Will SaaS / Enterprise 2.0 Migrate to Value Based Pricing?
Back in my day, there was a company called PeopleSoft. You old timers might remember them. Acquired by Oracle back in ought-four. They sold their product not by list price, but by value-pricing. For little companies, this was a great thing and for big companies, it probably wasn't too bad either. What it was, though, was difficult to predict, budget early on, or budget consistently (or so I'm told by my customers).
Which is why I was so intrigued by the post from Ian Hendry citing the comments of Laurent Lachal of Ovum. The general premise is that Salesforce has some much information about what you're doing with the data (number of leads coming in, conversion rate, close rate) that they can easily see how much value your getting from the system and could potentially price their platform in a way that relates to that value. From the post:
Salesforce.com, again as an example, holds a lot of back-end data on how many contacts each of their customers hold in their CRM systems; how many leads they have; what proportion of those convert to opportunities; and then statistics on revenue generated from those opportunities. Salesforce.com has the data to prove its system is helping to close leads and generate business; to shorten sales cycles. Why doesn’t SFDC bill based on the tangible difference it has brought to the performance of a customer sales team? Another example: email marketing applications from Vertical Response or Constant Contact bill you for emails sent, but they also hold data on who clicks through, so why not bill on traffic sent to your website instead?It is a really legitimate argument, until you think about the quality of the people behind the platform. For example, if you take 100 sales reps on a team, only 10 of them will be stellar when it comes to the use of your SFA system. The rest will use it as a glorified contact management system. I think that I'm an above average Salesforce user and I'd only give myself a C+ when it comes to taking advantage of what the system offers. I think that most sales reps would be hard pressed to say that they get $65 a month in value from their SFA tool. This is obviously not something that Salesforce wants to hear, but lets face it, 99% of sales reps can get by with Excel and a phone. I think that, in this case, Laurent puts far too much value on the tool and far too little on the carpenter. Salesforce, for all of it's cool bells and whistles, doesn't close business for you. If I close a $1M deal, there is no way on earth that Salesforce contributed even one tenth of one percent to that. With that in mind, if you tie the price of Salesforce back to actual revenue generated, a bad quarter for a customer could sink a sales rep at Salesforce. A bad quarter for a vertical sector or region or global catastrophe could dramatically impact the entire company. There is a huge lack of predictability both on the vendors behalf as well as the customers. A great quarter and all of a sudden a company is looking at a 10X bill for their SFA. As a sales rep, selling value-pricing is an even bigger pain in the ass because you have to convince your customers that the tool is going to transform their people into something that they aren't. I tend to agree with Markus Buckingham that people don't change that much, so stop trying to get them to do so. When you try to sell a product based on value-pricing, you not only have to sell on the merits and the value of the product (already hard), but you also have to convince your potential customer that they are going to be able to change the way that they do business so dramatically, so immediately, that they will want to pay a premium for this potential transformation. This is a really, really tough sell for limited upside to the vendor. A similar example can be made for the email marketing system that Laurent points out. Again, the email marketing platform is a tool. If I put shit content into it, I'll get zero click through, but the vendor shouldn't be penalized based on a customer not being able to create good content. In the end, I think that if value-based pricing worked, you'd see it being adopted by a gaggle of companies instead of the Oracleized PeopleSoft (BTW, I don't think that they do this any more. Can anyone confirm?). The problem is that as a vendor, you need to defer your revenue for a long time - until you and your customer agree that value has been seen. As a sales rep, you have to sell twice as hard. And as a customer, you need to predict the future and expect that people will change. Combine all this and you have three strikes to value-based pricing never catching on. What do you think? Am I crazy? Am I missing the value based pricing sales model? Let me know in a comment. Photo: ValueKing by Ilja
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Comments (7)
This post was mentioned on Twitter by schnaars: New blog post - Will SaaS / Enterprise 2.0 Migrate to Value Based Pricing? http://bit.ly/4j5olX...>
You raise some very valid points. I think value-based pricing fits certain applications better than others. As a SaaS vendor of predictive analytics I am a big proponent of value based pricing because we can measure the value and predict the impact. Whether you are looking at sales optimization, marketing performance or risk management, our predictive models tend to deliver measurable ROIs in quadruple digits in a just a few months. The types of problems we address are very specific and we are able to measure change very effectively because we dive very deep into the data. The challenge we face when proposing value based pricing is that the actual value might be too large and most customers actually feel more comfortable with a predictable monthly fee. I can only hope for that to change.
