Then please join me and my friend and esteemed colleague Thomas Otter on Thursday mornings at 8 am pacific for a series we’re calling The SaaS Product Power Breakfast where Thomas and I will interview invited special guests and engage the audience in discussing all things product, including:
Product requirements (to generalize or not to generalize)
Application / platform dynamics
Product input and feedback processes
Managing new vs. existing products
The transition from 1 to N products
Product development processes (e.g., agile, scrum)
Minimum viable product
Managing product managers
The transition to general manager (GM)
And much more
For those on Clubhouse, here’s a link to the first event. If you’ve not tried Clubhouse yet, well here’s a great reason to join — ask a friend (or us) for an invite if you need one. Finally, we’ll be making recordings of the episodes available as a podcast (which took about four episodes to figure out).
My interest in product stems from my overall fascination with strategy and my experience in product marketing at Ingres (RDBMS), CMO at Versant (ODBMS) and Business Objects (BI/analytics), SVP/GM at Salesforce.com (Service Cloud), and CEO at MarkLogic (NoSQL) and Host Analytics (Planning). That’s not to mention lesser involvement in strategy working in board and/or advisory mode at companies including Aster Data (NoSQL), Nuxeo (ECM/DAM), and Alation (data intelligence).
Thomas’ interest in product stems from his infinite curiosity about the intersection between technology and people. Thomas was part of the leadership team that scaled SuccessFactors to over 50M end users, managing not only product but literally scores of product managers. Prior to that Thomas was an analyst at Gartner where he drove the HRTECH research agenda that helped shape the industry. Truly a multidisciplinary thinker, Thomas’ PhD dissertation “sits awkwardly at the intersection of IT, law, and business.” He’s thus a heck of an interesting guy to talk to.
Most salespeople are familiar with so-called BANT qualification: does the prospect have Budget, Authority, Need, and Timeframe in order to make a purchase? While Solution Selling purists dislike BANT (arguing that it’s great way to find existing deals that have been already rigged for the competition), most sales organizations today use BANT, or some form of it, for lead qualification and scoring. Typically, in an enterprise SaaS company, a sales development rep (SDR) will not pass an opportunity to sales unless some form of BANT qualification has been performed.
The purpose of this post is to drill into how you should do price (i.e., budget) qualification, which I believe is far more subtle than it appears:
People can sometimes spend far more than they are spending (and/or imagine they can spend) once they realize the total cost of owning their current system and/or the total benefits of owning a superior one. Great salespeople, by the way, help them do precisely that.
SDRs barking average configuration prices or, worse yet, price list items (e.g., “enterprise edition has a base fee of $100K/year plus $2.5K per admin user/year”) can either scare away or anchor bias prospects to given price points.
For example, let’s say that your company sells a high-end planning/budgeting system (average cost $250K/year) and you find a prospect who is spending $50K/year for their existing planning/budgeting system, which isn’t delivering very good results.
It’s inflexible and doesn’t allow the VP of Finance to make the reports the CFO repeatedly requests.
It’s arcane and requires highly paid consultants to come several weeks/quarter in order to make changes and performance maintenance on the basic setup.
It’s slow, so users are frustrated trying to load their budgets, and instead mail them to Finance via spreadsheets, asking Finance to do the loads, creating a significant amount of incremental work for the finance team.
How are we supposed to price qualify this opportunity? Ask the prospect:
How much they want to spend? Answer: as little as possible.
How much budget they have? Answer: $50K.
How much they are paying for the existing system? Answer: $50K.
As an SDR, are you supposed to pass this ostensibly $50K opportunity to a salesrep who normally does $250K deals ? If you’re smart, you know they have the money — those consultants in problem 2 might run $100K/year, they probably have to hire an extra analyst or two to solve problem 3 at $80K/year each, and problem 1 — which is career threatening for the VP of Finance — is, as Mastercard likes to say, “priceless.”
What’s more, what do you say if the prospect tries to price qualify you?
You know, we don’t have a lot of money for this project so I need to know the typical price of your system?
What do you say then? $50K and jeopardize the deal downstream when the salesrep proposes $250K? $250K and possibly scare them off at the start — even though you know the total cost of their existing system might be bigger than that today?
I’ve always liked Tiffany’s as a reference point for this. As you may know, most Tiffany’s stores are divided in two. On one side — typically the smaller, more crowded one — you can buy jewelry from $200 to $2,000. Then there’s the other side, where the security guard hangs out, that’s bigger and less crowded, and where the jewelry costs from $10K to $200K+.
The thing I find funny about Tiffany’s is that somehow, magically, most people seem to figure out what side they belong on. And when they don’t, the staff don’t ask you how much money you have — they tell you broad price ranges on each side of the store.
The keywords, in an enterprise software context, being “broad” and “ranges.” So, in our scenario, I think the best initial answer to the pricing question is:
That’s a hard question to answer at this point. Each customer and every situation is different. Our systems scale across a broad range of needs and, as a result, prices typically range from $50K on the low end to $500K+ on the high-end. Based upon what I know about your situation, I’d recommend that you have a conversation with one of our account managers so we can better understand your challenges, our ability to meet them, and establish a clearer price point for so doing.
Your goal is to neither scare them off nor anchor bias them to a lower price (“sure we can do that for $50K”) that later results in disappointment or, worse yet, a feeling your company can’t be trusted.
