Bruce On Business

To Many People, Pricing Is a Black Art

August 19th, 2010

Too many companies are haphazard when it comes to pricing, thinking good pricing methodology is a black art. Does this really matter? It does. A lot. Research by McKinsey determined that for Global 1200 companies a one percent improvement in selling price on average resulted in an 8.7 percent increase in operating profits.

Unfortunately, you can’t simply raise your prices by 1 or 2 or 5 or 10 percent. Or can you? Sometimes you can! Only once in my career have I had a customer tell me, “I don’t care what it costs,” but I’ve had a number of clients where after talking to customers it became clear they had a lot of unused pricing power. In other cases, clients were employing massive discounting (in one case an average of 85% off list price). It doesn’t take an expert in black arts to know that’s broken.

So, what do you do?

Ideally, you get a clean sheet and can do the research necessary to understand the true value of your offer and how customers perceive alternatives. As a consultant, however, I get called into messy situations where the options are more limited. There is still a lot that can be done.

The most common areas where you can make an immediate difference are:

Price what your customers want to buy. This is a major source of discounting. The product team bundles several options together to create more “value,” and then sales discounts the package because the customer only wants one or two of the components.
Better segmentation. If everyone is uncomfortable with the pricing, with some thinking it is too high while others think it is too low, you could be using one offer to address both high- and low-end segments. “Splitting the difference” is a poor strategy that prices you out of the low end while leaving money on the table at the high end. There are lots of ways to create multiple offers, but sometimes it takes some creativity. An excellent case study of what can be done is here.
Understand alternatives. Adobe has lots of competitors, but within the creative professional segment, there are few alternatives. This gives Adobe unusual pricing power. Within some segments, such as vocational education, there are neither competitors nor realistic alternatives as skipping an upgrade puts the school at a competitive disadvantage in attracting students and employers.

There is a lot more you can do to optimize pricing, but for many companies these principles can deliver significant—even substantial—returns that drop straight to the bottom line. In most cases, solutions can be implemented quickly. Not only that, they’ll help you position yourself better with customers so you can grow both volume and ASP.

Tags: pricing, segmentation
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Google Falls to Microsoft (at least in healthcare)

August 6th, 2010

At first glance, Microsoft’s HealthVault and Google Health appear quite similar. When these two companies go at it, a review of past battles informs us how this conflict is likely to turn out: Google will triumph over Microsoft yet again. This time, it’s not turning out that way, so it’s worth a deeper look.

Microsoft’s HealthVault vision is ambitious. They are seeking to fundamentally change the way we store and use health information. In place of the traditional proprietary (i.e. paper-based, location-specific) medical records, Microsoft is advocating a network model for health data where information is stored centrally as standards-based data and accessed where and when needed.

The full HealthVault vision encompasses not only key medical data from one’s primary care physician or medical group, but all relevant healthcare records from all of our various providers. For example, an oral surgeon prescribing a pain killer or antibiotic wouldn’t have to depend on a patient’s memory in determining potential interactions.

The rub with all healthcare portals is that they need data. Expecting consumers to enter all of their own data won’t work. Getting a wide range of providers to upload patient data will only happen when (a) each of the many providers sees value to themselves from participating, or (b) patients demand it. High value, but infrequent and low probability events such as being incapacitated while traveling are unlikely to provide the needed impetus. A better strategy is to create a broad range of applications aimed at consumers so that there are more frequent touch points. This will drive consumer demand.

Where Microsoft separates itself from Google is in its expertise in creating developer ecosystems. Microsoft doesn’t have to figure out how to build and deploy all these applications—third-party developers will do so on their own dime. Fundamentally, Microsoft has adopted a B2B model versus Google’s B2C model, with Microsoft not only facilitating, but encouraging third-party applications to sit on top of HealthVault. While consumers need a HealthVault account, all their interactions can be via third-party HealthVault applications. Current applications range from health and fitness tracking to diabetes assessments, cardiac care, automatically updated MedicAlert information, and other specialized applications. HealthVault becomes not an application, but primarily a repository for standardized data and mechanism for privacy control.

