Part 1 of this blog series introduced LeveragePoint as a cloud-based newcomer to the business-to-business (B2B) pricing market with a novel pricing approach: value-based pricing. In this day and age of highly accelerated new product introductions, history-based pricing approaches are often inadequate. My previous post explained the company’s approach and current state of affairs.
Part 2 follows with my discussion with LeveragePoint’s CEO Steven Forth both during my recent visit to the company’s head office in Cambridge, Massachusetts (US), and via follow up correspondence. Steven Forth is CEO of LeveragePoint and sits on its board of directors. He is responsible for strategic direction, finances, and key relationships.
Prior to leading LeveragePoint, he was Vice President of Online Solutions at the eMonitor unit of Monitor Group. Steven has extensive experience with technology startups. Before joining Monitor, he co-founded the identity and social media company CrowdTrust and was CEO of Recombo. He is active on many of the LinkedIn Groups on pricing and sales operations.
Value-based Pricing – More Details
My prodding questions and Forth’s in-depth answers are as follows:
PJ: How do you judge your competitive landscape, and why do you win over or lose to your competitors?
SF: We have no direct competitors — value-based pricing is currently done using spreadsheets and Microsoft PowerPoint slide decks prepared by consultants and pricing experts (internal and external). Some of these consultancies have developed or are developing software tools, usually using Microsoft Excel and a database such as Microsoft Access. Some companies choose to remain with consultants and spreadsheets sharing them through Microsoft SharePoint and similar technologies rather than adopt LeveragePoint.
Most of our large customers already have a “big iron” pricing solution from PROS Pricing, Vendavo, or Zilliant (we have customers using all three). There is some talk of integrating LeveragePoint with these applications so that, for example, the Differentiated Value becomes the first step in the Pricing Waterfall, but this has not yet been implemented.
PJ: Why do you believe that your value-based pricing approach is better than segmentation on customers’ willingness to pay (WTP)/sensitivity to price?
SF: Value-based pricing and value-based selling are focused on the customer’s business model, not the seller’s historical pricing data. This focuses the seller on the customer and how the solution helps the customer, which is the best way to understand customer needs and business requirements, built trust, and justify a price premium.
Value-based pricing recognizes that the customer has alternatives, i.e., competitors, internal solutions, doing what they do now, even doing nothing. Value models include these alternatives as a reference price and formally model the advantages that the alternative may have. Acknowledging the value of alternatives builds trust and allows sales to deal with price objections more systematically.
Value-based pricing is outward-facing and depends on customer and competitor data and not on internal legacy data. This makes it much more effective in addressing changing market conditions where historical value and pricing relationships are being disrupted, for entering new markets, and for setting the price on new products.
Finally, value-based pricing builds a collaborative and mutually supporting relationship between pricing and sales organizations. Instead of pricing analysts telling sales reps what the price should be and sales pushing back or defaulting to undisciplined discounting, it gives these two key business functions a framework and meaningful customer and competitor focused data that can be used to optimize pricing and messages.
PJ: How do you overcome the traditional hurdles to better pricing software adoption (sales folks’ anxiety, general unawareness of the potential benefits, companies being secretive, etc.)?
SF: Our entry point into most large companies is the pricing function, but in the pilot process we develop cross-functional teams and ensure that these teams get to use the software and directly experience its power. The VP of Sales and the VP of Product Development is our ally in winning the sale and driving adoption. At this point, companies are adopting LeveragePoint for the following two main reasons:
PJ: How do you motivate customers’ product managers to act as advocates as well? (I understand why sales folks would be)
SF: Product development has learned to think in terms of how product features provide customers with benefits (feature-to-benefit mapping, which is something for which we provide explicit support). But in today’s competitive markets this is not enough. In the B2B space, economic factors loom large in the buying process and product managers have to go beyond benefits and link features and benefits to differentiated value.
If a feature does not either provide a differentiated value or eliminate the differentiated value of a competitor then it should not be developed at all. Product managers have to make many trade-off decisions. A feature may deliver differentiated value, but how much and for which sectors of the market? The holy grail for product management is to focus resources on those feature sets that deliver the maximum differentiated value for the lowest cost to develop and the lowest cost to serve.
