Source: The Kula Ring

Pricing for Success

Announcer: You’re listening to The Kula Ring, a podcast made for manufacturing marketers. Here are Carman Pirie and Jeff White.

Jeff White: Welcome to The Kula Ring. My name is Jeff White, joining me today is Carman Pirie. Carman, how are you doing?

Carman Pirie: I am doing fantastic, Jeff, and you?

Jeff White: I’m doing really well. I’m really excited about the guest we have lined up today. He’s got a very interesting perspective on a subject that you and I really enjoy talking about. Or arguing about.

Carman Pirie: Arguing about. I think it’s a topic that’s almost designed for arguing. Yeah, we’re hoping to make today’s episode, folks, all about pricing. And, more specifically, the pricing dynamics that are at play in complex B2B sales. So, let’s just dive right in, Jeff. Introduce our guest, please.

Jeff White: Absolutely. So, joining us today is JD Dillon, James Dillon, goes by JD. VP of Marketing and Pricing at Enphase Energy, joining us all the way from the other side of the continent, welcome to The Kula Ring, JD.

JD Dillon: Great to be here, gentlemen.

Carman Pirie: Now folks, what you don’t know is that we’re recording this fairly early in the morning, and it’s early enough on the East Coast that I’m barely awake, and JD is joining us from the West Coast, so heretofore unseen level of dedication brought to The Kula Ring. JD, great to be chatting with you. Please, if you will, tell our listeners just a bit about yourself.

JD Dillon: You bet. I went to United States Military Academy at West Point, and after my study in Engineering there and after my time in the Army, I started at a company called Cypress Semiconductor in a marketing role there, a technical marketing role—a product marketing engineer. The initials were PME, and of course everybody jokes about their own job, and we called this Pretty Much Everything. And as my time evolved there, I touched every part of marketing, but I honed in on pricing because I found it the most intellectually stimulating and far and away the most impactful job, in my opinion, in the world. Honestly. That sounds a little bit overblown, but it’s true. And then since then I established structure at Cypress, I moved on to a company called OCZ Storage, where I also focused on pricing, and then a small startup where I did pricing, and done some consulting gigs along the way, and now I’m at Enphase Energy, and I spend most of my time on pricing. Now I’m evolving a bit to more pure marketing, but pricing’s a passion. I’m in the Professional Pricing Society, who knew there was such a thing?

Carman Pirie: I love pricing being described as the most impactful area in business. Because frankly, often it’s said that here at Kula, we’re on a mission for people to really give the same level of importance that they give to product development, and R&D, and production efficiencies, to give that same level of import to the marketing and sales function—that you can unlock hidden value in what you make by concentrating on how it’s marketed and how it’s sold. And so much of that, of course, is about how it’s priced. So when you say that you can deliver the most value by pricing, of anything in the enterprise, just by definition, you’re agreeing with me, JD, so I like you already.

JD Dillon: I like to be liked.

Carman Pirie: Alright, so you’ve been at this pricing gig for a while, what’s the one, if you had to say the biggest thing that people miss, the blind spot that people have about pricing, what is it?

JD Dillon: The simplistic approach to pricing. I’ll give you a couple of examples. In many companies, pricing reports to finance, so how do you come up with a price? Well, you figure out what are the costs, how much it costs to make the widget, whatever it is, and then you say to yourself, “You know what? 50%’s a good margin. I’ll just tack on 1.5 times,” and that’s missing it. If you’re in the sales function, you say, “Hey, what do I need to close the deal?” So that’s competition-based pricing, or excuse me, that’s “customer’s willingness to pay”-based pricing. Some people say, particularly in a more consumer bent, “Yeah, we need to be more or less than the competition.” So that’s a third way. So there’s cost plus, there’s willingness to pay for the customer, and then there’s the competitive base. And then the fourth is the most evolved, and that’s value-based. But you got to value against what? And that generally weaves back to competition.

So there’s four different ways to do pricing, and so many folks see this as a simplistic, one of the four. It’s kind of like the old adage—you go up to touch an elephant, you touch the side, you think it’s wall, you touch the tail, you think it’s a snake, etc. And it’s much more complex than that.

Carman Pirie: Well, talk to me some more. So you’re saying people usually feel that they need to use just one of these four approaches, and that’s it that’s all.

Jeff White: Or that they only know one of the approaches?

Carman Pirie: Yeah, or are you saying there’s a magical fifth way that you’re about to reveal on this podcast for the first time?

