Category Archives: Pricing

Price Qualification: The Tiffany Way

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.

  1. It’s inflexible and doesn’t allow the VP of Finance to make the reports the CFO repeatedly requests.
  2. 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.
  3. 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 [1]?  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?

Capture

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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Notes

[1] 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.”)

 

The Era of Consumer Deception:  Why Do We Tolerate Such Price Opacity?

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.