This afternoon, I was speaking with a salesperson for a start-up company. We were discussing one of the biggest deals they had ever gone after, both he and the company really needed this deal. Unfortunately, he was showing me the closing presentation after he had presented it to the customer. Two charts caught my eye.
The first was the final chart–the deal chart. It started with the normal list price of the service being offered, then there were some other numbers culminating in a “Special Offer” that was 80% off the normal pricing of the offering! Yes, straight out of the hopper he was offering an 80% discount. Yes, that’s a terrible opening tactic–but I’ll come back to this.
Buried in the middle of the presentation was an estimate of the results the customer would achieve in implementing the solution. It was $10’s of millions. I did a quick ROI calculation based on the “list pricing” of the service. The return was 77 time the original investment! Yes, there’s no decimal point, 77 times! And that’s based on list price, remember he offered a discount of 80% off that price.
I was floored, I didn’t know where to start. I knew the sales person and the company needed the sale, but this was all wrong.
I gathered my thoughts, then asked, “Why did you offer the 80% discount?”
He eagerly replied, “When I reviewed our pricing methodology with the customer, they said it was way too high. (This was a SaaS offering). They are used to paying much less than our list price for these types of services. Plus we can make money even if it is an 80% discount.”
“How did you establish the business value cited on chart XX in the deck?” I asked.
“Oh, it was a combination of things. We’ve benchmarked the performance of similar customers. We reviewed that data with the customer and came up with the estimate on the chart. The customer actually thinks it’s pretty conservative!” he replied enthusiastically.
I was really confused. Here we had numbers the customer had established which represented $10’s of millions in business value and an extraordinary ROI. Any business person would immediately leap at this opportunity! If anything, the pricing of the product was far too low! they could have priced the offering much higher and still have a business case that would cause and CEO or CFO to salivate over.
I asked, “Did you discuss the ROI and the business value with the buyer when the buyer objected to the pricing?”
“Well, we had discussed it, but all she was focused on was pricing. They just aren’t used to paying our full price on these types of products. She was worried about getting the budget for this. We really didn’t talk about the business value very much.” He replied.
I wish this was an unusual case, but it’s all too familiar–though this is the most extreme in terms of ROI and business case. Too often we enter into pricing discussions without having established the business value of the solution. Of if we have, we fail to keep the business value tied inseparably to the ROI, and the pricing.
We and the customer have no basis for declaring the price is too high, without understanding the business case. We have no reason to even mention the “D- word (discount)” until we have established the business value. In fact the corollary is that discounting is usually driven because we haven’t established the business value of the solution.
Any discussion of pricing is absolutely meaningless until, with the customer, we have determined the business value of the solution, understood the expected financial hurdle rates, and presented our solution in the context of all those.
In this particular case, had the customer continued to maintain the price was too high, I would have responded, “How many opportunities do you evaluate every year that have, conservatively, using your numbers, a return that is 77 times your original investment? Where can you invest the same amount of money and get the equivalent return?”
We focus entirely too much on pricing. We leave far too much money on the table because we fail to establish business value and tie our pricing to the business value!
If you have great business value, if you can create a business case that exceeds any financial hurdles your customer may have (e.g. desired payback, ROI, IRR, risk, etc.), then there is never a reason to discount!
Stop defeating yourself by focusing on price, focus on the business value!