JD Dillon: Wow. No magical fifth way, the answer is you do all four. But the point is, if you look at one, but not the others, you will either overprice or underprice. One of my favorite examples is there is a product when I was first starting out in the semiconductor world that sold for, and it was chip, it was a computer chip, and it sold for, the average price at the time was $27.50, and it cost us $0.85 to make. And if we went in with a cost plus mindset, there’s no way we would have unlocked all that value. So if finance had been setting the price, it would have totally underpriced the product. And then on the flip side, this company that I’m at now, there was a time, and this is open information, if you go on the internet, you could search around, where there were deals that the company took that were negative margin. Because that’s what the company needed to make the deal.

Okay, so that’s not even looking at the cost, it’s doing what we needed to grow. That was a customer’s willingness to pay. So those are two bookend examples where you look in one direction at the price, whereas if you look at all four of them, you would have done something a little different.

Jeff White: If we go back to the first example, obviously if you’d done cost plus on that, you would have a less than two dollar chip, what impact does pricing that at, what was it, $28, what impact does that have on the perception of the product itself?

JD Dillon: Well, the classic example is wine in the consumer world. Oftentimes, higher price can positively impact a product, the marketing message. So if you look at the four components, price is one part of the classic MBA course, you have product, promotion, place, and price. And price can absolutely… go to wine, and you may buy wine for $28 and you say, “Oh, this is better wine than the $12 wine.” Well, it’s the same grapes. Or another great example is high-end luxury goods. But the same is true in actual B2B. Because a lot of folks listening are B2B on this call, likely, and they say, “Wow, I’m dealing with a purchasing organization that looks past that.”

Well, you know what, they’re still humans. And humans make decisions, not corporations, and if people perceive the value, then the value is often there.

Carman Pirie: Well, and all value is perceived, right? And I think you’re quite right. People still buy emotionally, there’s just this, one of the biggest, I think, problems, or challenges for marketers is that there’s this sense that people are uber-rational when they’re operating on behalf of their business, or their employer, but then they’re somehow frivolous and able to be impacted by marketing in a much different way in their consumer lives. Like they somehow have these two switches and they just switch them on and off on Monday morning and Friday night. And that’s just not the case. So I really see and understand what you’re saying there. I wonder when it comes to… so many sales people in that classic marketer versus sales person conversation debate/discussion/argument, whatever we want to call it, where basically it comes down to the salesperson saying, “Well the problem is that the price is just too much. The reason we’re losing on these deals, the reason our close rate is what it is it, is because we’re just priced too high.”

It’s just this simplistic view of that. And I think marketers often, at that point, struggle with a conversation with the salespeople, because they’re not the ones that are kind of in that line-of-fire, if you will. What would you say to those marketers who are finding themselves in that discussion with a sales organization where it seems that it’s just all coming down to this simplistic view of price?

JD Dillon: I’d say there’s three simple approaches. “Simple” is I guess probably the wrong word. There are three relatively straightforward, in my opinion, approaches. The first one is, I try to… salespeople, if any salespeople that I’ve worked with are listening to this, they probably will throw a flag on this, but I try to empathize with the salesperson. A great way to approach it is, yes, that may be true, the price may be off. Let’s first walk through three other ideas on how we can win this sale, or improve take rate, or whatever the dynamic that you’re discussing is. What are three other ways that maybe we can approach it?

That idea, the very, very simple idea came to me from Madhavan, a friend of mine who’s at Simon-Kucher and Partners, a great pricing consultancy. And if you go through, oftentimes by the time you get to that third idea, you forgot about the price. So that is one approach. The second one is to remove services. And you say to yourself, well I sell widgets, it’s not a service. Well, but do you have a warranty? Do you have a line, a support line? Do you have a dedicated apps engineer, perhaps, that maybe you will tell the customer, “You know what? We can’t have a dedicated apps engineer, but if you want the product at $18, or $1.20,” whatever the number is, “instead of 20% higher, we can absolutely do that, but you’ll no longer have a dedicated support engineer.” Then the customer will go, “Whoa, whoa, whoa, whoa, whoa, whoa, I need that.” Or the customer will say, “Great.” Well, you just learned something right there. Perhaps your services aren’t as valuable as you thought.

So that’s the second thing. The first is do the three choices, the second one is pull on services sometimes. Basically lower your cost-to-serve for the product. Then the third idea is to focus on the next best alternative. I don’t actually call it competition, because the next-best alternative could be not purchasing the product. Well, that’s not competition, that’s just not buying. Or the next-best alternative could be a different way to solve the problem that you’re trying to solve. So spending time on the next-best alternative, and oftentimes after that conversation happens, you realize that… I actually had a gentleman one time, we were selling a chip into a cell phone, and he would say to me, “Got to be lower, got to be lower, got to be lower.”