Microsoft can offer HealthVault for free because they intend to monetize the data via search. When someone searches for answers regarding high blood pressure, they will see paid results for devices, books, and services related to high blood pressure. Success here for Microsoft is far from assured as it requires success in search where Microsoft historically has struggled. They also need to be careful about how they use a consumer’s medical information.

Tags: Google, healthcare, Microsoft, strategy
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The Strategy of Less Is More

June 21st, 2010

Of all the decisions we make as business leaders, saying “no thanks” to a potential customer willing to pay us money is among the most difficult. The more your business is in need of orders and revenue, the harder it is to turn away a paying customer. Sometimes, however, it is absolutely the right thing to do.

Strategies help us decide what to do: products and markets to invest in, development approaches to pursue, key customers to win. Good strategies also tell us what not to do. In too many cases, however, strategies are overbroad and overly optimistic so while they encompass what we need our companies to do, they aren’t specific enough to provide clear guidance regarding what we shouldn’t do—at least right now.

The area where I see this most often is in target markets. More companies fail as a result of focusing on too broad a market than from thinking too narrowly. Your product or service might be a great solution for a broader set of customers, but you probably lack the resources currently to address more than a slice really well. Hitting a lot of singles is a great strategy for baseball, but hitting home runs generally is a better marketing strategy and way to build a strong brand position. A big fish in a little pond always has the option of growing the pond. A little fish is always a little fish.

This brings us back to saying no. I see lots of strategies based on what a company could do in a perfect world rather than how to focus available resources laser-like on a few places where it can hit home runs. The result is that too many companies end up with a little success here and a little success there. Rather than foreshadowing future success across many markets, this approach serves mainly to deleverage the sales and marketing process because it offers little leverage for the future. Worse, it commits the company to servicing and supporting customers that are not truly strategic. Each customer win should make the next win more likely and come at a lower cost. One customer each in the banking, travel, health care, and construction markets is generally less useful than three or four customers in a single segment. From a position of strength in one market, say banking, you can strategically target additional segments with a much highly probability of success.

Next time an excited sales rep brings you a bluebird opportunity, weigh the revenue against not only the direct cost of servicing and supporting the customer into the future, but also the opportunity cost of deleveraging your sales and marketing engine. Saying no to revenue is hard, but sometimes it is the best way to make money in the long run. Your strategy should stretch your organization and encourage it to achieve ever higher levels of performance, but it is hard to excel without lots of focus. If you aren’t crystal clear about what your organization shouldn’t be doing, then the people that work for you probably aren’t either.

Tags: performance, target market
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Getting more value for your research dollar

May 27th, 2010

Most of my consulting projects include a research component. Since clients generally call on me to help them make key decisions about markets, products, customers, or channels, working from the right information is critical. Knowing what kind of research, and how much, is needed to fill in the gaps thus has a major impact on the quality of the business advice I can provide and my clients’ success.

Traditional quantitative research has its place, especially if I’m testing a specific hypothesis. Focus groups and ethnographic profiles also have their place. If I’m setting a specific price point or trying to reach millions of consumers, these are good tools and worth the cost.

However, if I’m trying to learn what I don’t know or how buyers will react in more complex situations such as licensing scenarios, I typically use a series of structured, in-depth interviews. I can gather additional insights such as enthusiasm and hesitation, I can “go fishing” to test boundaries and fringe ideas, or I can re-focus the conversation on-the-fly to concentrate where the interviewee can provide the most information. A small number of rich interviews will not provide a scientifically valid sample, so I need to keep my grains of salt handy, however, they offer deep insights for a modest cost and can be done quickly. Each conversation is different and, taken singly, is incomplete. Viewed together, however, they form a mosaic with a surprising level of detail and provide a rich source of insight that surveys and market data can’t match. In theory focus groups can do this, but they introduce a level of group dynamics that must be filtered out.

Using an expert third-party is a good move because you’ll end up with better insights.