Cheers,
-M.
I suspect that the example you quote is not truly one of Value-Based Pricing!
You state “... difficult to predict, budget early on, or budget consistently”. Value-Based Pricing is all about giving a fixed-price quote for a fixed-scope ‘project’. If this is done, it is impossible to claim that budgeting is difficult - the purchaser knows precisely where they stand, with no hidden extras!
You state that “... they (Salesforce) can easily see how much value your(sic) getting from the system and could potentially price their platform in a way that relates to that value.” Value can only ever be in the eye of the beholder. This has always been and will forever be true! In this case they (Salesforce) seem like they are not implementing Value-Based Pricing. They are just implementing a new way to charge the customer an unpredictable amount, of Salesforce’s choosing!
Ian Hendry’s post asks “Why doesn’t SFDC bill based on the tangible difference it has brought to the performance of a customer sales team?” This is almost precisely the nature of Value-Based Pricing. The skill in applying it, in a sales context, is the skill to help the customer understand and articulate for themselves the full value of no longer having their problem and thus no longer suffering the pains it was causing. However, I would take issue with Ian over his phrase “has brought”. Value-Based Pricing is about the value the purchase “will bring”.
You attempt to counter Hendry’s assertion with “... most sales reps would be hard pressed to say that they get $65 a month in value from their SFA tool. This is obviously not something that Salesforce wants to hear.” Salesforce would only not want to hear it if they were charging after the event, based on results! Remember, the term is Value-Based Pricing, not value-based billing!
Pricing happens before the deal is struck, not afterwards. Pricing must be based on the value that will be delivered as a result of making the purchase. This requires trust - of the supplier, by the purchaser. If a supplier cannot engender this trust, they will not get a deal! If you believe that Salesforce “... doesn’t close business for you” then the value you believe you will be getting is small and the amount you are willing to pay is even smaller.
Your next comment that “... if you tie the price of Salesforce back to actual revenue generated, a bad quarter for a customer could sink a sales rep at Salesforce.” Again, only if they are implementing value-based billing. With Value-Based Pricing correctly applied, this is not relevant.
As you would expect, I totally refute your suggestion that “... selling value-pricing is an even bigger pain in the ass because you have to convince your customers that the tool is going to transform their people into something that they aren’t.” Applying Value-Based Pricing in the context of the entire sales conversation is a matter of allowing, and helping if necessary, the customer to convince THEMSELVES that they are being offered the opportunity to make step changes in their businesses. This is done honestly, ethically, morally and legally, without illusion, chicanery, deception or lies.
Why are you so negative, Scott? “... you not only have to sell on the merits and the value of the product (already hard), but you also have to convince your potential customer that they are going to be able to change the way that they do business so dramatically, so immediately, that they will want to pay a premium ...” If you are selling a product or service that really works, and is not ‘snake oil’, then this should be a welcome course of action!
“This is a really, really tough sell for limited upside to the vendor.” No it isn’t! The correct application of Value-Based Pricing results in customers saying “That’s a bargain! How soon can you deliver?” while simultaneously salesmen are thinking “I’ve rarely done such a profitable deal!”
You go on to say “... the vendor shouldn’t be penalized based on a customer not being able to create good content ...” and at last I can agree with you! But the vendor should not be charging later, by results. And these guys like Vertical Response and Constant Contact aren’t! They are charging up-front for the value that is expected to be delivered. They offer massive amounts of assistance to customers to help them create e-mails that will achieve the desired results, but ultimately the use of the tool is in the hands of the customer!
Your concluding paragraph yet again shows you are indeed “... missing the value based pricing sales model”!
“... The problem is that as a vendor, you need to defer your revenue for a long time – until you and your customer agree that value has been seen.” NO YOU DON’T! In fact Value-Based Pricing, applied skilfully and correctly, enables you to ask for a very high proportion - 50% as a minimum, I would suggest - of the payment in advance.
“...you have to sell twice as hard. And as a customer, you need to predict the future and expect that people will change. Combine all this and you have three strikes to value-based pricing never catching on.” NO! The application of Value-Based Pricing, within the context of the entire sales conversation, makes it EASIER to sell; the customer is entirely CERTAIN about the future; and people can see the BENEFIT OF CHANGING and willingly do so. These are THREE PROVEN REASONS why Value-Based Pricing is the fairest way of selling!