Product managers also need to think in terms of the whole solution – what is the package of goods and services that the customer needs to maximize differentiated value and how much will it cost to deliver this. Value-based approaches help product managers think through trade offs. Companies using value-based pricing are able to launch products at higher prices and actually win those prices in negotiations.
Value driver and data libraries that are developed as companies use LeveragePoint provide an important source of customer and competitor information that are valuable to product management. The product increases in value over time. Its ability to share resources and collaborate multiplies that value.
Value-based pricing is a standard part of many of the stage-gate processes used in new product development and introduction (NPD&I) at many companies. Companies want to ensure that what they are developing will have a differentiated value and will sell at a price premium that will enable them to get a high return on investment.
PJ: Some so-called “big iron” pricing players view you as being complementary rather than competitive. They claim that, when one peels back your solution, what your software does is to put a dollar value on the attributes of a product that create value. For their part, what they do is determine WTP per segments, and these two approaches merge when it comes to recommending a price. Do you agree or not, and why?
SF: I agree that for the top end of the market, those large companies with large collections of transactional data, the solutions are complementary. And in fact, many of our customers already have pricing software from PROS, Vendavo, Zilliant and use LeveragePoint to set prices for new products and new markets, to craft value propositions, and to support sales. But I do not think that WTP is the most important function of traditional pricing software.
I think the ability to detect leaks through price waterfall analysis is generally more compelling. WTP and Margin Leakage are good diagnostic tools, they indicate where there may be problems and opportunities, but it is LeveragePoint that provides the actionable treatment in that it sets prices based on value, pricing power and strategy and then gives sales the tools they need in order to execute.
Setting Prices for Configured Products and Spare Parts
PJ: You seem to pay lots of attention to competitor’s prices in your value-based pricing approach. But what if both the company’s sales reps and competitors’ folks are out of touch with what the market can bear (i.e., WTP)?
SF: You need to know the next best competitive alternative as this establishes the reference price. If you have a differentiated offer you provide value above the reference price, but the price for the commoditized part of your offer is set by the market. The next best competitive alternative is sometimes a competitor, but it can also be an “internal option” (make it in-house) or even “doing nothing” (and even doing nothing can have a cost). The problem with WTP is that it does not parse out into actionable information for sales. Sales force has to know why different segments have differing willingness to pay and not just that they have them.
Part of the sales process should be to uncover the next best competitive alternative, and most prospects will share this with you or it can be inferred from an request for proposal (RFP)/request for quotation (RFQ). The customer is often coy (or misleading) on cost, but a good pricing team invests time in understanding the competitive alternatives and how they are priced. Pricing cannot be purely inward focused on legacy transactional data. It must look out to competitors and customers.
PJ: How do you plan to marry segmentation with value based pricing?
SF: In regards to segmenting using WTP, it is actually quite straightforward. You are basically trying to find groups of customers that show the same demand elasticity at the same price levels. You then define these as a segment. Normally you would also layer in your price waterfall data so that you could create a grid with one axis being demand elasticity and the other being the components of the price waterfall such as cost to serve, shipping costs, etc.
Personally I don’t think this is a very good approach for most companies. If I was putting in place this sort of segmentation, I would want to first test for any legal issues as my understanding is that in the US there are restrictions on selling the same thing for different prices. But more to the point, I think this approach does not help understand the customer or why the willingness to pay differs.
Segmentation is most useful when marketing and sales can use it to execute, and I think that generally requires insight. Our approach in our upcoming segmentation capabilities will be quite different. The most powerful segmentation has the following three axes:
Today LeveragePoint can provide you with the data on the key value drivers and in the future we will provide cost to serve models. I believe that eventually marketing automation systems will help buying process-based segmentation.
PJ: How applicable is value-based pricing to selling configurable products with multiple options?
SF: For configured products (our customer Parker Hannifin has a lot of these), the standard approach is to build a large value model that supports the different configurations. Depending on your business process and how involved pricing is in individual sales one can then either use the “save as” feature and make a new value model for the case or have sales reps turn value drivers on and off and tweak parameters. We have heard from some customers that the sales force must be able to build new value models and we are looking into accelerating development in this area.