And I finally said, “So what is the next-best alternative?” He says, “Well, you can’t use anything else.” “Oh.”

Carman Pirie: All of a sudden the conversation starts going the other way.

JD Dillon: I’m like “Are you serious?” And he says, “Yep,” he can’t. He has to use us, we’re the only one that fits on the board. I’m well, “Well… ” and it doesn’t mean that you should lord it over them, but jeez, that changes the dynamic, now doesn’t it?

Carman Pirie: Changes the dynamic incredibly. A guy that I worked with also likes to use the process of anchoring against certainty, so what if in a complex sale where you’re maybe… the outcome of what’s being purchased is uncertain. Often, in terms of selling professional services that would be the case. The question would be, then, to anchor whatever the price is against what is it worth if we guaranteed an outcome, if that could be done? And all uncertainty was removed from the equation, what is that worth, and then comparing those two prices oftentimes puts it into some favorable perspective.

JD Dillon: Which is fantastic, because you brought up a fourth. I tend to like to do things in threes. The ex-military in me. But you brought up a fourth, which is to change the unit of measure of a sale. Now this is a lot harder to do. You’re not going to do this tactically, this is a company-changing event. I’ll give you an example. Everyone knows software as a service, but what about outcome-based pricing? I went to a pricing conference with Michelin. A gentlemen from Michelin, the tire company. And he said they were selling airplane tires. And they weren’t selling by the tire, they were selling by the landing. So every landing the plane made, because just logic tells you that’s where all the wear-and-tear is on the tire of a plane, every landing the plane made, is what they got paid for. Not the tires. So if they could extend to more landings, i.e., higher quality tires, Michelin would make more. Fewer landings, they’d make less. And of course safety trumps everything, so that’s a non-negotiable part of the sale. But fascinating dynamic.

Carman Pirie: And I find, I mean it’s almost like they’re easier to talk about in theory than they are in practice. I mean, some place along the way somebody has to track how many landings that’s going on those tires and charge it back, right? There’s some complexity in pulling that off.

JD Dillon: Well, in that case, safety regulations, that one’s regulatory built-in. Every aspect of air travel. Now that happens to be a specific industry, but the dynamic exists elsewhere, too. Anything where safety’s involved, records are usually pretty meticulous. There’s other examples you can do that, if you’re selling semiconductor equipment, uptime. I mean every company keeps a, OEE is the term, I frankly can’t remember what it stands for, it’s how often a piece of equipment is up. Well, you can track up-time, and that’s a relatively well-known metric. So almost every industry has metrics, we’re so metric-driven these days. Everything from sports teams to a business, that it is possible.

Announcer: You’re listening to The Kula Ring, conversations on manufacturing marketing. Don’t forget to subscribe now at kulapartners.com/thekularing, that’s K-U-L-A partners dot com slash The Kula Ring.

Carman Pirie: I want to go back to this customer willingness to pay method of pricing, only because I… trying to assess a customer’s willingness to pay, of course, has a lot to do with the positioning and the framing of the pricing options that we’ve just talked about. So I guess let’s talk through that a little bit further. Do you have any tips for people who are endeavoring to… I guess how would you unearth that? How would you tell people—how do they determine the customer’s willingness to pay beyond simply listening to what the sales folks are saying they’re hearing?

JD Dillon: There’s no substitute for primary research. And I am not a consultant, nor do I pretend to be, and I don’t mean to advertise consultancies, but having a consultant do it is very, very useful, because that’s a third-party. So there are a lot of good firms that are experts at it, where they can ask and not enter into the negotiation. Because the important part is you don’t want to have a willingness to pay, in negotiation, taint that. So if you call up your largest customer, talk to the purchasing agent and say, “How much would you be willing to pay for this new product?” Well, they just… negotiation just kicked in. So that doesn’t work at all.

I will give you a very specific example of something that I did nine months ago. I found ten customers, randomly I might add, and I called them up, me personally. And I set a meet with them, and they were kind of surprised to be called up by a vice-president of the company. And how I asked the question is the most important thing. And so there’s two ways to ask that question. One, I said, I explained the program, we’re looking at providing upgrades to your micro inverters, and I said, “What would be a reasonable price in your opinion?” And of the ten that I called, nine answered, one refused to answer in an odd twist, but the other nine, they gave answers, and then I said, “Why is that?” And they explained why. And then I said, “What would you find to be a prohibitively expensive price?” So asking it that way then bracketed from reasonable to prohibitively expensive, and then I said, the third question is, “If I sold it to you for,” and I gave the whatever they said as reasonable, “What would be your likelihood to purchase?”