Customers, partners, and even employees generally are much more open when talking to an outsider. However, the conversation needs to be “safe and comfortable” for them to open up. Experience has taught me how to sequence conversations and how to approach sensitive subjects gracefully.
Ok, this sounds cynical, but not everything I hear needs to get passed along. For example, sales reps will always complain about pricing. How they complain, however, speaks volumes. Knowing the difference comes from operational experience, years of doing this, and the opportunity to talk to their customers. The key is how a change, such as to the price, service level, or comp plan will affect their behavior.

Decision making is about having enough of the right information to be able to move ahead. Even if you can’t model the exact demand curve, knowing that you could raise prices significantly without hurting unit volume is tremendously valuable and highly actionable information. Engineers like to optimize. The best marketers focus on satisficing—being good enough to accomplish a given goal in a specific situation.

Tags: decisions, research
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Will You Hack My Product: The Rise of the Configurator

May 5th, 2010

Even if our understanding is limited, we’ve all heard of open source software. Less talked about—and even less understood—is the analogous movement to open up hardware that is fundamentally re-aligning the market environment for many mainstream products. In the context here, open sourcing hardware is not the attempt to make a royalty-free, mass market product, but rather a conscious and deliberate strategy for sharing intellectual property in ways that drive greater innovation. This type of open hardware is different from the majority of open source software in that it is predicated on traditional measures of value and a solid, profit-based business model. Read the rest of this entry »

Tags: business model, hardware, open source
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We Don't Always Play Our Best Against the Best

April 5th, 2010

“From the playing field to the boardroom, when one competitor is clearly the best, the others don’t step up their game—they give up.” So begins Jonah Lehrer’s piece in the Wall Street Journal on what he calls “The Superstar Effect.”

While Lehrer offers some compelling data regarding a decline in competitor performance when Tiger Woods is playing, and über-chessmaster Bobby Fischer’s effect on competitors was legendary, the nature of the superstar effect remains opaque and its implications for business leaders even more unclear. Read the rest of this entry »

Tags: competitor, performance, superstar, wall street journal
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AT&T's Evil Business Model

March 17th, 2010

While traveling through Canada you decide to use your mobile data card. You think you were being productive, but later discover AT&T Mobility has billed you for over $10,000 because you didn’t read—and understand—the legalese in your contract.

This is exactly what a colleague of mine did recently. Not only do the rates go up once you cross the border, the billing increment changes from MB to Kb! The net-net is mobile data service in while roaming Canada is 3000% the domestic rate. Yikes!

What’s a person to do? The charges are legitimate; albeit unconscionable no matter how one measures these things. For $10,000, Nilofer raised a stink with AT&T, did at least seven tweets on Twitter (here, here, here, here, here, here, and here)—as did Mythbuster’s Adam Savage when faced with the same situation—and got another colleague who follows the mobile market to write a lengthy blog post. $10,000 is worth fighting about, but what about people that just do email and run up $200-300 in charges? I bet the vast majority of them grumble, but end up paying. AT&T makes out like a bandit. Bwahaha.

Consumer always wins arbitration
OK, now for the rest of the story.

AT&T Mobility knows exactly what is going on, and yes, they do think their customers are suckers. It’s all there in the fine print. Not in the fine print regarding rates and fees, but rather in the section mandating arbitration of disputes. You see, AT&T knows their business practices are so beyond the pale that it employs “customer always wins” arbitration. You can read for yourself here (scroll down).

AT&T apparently makes enough money off of the suckers it has for customers that it is willing to absorb the occasional bit of bad press. There’s nowhere to run as all the other carriers operate the same scam. What AT&T is afraid of, are class-action lawsuits. Cue the “customer always wins” arbitration procedure.

While the AT&T contract mandates arbitration of disputes, AT&T pays all costs of arbitration, pays the consumer’s attorney fees if they prevail, and specifies a minimum payout of $7500, if the consumer wins. Reading between the lines, this tells you that AT&T simply settles nearly all disputes in favor of the consumer. AT&T gets to have its cake and eat it too. If you are dumb enough to pay your outrageous bill, AT&T will keep your money in the grand spirit of PT Barnum. If you decide to fight AT&T, they force you into an arbitration process which will end well for you. With a generous decision in your favor—delivered like clockwork—AT&T has erected a formidable defense against potential class-action lawsuits.