PJ: How good is your value-based approach for spare parts pricing? Namely, spare parts pricing is governed by different rules than finished goods, such as how desperate the customer is (delivery lead time), the lifecycle phase of the product, competitors prices, etc.
SF: This is a standard domain for value-based pricing and there are some good case studies. One of the key questions of course is whether the value model is from the point of view of the original equipment manufacturer (OEM) or from the point of view of a third-party aftermarket supplier, and if the latter then what the differentiation of the aftermarket supplier is. But as long as there is differentiation that has an economic impact on the buyer then value-based pricing is the best way to set a price and then communicate the value proposition to the buyer.
Some spare parts pricing vendors fail to understand the role of pricing in product innovation and that many companies now design product and services to function together. This may be a critical weakness for them since people buy solutions rather than parts and services. This is something our own customers are driving home to us. Clearly, Servigistics has a much more mature solution for service life-cycle management (SLM) and its integration of Parts Planning and Parts Pricing is why I think the vendor should be winning deals. I don’t think PROS (or LeveragePoint for that matter) can do this at this stage.
Over time, we will match this with our pricing life-cycle management framework. But when it comes to actual price setting, as described at Servigistics’ web page, Servigistics too seems to be trapped in an old paradigm that depends too much on legacy transactional data and fails to address the real challenges of running a “parts and services” business. Given the current state of affairs I suspect we can be a complement to Servigistics for large companies with multiple parts, and a better solution for after-market part suppliers.
A Glance into the Future
PJ: Why do you think that building apps on salesforce.com’s Force.com cloud platform is limiting? In other words, why did you opt for Google Web Toolkit (GWT) on the front end and Java Class Libraries on the back-end?
SF: Using Force.com one can build very powerful database-centric and rules-based applications. But one can only innovate at the pace that is supported by salesforce.com and in the directions that the master vendor wants to take its own applications and the market. One has to be a follower and not an innovator to develop in this environment. For LeveragePoint, Force.com is currently weak in the following aspects:
Visualization, semantic Web-based inference, and integration with multiple external data sources and search engines are all central to LeveragePoint’s strategy. Sales users will generally access Value Propositions and create Unique Value Propositions through their customer relationship management (CRM) system. Sales Cloud is the most important CRM system but it is not the only player. At the upper end of the market SAP and Oracle/Siebel remain dominant; in the midmarket Microsoft Dynamics CRM and Sage Saleslogix have a strong customer base; at the lower end of the market there are many disruptive threats such as SugarCRM.
PJ: Given your significant research and development (R&D) investment and lack of marketing investments thus far, how will you ensure your business is sustainable in the long run?
SF: We have found that social media, especially LinkedIn, is a very powerful tool for generating awareness, understanding, and consideration. We also have the advantage of the pricing thought leader Tom Nagle’s support and endorsement (see the “Ask the Expert” feature on our corporate blog), and this carries a lot of weight in the pricing community and at the Professional Pricing Society (PPS). It was important for us to bring something with differentiated value to market before we began to invest in marketing. That said, you can expect to see us step up marketing in 2012.
PJ: What are you at liberty to volunteer regarding the company’s future moves?
SF: Our goal is to support deal optimization. We want to make it easier for sales to find the win-win with customers. For us that means that we want to help sales optimize value provided to the customer with profitability. This is something that Tom Nagle refers to as Advantage-Based Marketing.
We are also deepening our analytics packages so that our customers will be able to answer questions such as the following:
Dear readers, what are your views, comments, opinions, etc. about the current economic climate in your region/industry and about your approach to pricing your products and services? What are your best practices as well as experiences with particular B2B pricing applications? If you are a LeveragePoint user, I would appreciate hearing about your experiences with the product and the company.
LeveragePoint Adds Value to B2B Pricing â?? Part 2 » The TEC Blog…
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LeveragePoint Adds Value to B2B Pricing â?? Part 2 » The TEC Blog…