So there is science on this, but with those questions, number one the most important thing is the why, because then you can analyze the heck out of that. Number two, if their likelihood to purchase on a scale of one to ten is an eight, that’s a different answer than a two, and so you can analyze that. And frankly, I didn’t go crazy, I only got nine, and I did it via interview, not via survey, and it immediately got us enough information to know whether it’s directionally correct.

Carman Pirie: And did you find a lot of somewhat consistency, or were the results fairly tightly grouped, I guess?

JD Dillon: There was one that was skewed way high, two that were skewed way low, and I could quickly tell that they were cheapskates, and then I just threw them out. And then the other ones were all rounding error to each other.

Carman Pirie: So a bit of a bell curve emerged, even within the nine.

JD Dillon: It was a bell curve, but it was spiked. Yep. And it totally colored the direction that we were headed. I knew exactly which way to go from that point.

Jeff White: Very interesting. What would you, I mean I’m sure you’ve seen a lot of the same CEV and Gartner research that’s been out around the increasing size of the buying committee, and you notice you’re getting people from all kinds of different departments within an organization, at least having some form of say over an actual sale. How do you, as a sales person, as a marketer, sell into that from a pricing perspective?

Carman Pirie: Does it change the pricing conversation as the buying group increases?

JD Dillon: So, I very carefully, if you go back to the previous example. What I was giving you was ten different customers. But let’s change that answer I gave on the willingness to pay to your question right there. What if I asked ten different humans at the same customer? The problem you run into is lowest-common-denominator. You got the one who doesn’t care about the price, the two cheapskates, and the ones in the middle, but as an organization, they will end up going to the lowest-common-denominator if you try to please the two cheapskates. That’s the problem that you just described. And the answer is, kind of sales 101, who’s the decision maker?

And if the true decision maker, or a person with strong veto, is one of the two at the lower end of the bell curve that I described, then therein lies the discipline of pricing. Walk. If the person’s somewhere in the bell curve, then sell it at the bell curve price, and just be willing to deal with the two people at the low end. But that’s the rub, figuring out who the true decision maker is, and whether or not someone has the veto, and having the discipline to walk.

Carman Pirie: I think that’s good advice, and I’ve kind of, as Jeff brought this up, I want to go back to something that you said earlier around the next alternative. And acknowledge at that point that sometimes that could actually be buying nothing or doing nothing. Which is, in fact, what Gartner has found, is that as the buying group has increased in size, their propensity to buy nothing goes up. The more people that are making the decision, the more likely their decision is not to buy. In fairness, it probably in some cases a much safer decision than an expensive purchase.

JD Dillon: Wow. I tell you what, that’s fascinating, because see this is why I love these conversations. I just learned something. I hadn’t thought about it exactly the way you said, but you’re absolutely right. It’s harder to get… I mean, for goodness sakes, look at government. It’s hard to make decisions. The more people you involve, the harder it is to make a decision, so the default is no decision. That is great. Anyway, ask your question, that was wonderful. Thanks. I just learned a lot.

Carman Pirie: I don’t even know if I had a question, I was just trying to square these two-

Jeff White: It was just more of a statement.

Carman Pirie: These two dynamics. If you’re using, “Jeez, Mr. Customer, let’s talk about my pricing, compare it against the option of doing nothing,” that can be a little bit more fearful, or fear-inducing I should say if the likelihood of them doing nothing is considerably higher.

JD Dillon: And that’s where not being desperate is so important. A friend of mine, years and years ago, taught me… when I first started in marketing, he was a seasoned sales person, he drove a Cadillac, he was a little bit slick, but one lesson he taught me was, sometimes you have to lose the sale to win the customer. And sometimes it’s not the right deal, for either of you. Oh, that’s hard to swallow for most people.

Carman Pirie: That’s when you have the real power in a sale dynamic, is in the ability to walk away. You’re quite right, if you don’t have that, or you’re not willing to exercise that, then you’re on the fast train to the bottom, really. This has been an interesting conversation. The psychology of pricing is just, I mean there’s so many layers to it. When we’re talking about, again, a complex B2B sale where there’s an RFP process that’s probably at play, an extensive proposal, a lot of moving parts within it, I know that some of the… I was reading some of your articles in the lead up to this interview, and you were giving some pretty good advice around how to kind of mix-and-match, or take different pricing approaches within that kind of an environment. I’d like to touch on that now as we turn our eyes towards wrapping up the podcast in the next little while.

