a team. In fact, I’ve found repeatedly that if an executive enlists the aid of their direct reports in goal setting and prioritization, there will be much more buy-in and enthusiasm. Ask each for suggestions for other ways of getting the task or project accomplished. Listen and be willing to really hear their comments. Team members often state that they have no input and are told exactly how to perform their jobs, leaving no creativity. They know much more than you do about the everyday nature of their work. Let them have a say and you will see just how performance improves.
  10. Strive for continuous improvement.
    Continuous improvement is not just catchy consultant speak and TQM sloganeering by management – it’s a way of thinking. We should always be learning, always be working on improving ourselves. While there are many frameworks, tools and resources (outside consultants!) that can help the process, the most valuable resource is the team itself.  If you want to close the gap from where you are to where you want to be, you should convene the team at regular intervals to ask them: What do we need to be doing more of? What should we be doing differently? And, what should we stop doing? Remember, top teams don’t rest on their laurels – the laurels of yesterday are ever fading. There is always room to grow and improve.
  11. It’s Okay to Be Friends.
    In most offices, you’ll spend more time with your coworkers than you do with your family. Being friends and getting along not only increases performance, it also leads to a great work environment. Some bosses think that if they have too many friends on a team, then team members will lose respect for them and productivity will suffer. I have found, however, that as long as you keep a goal-oriented focus and hold people accountable, you shouldn’t be concerned that team members are your friends – and often, you will get feedback that will help you to become a better leader.
  12. Delegate, Delegate, Delegate.
    Clearly delegate responsibility and give your employees authority along with the responsibility. All those with a tendency to micromanage their teams and projects, do you give inconsistent messages? Do you ask the employee to handle a problem or project and then give them negative feedback or give them an assignment and then not give any feedback at all? Then make some changes! You cannot expect people to be responsible if they do not have authority to do the job. Giving team members authority to carry out decision-making and problem-solving is a pre-requisite for improved performance. Does that sometimes require a lot of trust? Yes, it does! But it’s the only way to grow a team to reach their potential.
  13. Have fun and laugh together.
    High performing teams enjoy each other and frequently crack jokes and kid each other. This happens most often in teams where the team members have trust in each other, can be vulnerable and generally like each other. If you’re not enjoying yourself being a part of a team, why are you there? We live in an amazing country where intelligent, highly capable and hardworking people are in demand. Those people can pretty much choose where they want to work. Choose to work with people you respect and can enjoy being with. And, if you aren’t happy yourself… don’t make others miserable by burdening them with your unhappiness. Either change your attitude, strive to improve the situation or get another job where you can be happy.