David
I suspect that the example you quote is not truly one of Value-Based Pricing!
You state “... difficult to predict, budget early on, or budget consistently”. Value-Based Pricing is all about giving a fixed-price quote for a fixed-scope ‘project’. If this is done, it is impossible to claim that budgeting is difficult - the purchaser knows precisely where they stand, with no hidden extras!
You state that “... they (Salesforce) can easily see how much value your(sic) getting from the system and could potentially price their platform in a way that relates to that value.” Value can only ever be in the eye of the beholder. This has always been and will forever be true! In this case they (Salesforce) seem like they are not implementing Value-Based Pricing. They are just implementing a new way to charge the customer an unpredictable amount, of Salesforce’s choosing!
Ian Hendry’s post asks “Why doesn’t SFDC bill based on the tangible difference it has brought to the performance of a customer sales team?” This is almost precisely the nature of Value-Based Pricing. The skill in applying it, in a sales context, is the skill to help the customer understand and articulate for themselves the full value of no longer having their problem and thus no longer suffering the pains it was causing. However, I would take issue with Ian over his phrase “has brought”. Value-Based Pricing is about the value the purchase “will bring”.
You attempt to counter Hendry’s assertion with “... most sales reps would be hard pressed to say that they get $65 a month in value from their SFA tool. This is obviously not something that Salesforce wants to hear.” Salesforce would only not want to hear it if they were charging after the event, based on results! Remember, the term is Value-Based Pricing, not value-based billing!
Pricing happens before the deal is struck, not afterwards. Pricing must be based on the value that will be delivered as a result of making the purchase. This requires trust - of the supplier, by the purchaser. If a supplier cannot engender this trust, they will not get a deal! If you believe that Salesforce “... doesn’t close business for you” then the value you believe you will be getting is small and the amount you are willing to pay is even smaller.
Your next comment that “... if you tie the price of Salesforce back to actual revenue generated, a bad quarter for a customer could sink a sales rep at Salesforce.” Again, only if they are implementing value-based billing. With Value-Based Pricing correctly applied, this is not relevant.
As you would expect, I totally refute your suggestion that “... selling value-pricing is an even bigger pain in the ass because you have to convince your customers that the tool is going to transform their people into something that they aren’t.” Applying Value-Based Pricing in the context of the entire sales conversation is a matter of allowing, and helping if necessary, the customer to convince THEMSELVES that they are being offered the opportunity to make step changes in their businesses. This is done honestly, ethically, morally and legally, without illusion, chicanery, deception or lies.
Why are you so negative, Scott? “... you not only have to sell on the merits and the value of the product (already hard), but you also have to convince your potential customer that they are going to be able to change the way that they do business so dramatically, so immediately, that they will want to pay a premium ...” If you are selling a product or service that really works, and is not ‘snake oil’, then this should be a welcome course of action!
“This is a really, really tough sell for limited upside to the vendor.” No it isn’t! The correct application of Value-Based Pricing results in customers saying “That’s a bargain! How soon can you deliver?” while simultaneously salesmen are thinking “I’ve rarely done such a profitable deal!”
You go on to say “... the vendor shouldn’t be penalized based on a customer not being able to create good content ...” and at last I can agree with you! But the vendor should not be charging later, by results. And these guys like Vertical Response and Constant Contact aren’t! They are charging up-front for the value that is expected to be delivered. They offer massive amounts of assistance to customers to help them create e-mails that will achieve the desired results, but ultimately the use of the tool is in the hands of the customer!
Your concluding paragraph yet again shows you are indeed “... missing the value based pricing sales model”!
“... The problem is that as a vendor, you need to defer your revenue for a long time – until you and your customer agree that value has been seen.” NO YOU DON’T! In fact Value-Based Pricing, applied skilfully and correctly, enables you to ask for a very high proportion - 50% as a minimum, I would suggest - of the payment in advance.
“...you have to sell twice as hard. And as a customer, you need to predict the future and expect that people will change. Combine all this and you have three strikes to value-based pricing never catching on.” NO! The application of Value-Based Pricing, within the context of the entire sales conversation, makes it EASIER to sell; the customer is entirely CERTAIN about the future; and people can see the BENEFIT OF CHANGING and willingly do so. These are THREE PROVEN REASONS why Value-Based Pricing is the fairest way of selling!
