From time to time over the past 30+ years, vendors have described to me pricing schemes in the vein:
- Calculate a measure of your customer’s business improvement, for example cost savings, revenue increase or marketing lift.
- Take a fraction of it for yourself.
That sounds like a risk-sharing win-win kind of deal, in which your customer’s costs perfectly mirror the benefits achieved.
The naive form of that argument is wholly ridiculous, however; what customers pay you is only a portion of their total cost of ownership, and in most cases not close to the majority. The plan has more fundamental problems too, and experience shows that it rarely works in practice.
Last May, I summarized and explained my standard pricing advice by:
- There should be 2 or more simple pricing algorithms, so that …
- … the price for any given customer is the lowest of those choices.
Generally one pricing algorithm will be suited for most of your customers, while the others will be meant for minority or edge cases. …
Core reasons for that approach include:
- Simplicity. Your salesman on the account should be able to quickly determine which pricing approach will apply. The prospect should be comfortable that there won’t be hard-to-foresee “gotcha” charges.
- Fairness and match to use case. For any particular prospect, there probably will be a pricing scheme that fits well.
- Competitive flexibility. Nothing in this strategy puts much of a floor or ceiling on your pricing. You can do whatever you think is economically best.
Benefit-sharing pricing, by way of contrast, can be simple or fair, but it has great trouble being both at once. So if you propose it, messy negotiations will ensue.
For example, suppose that Tweedledee Inc. mirrors Tweedledum Corp. in all ways but one: Tweedledee uses your best competitor Humptyware, while Tweedledum runs the far inferior Dumptysoft. Thus, if Tweedledee implements your Frabulizer, their rate of rattle-breakage will drop from 2 percent to 1; but if Tweedledum buys it, their rate will drop from 10 percent to the same 1. Should and will Tweedledum really pay you 9 times as much for the same thing as Tweedledee? Not a chance. So if you try to price on the basis of measurable outcomes improvement, you’ll probably just get into a huge price negotiation mess.
I do see one scenario in which I might consider benefit-sharing prices — when you’re in a messy price negotiation anyway, and benefit-sharing could close the gap. For example, if you want $1 million for what you claim will be a $20 million benefit, and the customer offers $750,000 for what they more conservatively estimate as a $10 million outcome, you could let the last $250,000 ride on some agreed-upon metric tracked over time. But even that is a questionable stratagem, in that it amounts to a bet that your salesman’s optimism will actually prove to be correct.
Bottom line: Keep your pricing simple, which it isn’t if it depends upon your customers’ internal operating metrics.
I consult to ever more stealth-mode companies, so perhaps it’s time to pull together some common themes in my advice to them. Here by “stealth mode” I mean the period when new companies — rightly or wrongly — are unwilling to disclose any technological specifics, for fear that their ideas will be preempted by rival vendors’ engineering teams (unlikely) or just by their marketing departments (a more realistic concern).
To some extent, “stealth-mode marketing” is an oxymoron.* Still, there are two genuine stealth-mode marketing tasks:
- Recruit employees.
- Prime the pump for post-stealth marketing.
Further, I’d divide the second task into two parts — messaging and outreach. Let’s talk a bit about both.
*I am reminded of my late friend Richard “Rick” Neustadt, Jr., whose dream job — notwithstanding his father’s famous book on presidential power — was to be a US Senator. So he needed to punch his military duty ticket, and got a billet doing PR for the Coast Guard. (One of his training classmates was Dan Quayle.) His posting was to a classified base, and so his PR duties consisted essentially of media-mention prevention. But I digress …
As I wrote in a collection of marcom tips, the pitch style
“We’re an awesomely well-suited company to do X.”
- In stealth mode, when you don’t have anything else to say …
- … but not at first product launch, when you finally do.
For small start-up companies, this message is most easily communicated through highlights of the founders’ awesome resumes, for example:
Our CTO personally stuffed and dyed the yellow elephant for which the Hadoop project is named.
But that still begs a central question – how do you describe what your stealth-mode company is planning to do? I.e. — in the quote above, what is the “X”?
A common question I’m asked may be paraphrased as:
- We have differentiated technology, and have been marketing on that basis.
- Our best sales cycles are the ones driven by line-of-business executives — for example Chief Marketing Officers — rather than IT.
- So (how) should we message with a business rather than IT focus?
My standard three-part answer is:
- You should at all times have a complete messaging stack that spans all relevant audiences. This is something I’ve been advocating for years. Please see for example my recent post summarizing many of my thoughts on strategic messaging, and the more detailed posts to which it links.
- The choice of what to emphasize in sales should be made on a meeting-by-meeting basis, with adaption on the fly as discussions unfold. This is so obvious it hardly bears saying. Of course your sales teams should be prepared for business and technical discussions alike. Of course your sales executives should understand which emphasis is called for when.