Arbitration clause is at risk
AT&T’s motives are so transparent that the Federal Ninth Circuit Court of Appeals recently upheld a District Court ruling declaring the arbitration terms are “unconscionable and unenforceable.” AT&T is currently appealing this adverse decision to the US Supreme Court.

It will be interesting to see what happens to international mobile data roaming charges if the current litigation prevails in striking down AT&T Mobility’s arbitration clause and AT&T is exposed to class-action lawsuits. My guess is the rates will come down. A lot.

Tags: AT&T, business model, consumer behavior, mobile data
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Mission Clarity Cranks Performance “Up to Eleven”

March 9th, 2010

Effective CEOs recognize that articulating a clear mission is an important part of their job. Yet, in my 20 years in Silicon Valley, including eight years of consulting with dozens of companies, I’ve sadly concluded that few CEOs do this really well. Part of the problem is that it’s hard to distill what’s needed for success in a complex technology-based business into a simple mission that can be understood throughout the organization. And few even know what they are missing.

Most companies have mission statements, many of which seem clear and concise, so why don’t more companies operate with clear missions in practice? Sometimes it’s because companies are living a lie and there is a mismatch between the culture and the mission, but usually it is because words alone don’t drive culture. The two most mission-driven organizations I’ve been part of didn’t have a written mission statement. Read the rest of this entry »

Tags: clarity, collaboration, Cornerstone, mission, performance
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Customers Determine the Quality of Your Product

March 1st, 2010

How many times can I read about the death of newspapers without a mention of the elephant in the room: content quality? Yes, there are big changes need in news and content distribution, but what if newspapers were actually pushing readers to find alternatives rather primarily being a victim to alternatives? Everything I say here about the NYTime applies to most other big papers, except the Wall Street Journal.

What if the ex-print subscribers of the NYTimes aren’t migrating to free content on NYTimes.com, but are electing to get their news elsewhere? If they valued the NYTimes’ content as much as its supporters do, many would migrate to NYTimes.com. While some do, many more are becoming less engaged with the NYTimes. Everyone blames the messenger, rather the message. Isn’t this critical information? Read the rest of this entry »

Tags: business model, consumer behavior, decisions
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Will playing chess make me a better leader?

February 19th, 2010

The list of things we’ve learned from chess-playing computers keeps getting longer. In 1985, Gary Kasparov was able to beat 32 computers in simultaneous games. By 1997, IBM’s Deep Blue was able to edge him in a series of games. While a single human can no longer beat a single computer, a team of humans and computers collaborating is an even more formidable competitor. Interestingly, neither the humans nor the computers need be chess masters. As with any good collaboration, the whole is much greater than the sum of the parts.

This isn’t a chess or technology blog, so what does this mean for business leaders?

Computers don’t out-think humans, they simply brute-force calculations for all the possible moves and countermoves. Since reasoning actually involves relatively little computation, computers are very, very good at it. Conversely, the things we take for granted such as recognizing a face are highly complex functions that involve neurological “black magic” that is difficult to reproduce with computers. Quoting Steve Pinker:

“The main lesson of thirty-five years of AI research is that the hard problems are easy and the easy problems are hard. The mental abilities of a four-year-old that we take for granted – recognizing a face, lifting a pencil, walking across a room, answering a question – in fact solve some of the hardest engineering problems ever conceived…. As the new generation of intelligent devices appears, it will be the stock analysts and petrochemical engineers and parole board members who are in danger of being replaced by machines. The gardeners, receptionists, and cooks are secure in their jobs for decades to come.”

In this light, the teaming of humans with their intuition and computers with their ability to do billions of rote calculations starts to make sense, and is instructive.

The lesson for leaders is to look for ways to combine humans and computers in ways to accentuate the strengths of each. The experience with chess teaches us that purely automated processes can outperform purely human processes, but that a human controlled process backed by computers checking for errors and consistency will outperform both. Recognizing this will have implications for how we make decisions. The first step is to understand how we make decisions, so we can learn how to leverage the relative strengths (and cover the weaknesses) of humans and computers respectively.

Tags: chess, collaboration, decisions
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