Finally, the great part about the Tiffany analogy is that most enterprise software companies actually do have both sides of the store — corporate sales and enterprise sales, often each selling different and appropriately priced editions of the software. While few SaaS companies actually segment between the two based on deal size, they typically use other variables that are intended to act as direct proxies for it.
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 The answer in most SDR models would be “yes, just pass it” so the hard part isn’t the decision to pass it, but how to do so without anchor biasing the prospect to a $50K price. (“Whoa, the SDR told me you could do this for $50K; he asked how much budget I had and I told him precisely that.”)
I was wondering the other day why Southwest would spend millions of dollars to remind people that Bags Fly Free. I’d argue there are two reasons:
It generally supports their friendly and transparent, low fees brand strategy
It reminds customers that a $500 fare on United might actually cost you more than a $550 on Southwest if you’ve got a few bags
Price have become so opaque over the past few decades that not only are consumers routinely surprised when they receive a bill, but companies now feel compelled to spend millions to remind them that quoted prices are often apples/oranges comparisons.
It’s not hard to find examples of price opacity:
Mortgages with variable rate structures people don’t understand and which exposes them to massive increase in payments (i.e., the 2008 crisis).
Bank accounts that have no monthly fee, but are laden with subtle and not-inexpensive fees that seem to silently sneak back in as terms are quietly changed.
Numerous airline refundability tiers, change fee policies, per-seat premium economy seat fees, and baggage fees that make true price comparison next to impossible.
Rental car policies like Hertz’s usurious $10/gallon refueling fee or the maze of overpriced and often unneeded insurance options that can double the price of a rental
Teaser rates for many services, including cellular and Internet, that bear no resemblance to the actual monthly fees
Most, but not all, of the time I manage to sidestep these problems because I’m sophisticated and can figure them out (when I take the time), because I carry balances that preclude most of the sneaky banking fees, and because I fly a lot and get exempt from some of the change fees and seat fees.
But just the other day, while I was in the midst of congratulating myself for avoiding the Hertz $10/gallon refueling fee, I looked on the receipt and saw a per-mile fee that nearly doubled the cost of my rental — when was the last time a rental car didn’t have unlimited miles?
It’s a cat-and-mouse game and companies keep getting better at playing it.
Now you could argue that this opacity is a company’s way of fighting back against price competition, and particularly the price transparency and comparability that the Internet brought. In an era of price comparison engines that scour the Internet for the best deal, why not sneak in some fees that give you an edge?
You can argue, as people often do when it comes to the airlines, that we’ve done it to ourselves – our consumer behavior has trained the companies towards these strategies. And that may be true, but we need to accept that these strategies are often fundamentally dishonest.
I realized this as my kids got older and I had to explain how rental cars work (which I still don’t know that well apparently), how airfares work (self-insure against cancellation by throwing out a ticket every now and then as opposed to getting gouged on refundable fares – or just fly SouthWest), how credit cards work (that’s a long one), how mortgages work, and on and on.
It’s what in Texas they call a boiled frog problem. It’s happened so slowly and incrementally that we’ve just gotten accustomed to it and the people most hurt by the practices tend to be at the bottom of the socioeconomic ladder (e.g., payday loans) and have the least voice.
And this society of deception already extends well beyond consumer pricing. Contests and prizes are another huge area, like fake $1M TV show prizes (e.g., America’s Got Talent) that are actually a 40-year annuity worth more like $300K, fake unwinnable TV contests like American Ninja Warrior (which has only been completed twice) which are made harder every year so nobody wins the fake 40-year $1M annuity, or even state lotteries (which started the annuity deception) which typically pay out over 20 years, slashing prize values by about half.
But where we’ve ended up is not acceptable. Ironically, after the Internet brought a brief wave of price transparency, we have ended with potentially more opacity than we had before as fees and terms and packaging get ever more complex. We’re eroding consumer trust by living in an era of manufactured confusion and price deception.
You may not think this is a big deal, but I’d argue it’s like Malcom Gladwell’s broken window theory. If we tolerate constant small deceptions in our lives, we open the doors to the big ones.
I’m Dave Kellogg, advisor, director, consultant, angel investor, and blogger focused on enterprise software startups. I am an executive-in-residence (EIR) at Balderton Capital and principal of my own eponymous consulting business.
I bring an uncommon perspective to startup challenges having 10 years’ experience at each of the CEO, CMO, and independent director levels across 10+ companies ranging in size from zero to over $1B in revenues.
From 2012 to 2018, I was CEO of cloud EPM vendor Host Analytics, where we quintupled ARR while halving customer acquisition costs in a competitive market, ultimately selling the company in a private equity transaction.
Previously, I was SVP/GM of the $500M Service Cloud business at Salesforce; CEO of NoSQL database provider MarkLogic, which we grew from zero to $80M over 6 years; and CMO at Business Objects for nearly a decade as we grew from $30M to over $1B in revenues. I started my career in technical and product marketing positions at Ingres and Versant.
I love disruption, startups, and Silicon Valley and have had the pleasure of working in varied capacities with companies including Bluecore, Cyral, FloQast, GainSight, MongoDB, Recorded Future, and Tableau.
I previously sat on the boards of Granular (agtech, acquired by DuPont), Aster Data (big data, acquired by Teradata), and Nuxeo (content services, acquired by Hyland), and Profisee (MDM, exited to Pamlico).
I periodically speak to strategy and entrepreneurship classes at the Haas School of Business (UC Berkeley) and Hautes Études Commerciales de Paris (HEC).