- You should alternate over time between benefit-oriented and technology-oriented emphases in your marketing. I’ll expand a little on that point below.
This blog is based on two precepts that also guide my consulting:
- In enterprise software and similar businesses, messaging is the core of strategy.
- Messages must be robust enough to withstand deliberate competitive attack.
Let’s spell that out.
Messaging is the core of strategy
The enterprise software business, in simplest terms, is about the building, marketing and selling of software. Messaging is central to all of those activities! In particular:
- Selling boils down to two main processes, one of which is delivering sales messages. (The other, of course, is managing prospect relationships.)
- Marketing is mainly about developing and delivering messages. (Most of the rest is lead generation.)
- Development’s job is to make great sales and marketing messages be true.
If we add another level of complexity, the story changes only a little. Read more
|Categories: About this blog, Marketing communications, Marketing theory, Technology marketing||2 Comments|
A common subject of my consulting is naming, and specifically naming the category of product or technology something goes in. Clients are well aware that no market categorization is ever precise. Still, words must be chosen, collateral must be prepared, and talks must be given to rapturous* audiences. Here are some of my go-to techniques.
1. My most precise tip starts from a classic naming dilemma:
- If we call it something entirely new, nobody will know what we’re talking about, or why they should care …
- … but if we say it fits in an old category, then how do we differentiate it?
Increasingly, my advice is to pick a name that’s “half new”, usually in the form of a two-word phrase that overlaps partially with the name of an old product category the new thing sort of resembles.
In some examples from my own work:
- ClearStory Data emphatically does not want its service called “business intelligence”, as doing so might denigrate the novelty of ClearStory’s innovations. A big part of how ClearStory beats traditional BI is in the intelligence of its data handling. Voila! With a nice bit of double-meaning, ClearStory’s secret sauce is now described as “data intelligence“.
- Platfora’s latest release focused on data sets that — after Platfora assembles them for you — are sort of like time series but also somewhat like event streams. “Event series” was the winning name.
- Tokutek, whose main differentiation is performance, makes storage engines for MySQL and quasi-storage-engines for MongoDB. What should we call them? “Performance engines” fits the bill, at least for the “not exactly a storage engine” MongoDB case.
2. A principle underlying that tip is that connotation is as important as denotation. The reactions that category names evoke can be as important as their literal meanings, especially since those literal meanings aren’t very precise anyway.
Returning to the examples above: Read more
Paul Graham got into a flap by saying that strong accents interfere with founders’ entrepreneurial success. The key section makes it sound like his point is you have to be able to pitch in (fairly) fluent English:
Conversations are more of a problem, as I know from my own experience doing office hours. We talk about a lot of subtle points at office hours. … And I know I don’t get as deeply into things with the groups that don’t speak English well. I can feel it happening; we just can’t communicate well enough. …
A startup founder is always selling. Not just literally to customers, but to current and potential employees, partners, investors, and the press as well. … And yet a lot of the people you encounter as a founder will initially be indifferent, if not skeptical. They don’t know yet that you’re going to be huge. You’re just one person they’re meeting that day. They’re not going to work to understand you. So you can’t make it be work to understand you.
At least in enterprise IT, however, I’d say that there are four points, not just one. You — and by “you” I mean the CEO, the CTO, and any contributor in sales, marketing or product management — should be able to:
- Pitch in (fairly) fluent English.
- Listen in (fairly) fluent English.
- Pitch in (fairly) fluent techspeak.
- Listen in (fairly) fluent techspeak.
My reasons for saying that start:
You can’t sell effectively without listening. This is one of the basic facts of business, yet shockingly many people forget it. You can’t pitch effectively without understanding how the prospect frames what she hears, and you can’t judge that unless you listen to what she says.
You can’t listen at maximum effectiveness without selling. Of course, that depends greatly on what you’re listening for. But commonly your goal in a conversation is one or more of:
- Make a sale.
- Pave the way for a sale.
- Prioritize product enhancements.
- Learn how to change your marketing pitch.
Some principles of enterprise IT messaging.
0. Decision makers are motivated by two emotions above all — fear and greed. In the case of enterprise IT, that equates roughly to saying they want to buy stuff that:
- Is safe.
- Will confer benefits.
1. For a marketing message to succeed, whatever its goals are, the “confer benefits” part of the story needs to be:
2. The “safe” part needs to be believed too. Rational belief in the safety of doing business with you is good. Blind faith is even better, but usually is enjoyed only by the most established of vendors.
In some cases, that may be the greatest competitive strength they have.
