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.
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