Value-based Pricing: When can I stop asking questions?

How do you know when to stop asking questions about value? Couldn’t this go forever, asking “Why? Why? Why?” until we end up in a philosophical discussion?

You want to ask questions until you no longer get meaningfully different answers. At this point, you know what you need to know.

For example, suppose you want to understand the value of selling a data backup service to a CIO. You ask the CIO why he cares about this. He responds that “obviously, we need to be able to continue our business in the case of data loss in our main data center.” This makes sense, but doesn’t tell you how valuable it is to continue their business.

So you ask “how much money do you lose if you can’t continue your business?” The CIO does not want to share that information, fearing you will use it to increase the price of your backup service. He assures you that he has done a cost estimate. You know from a back of the envelope calculation that they are a $1B business, so they do $3-5M in revenue per weekday. If they are out of commission because of a datacenter failure, they won’t lose all of that revenue, because some orders will be deferred, but they will likely lose over $1M per day, plus the cost of overtime and other opportunity costs from dealing with the aftermath. Since this is a risk-based value, you need to know the CIO’s estimate of risk.

“How do you calculate the risk of an outage or disruption?” you ask.

“We don’t have good metrics on that, but I know I don’t want to lose my job, or have my people and my customers have to deal with it.” At this point, you’ve established a pretty good value case, right? So you present the quote, confident that you and the CIO have established a shared view of value and have a great solution. A week later, you haven’t heard back and wonder what went wrong. You call the CIO and leave a voicemail. He emails you back saying that your solution looks good but they don’t have the time or budget right now. He promises to call you back when it’s a priority.

What went wrong? The CIO had other, more pressing challenges. If you had asked, “how does data backup compare with your other priorities?”, you might have heard, “it’s important, but we’re not doing anything until we migrate to the new version of our order management system.” In a different situation, you might have heard, “The CEO has made 24x7x365 business operations my number 1 strategic priority for the upcoming year and she sent me a clip from an online news article about a company that had suffered an outage for 2 days with the comment ‘this better not happen here.'”

Now you have two very different views of perceived value in these two situations (never mind the differential part, for now), although it appeared they both had the same value at the first level. If the CIO said something like “oh, sounds expensive”, you might even note “Price Objection” as your reason for losing the deal in the Customer Relationship Management (CRM) system. Product managers might see “we’re losing 60% of our deals because of price objections” and decide to lower prices.

This is just sales 101, though, right? What does this have to do with pricing?
Nothing, and everything.

First, you may be tempted to lower the price to sweeten the deal in the first case. However, you still won’t get the deal, because price isn’t the issue. At least not yet. However, if you have already offered a concession, when the CIO does call back to talk about your solution, he will start with the discounted price and negotiate further from there.

What can you do with price?
If price is not an issue, then lowering the price does not help. However, there are times when price is not a serious issue, but it can help. For example, if you know you have professional services personnel who are not currently billing, you may offer a discount on implementation services for a limited time. Even better than the savings for the buyer may be the ability to achieve some other goal with the extra money. Even better, if you are about to raise prices, you offer a compelling reason to sign now.

To give you an example, a company I worked for in the past was having trouble closing a deal. They warned the customer that prices were tripling next year. The buyer thought they were bluffing. It turned out to be an expensive gamble. Not everyone has the ability to negotiate with the threat of a 300% price increase, but if you have strong value, you can encourage prompt buying.