3. To be believed, enterprise IT messaging generally needs to be:
A certain amount of exaggeration is expected, and easily shrugged off. It’s also possible to get away with a certain amount of vagueness, whether in a fear/safety story or when pitching something as new/innovative/exciting. But don’t overdo either.
One common way to overdo your exaggeration — make an obviously false claim of uniqueness.
4. Please note: Deficiencies in the consistency of your messages can undermine credibility and clarity alike.
5. Messaging can become distorted in many ways, both accidental and deliberate. For example: Read more
|Categories: Analyst relations, Layered messaging models, Marketing communications, Marketing theory, Technology marketing||1 Comment|
Vendor clients often ask me about pricing. Everybody knows that there usually are:
- A low-quantity list price.
- A standard volume discount (typically 50%ish, assuming negligible cost of goods sold).
- The real negotiated price.
But the whole process has to start with some concept of a single-unit price.
What kind of price? Well, for appliances, you usually should just charge a one-time fee for whatever is in the carton, plus annual maintenance; most alternatives are gimmicks. But for packaged software, there are numerous choices. The easy part is timing:
- All software can be charged for on an annual license.
- Some can be sold on a perpetual license as well. (Exceptions include: Open source, SaaS, and perhaps other software whose main competition is reasonably-priced subscriptions.)
- Annual maintenance is usually 20-22% of the perpetual license fee.
- When there are both perpetual and annual options, the annual fee is usually 40-60% of the perpetual one.
Tougher is deciding what kind of “unit” you should price by. My standard advice has become: Read more
To a first approximation, messaging is the expression of positioning; and the way you know whether positioning is good is whether good messaging naturally flows from it. So it’s natural to conflate the two. But let’s focus for once on positioning itself.
I think positioning boils down to:
- Product category, even though product categorizations are never precise.
- Orientation, along multiple attributes.* Hence positionings are more complex than vendors commonly realize.
- (Optionally, but it’s a common option) Target customer group.
When positioning is framed that way, we can say that the primary goals of messaging are to communicate, emphasize or try to change aspects of your positioning.
*I used to say “dimensions” instead of “attributes” — but most likely the attributes aren’t all orthogonal to each other and also aren’t all measured on a continuous scale.
The modern concept of “positioning” was formulated and popularized by Jack Trout, starting in the 1960s, and can be stated as (filling) a “location in the customer’s mind”. In practice, a Trout positioning combines a product category with a single-attribute orientation such as “safe”, “powerful”, or “fun”. But I think that’s too simple for B2B or technology contexts.
I like the Geoffrey Moore formulation better, in which he offers a positioning template:
For (target customers)
Who (have the following problem)
Our product is a (describe the product or solution)
That provides (cite the breakthrough capability).
Unlike (reference competition)
Our product/solution (describe the key point of competitive differentiation)
When I am a VC overlord:
- I will not fund any entrepreneur who uses the word “disruptive”, unless she has actually read at least one book by Clayton Christensen.
- I will not fund any entrepreneur who mentions “market projections” in other than ironic terms. Nobody who talks of market projections with a straight face should be trusted.
- I will not fund any software entrepreneur who is unfamiliar with “The Mythical Man-Month”.
- I will not fund any software whose primary feature is that it is implemented in the “cloud” or via “SaaS”. A me-too product on a different platform is still a me-too product.
- I will not fund any pitch that emphasizes the word “elastic”. Elastic is an important feature of underwear and pajamas, but even in those domains it does not provide differentiation.
- I will hire a 16 year old intern of moderately above-average intelligence. I will not sign or propose any contract that intern finds difficult to understand.
- I will hire a second intern of moderately below-average intelligence. I will not fund any product whose documentation that intern finds difficult to understand. Exceptions may be made for products sold to orienteering athletes, crossword puzzle solvers, or engineers.
- When a board on which I sit approves revenue targets for the year, I will further stipulate that the year-ending sales pipeline must comprise more than a Chinese hair salon, an Italian pushcart vendor, the CEO’s brother-in-law and a bankrupt bait shop in Nome.
- I will only hire a CEO who can explain the technology at his previous company. A CEO who doesn’t know what his products do can’t sell or market them either.
- I will only hire a CEO who can also walk me through a sales cycle at her previous company. A CEO who doesn’t know how a customer buys may well have trouble producing revenue.
- I will support any plan that I agree is good for a company I have invested in, nor matter how modest or how bold. I will participate in any funding round that I think is profitable for my limited partners.
- I will remember that a board of directors has a fiduciary responsibility to all shareholders, and not just to the preferred ones.
Please offer your suggestions below. An associate will get back to you with our decision.
- The original “When I am an Evil Overlord” list
- A rival list
- The most comprehensive such list I know of (with additional sections for heroes, sidekicks, beautiful daughters, etc.)