JD Dillon: Certainly. So I believe the end-all is value-based pricing. And to do the complex sale, when you have multiple different influences, all of whom have multiple different motivations, if you can think in terms of the customer’s PNL… so one of the things I did at one of my companies was an economic value calculator. And if you take the company’s PNL and say, how can I drive value for the customer? Well, I can either… they can charge more for their product or service, as a result of my product or service. So they can charge more, they can sell more, they can get to market faster, hence pull in their revenue stream. They can decrease their cogs so they can lower their, often it’s build and materials—as a result of me, they can buy me and not have to buy others, for example, so you eliminate waste for them, so lower the cogs, or you can lower their opex, less service calls, less… service calls is often cogs, but… less engineering time, less development time, a shorter development cycle. So if you can think in terms of the customer’s PNL, that is how I bring it all together.

Carman Pirie: I think it’s fantastic advice, and I think it’s something that people should really be aiming towards. I also can’t help but imagine that there are a number of salespeople that could listen to that and think that it sounds like a tall order. I don’t know if they’re used to having conversations at that level.

JD Dillon: Wow, a salesperson will definitely, this is what makes it a complex sale, probably need to bring in multiple different folks from your company to make that sale. No salesperson, no human, is capable of doing all of those things at once. You might bring in the operations person who does your supply chain and your technical design engineer who developed the product to try to make the sale with you. You can’t do it alone. It’s not… the days of knocking on the doors and closing, selling steak knives, that’s gone.

Carman Pirie: And I like that idea if the sales organization can transition that value identification process, if you will, transition that outside of the sales process and operationalize it to an extent. Get the operational level folks both on the prospects side and on the selling organization side dealing with each other. I find if that can start happening, all of a sudden that sales function gets to be a heck of a lot easier.

JD Dillon: And frankly, for most of the seasoned salespeople I know, it’s also more fun.

Carman Pirie: Yeah.

JD Dillon: Seriously. It makes the job a little more enjoyable, it’s more dynamic, it makes work more enjoyable. And if it’s more enjoyable, you’ll probably do better.

Jeff White: Yeah, and they are also learning things by bringing in all of those people with those different degrees of expertise about what they sell in the process.

JD Dillon: Wonderful point.

Carman Pirie: Well, JD, what our listeners don’t know is that we’ve managed at least on two or three occasions throughout this podcast to get you to list things in even numbers rather than in odd numbers. And we started this conversation before the recording talking about the weird ticks that we both share for never setting an alarm for an even time of day. We’re always doing things in odd numbers. So I don’t know, I feel like we’ve shifted a timeline or something. Like we’ve gone from the Berenstein to the Berenstain, or what have you, timeline. I don’t know, I mean the whole world is going to change as a result of this, I think.

JD Dillon: And it’s an example of Canada and America working together. Wow. Look at that.

Carman Pirie: As things should be. If we can just, anything that we can do to bring these two nations closer together, we’re happy to be a part of it.

JD Dillon: Absolutely.

Carman Pirie: Thank you very much for taking the time to chat with us today, any last parting words of advice before we sign off?

JD Dillon: Wow, that’s a lot of pressure. So the parting words of advice is, give pricing a little bit more time and effort. What struck me when I first started is, it was a semiconductor company and I’d sit and I’d listen to the engineers talk about going from 99.1% yield up to 99.8%, and there’d be a long meeting, and lots of ideas, and then, I’d get on the phone with a sales guy and he’d say, “Let’s drop the price by five bucks.” And I’d be like, “Jeez.” I mean, that’s where it’s impactful. You can make… a junior pricing person can make their salary on one day with one deal. And there’s so much money to be made with good, solid pricing.

Carman Pirie: That’s fantastic advice to give pricing the time and attention it deserves. Don’t hesitate to peel back those layers a bit and understand that there’s some complexity under the hood. It’s not just a simple one-and-done conversation. I think that’s great advice, JD. Thank you so much –

JD Dillon: My pleasure, gentlemen.

Carman Pirie: For taking the time to chat. It’s been fantastic, and we look forward to reconnecting with you soon.

JD Dillon: Can’t wait. Have a good one.

Carman Pirie: Thank you.

Announcer: Thanks for listening to The Kula Ring with Carman Pirie and Jeff White. Don’t miss a single manufacturing marketing insight. Subscribe now at kulapartners.com/thekularing, that’s K-U-L-A partners dot com slash The Kula Ring.

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