David
I suspect that the example you quote is not truly one of Value-Based Pricing!
You state “... difficult to predict, budget early on, or budget consistently”. Value-Based Pricing is all about giving a fixed-price quote for a fixed-scope ‘project’. If this is done, it is impossible to claim that budgeting is difficult - the purchaser knows precisely where they stand, with no hidden extras!
You state that “... they (Salesforce) can easily see how much value your(sic) getting from the system and could potentially price their platform in a way that relates to that value.” Value can only ever be in the eye of the beholder. This has always been and will forever be true! In this case they (Salesforce) seem like they are not implementing Value-Based Pricing. They are just implementing a new way to charge the customer an unpredictable amount, of Salesforce’s choosing!
Ian Hendry’s post asks “Why doesn’t SFDC bill based on the tangible difference it has brought to the performance of a customer sales team?” This is almost precisely the nature of Value-Based Pricing. The skill in applying it, in a sales context, is the skill to help the customer understand and articulate for themselves the full value of no longer having their problem and thus no longer suffering the pains it was causing. However, I would take issue with Ian over his phrase “has brought”. Value-Based Pricing is about the value the purchase “will bring”.
You attempt to counter Hendry’s assertion with “... most sales reps would be hard pressed to say that they get $65 a month in value from their SFA tool. This is obviously not something that Salesforce wants to hear.” Salesforce would only not want to hear it if they were charging after the event, based on results! Remember, the term is Value-Based Pricing, not value-based billing!
Pricing happens before the deal is struck, not afterwards. Pricing must be based on the value that will be delivered as a result of making the purchase. This requires trust - of the supplier, by the purchaser. If a supplier cannot engender this trust, they will not get a deal! If you believe that Salesforce “... doesn’t close business for you” then the value you believe you will be getting is small and the amount you are willing to pay is even smaller.
Your next comment that “... if you tie the price of Salesforce back to actual revenue generated, a bad quarter for a customer could sink a sales rep at Salesforce.” Again, only if they are implementing value-based billing. With Value-Based Pricing correctly applied, this is not relevant.
As you would expect, I totally refute your suggestion that “... selling value-pricing is an even bigger pain in the ass because you have to convince your customers that the tool is going to transform their people into something that they aren’t.” Applying Value-Based Pricing in the context of the entire sales conversation is a matter of allowing, and helping if necessary, the customer to convince THEMSELVES that they are being offered the opportunity to make step changes in their businesses. This is done honestly, ethically, morally and legally, without illusion, chicanery, deception or lies.
Why are you so negative, Scott? “... you not only have to sell on the merits and the value of the product (already hard), but you also have to convince your potential customer that they are going to be able to change the way that they do business so dramatically, so immediately, that they will want to pay a premium ...” If you are selling a product or service that really works, and is not ‘snake oil’, then this should be a welcome course of action!
“This is a really, really tough sell for limited upside to the vendor.” No it isn’t! The correct application of Value-Based Pricing results in customers saying “That’s a bargain! How soon can you deliver?” while simultaneously salesmen are thinking “I’ve rarely done such a profitable deal!”
You go on to say “... the vendor shouldn’t be penalized based on a customer not being able to create good content ...” and at last I can agree with you! But the vendor should not be charging later, by results. And these guys like Vertical Response and Constant Contact aren’t! They are charging up-front for the value that is expected to be delivered. They offer massive amounts of assistance to customers to help them create e-mails that will achieve the desired results, but ultimately the use of the tool is in the hands of the customer!
Your concluding paragraph yet again shows you are indeed “... missing the value based pricing sales model”!
“... The problem is that as a vendor, you need to defer your revenue for a long time – until you and your customer agree that value has been seen.” NO YOU DON’T! In fact Value-Based Pricing, applied skilfully and correctly, enables you to ask for a very high proportion - 50% as a minimum, I would suggest - of the payment in advance.
“...you have to sell twice as hard. And as a customer, you need to predict the future and expect that people will change. Combine all this and you have three strikes to value-based pricing never catching on.” NO! The application of Value-Based Pricing, within the context of the entire sales conversation, makes it EASIER to sell; the customer is entirely CERTAIN about the future; and people can see the BENEFIT OF CHANGING and willingly do so. These are THREE PROVEN REASONS why Value-Based Pricing is the fairest way of selling!
David
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