Five Questions to Get Answered Early

In my recent readings and work with small businesses I have developed a list of five questions that a consultant should get answers to as early in prospect relationship as possible. Once you are hired (or have invested in a long-term sales cycle relationship) getting these answers provides little to no value.

  1. What is the purpose of their organization?
  2. Are they looking for an expert, a pair of hands, or collaborator?
  3. Are you being hired to potentially blame someone if it goes wrong or to reduce chance of it going wrong?
  4. Do they view this purchase as an expense or an investment?
  5. What is the state of their employee restrooms?

Hat tip to Wayne Schulz for the last question.

Thoughts on Pricing with Confidence

Executive summary (and Amazon.com review)

image Reed Holden and Mark Burton’s Pricing with Confidence makes the complex topic of pricing strategy understandable and usable to businesses of all industries and sizes. Many of the examples are easily transferrable from one industry to the next. Their approach is logical and rational and can be adapted to a sole proprietor with an entrepreneurial idea to the largest of companies. The only thing, I severely disliked about the book was the poker analogy which runs throughout the book. Business, unlike poker, is not a zero-sum game. I understand the analogy they are trying to make, but, in my opinion, it detracts from the overall value of the ideas presented.

Important ideas in the book

Develop and offer options. Having at least three options with different value propositions positions the organization to make fewer concessions during negotiation. When a prospect balks at price you can always direct them to a lower cost, but lower value (to them) option. Companies should establish a “walk-away” price for your lowest priced option. This assists in making sure you do not take on a bad customer.

Create a good “fence” between options. A fence is the way to protect one option from the other by providing a clear trade-off of price and value between the options. Well developed fences will make sense for both the customer and provider. The most utilized fence strategy is bundling. When you bundle, if a customer asks for a break down, you should explain that while you could provide that for them, the overall price will be higher.

Setting price is one of the most difficult decisions leaders and managers can make. The strange thing is they often delegate it to others including allowing competitors to be a large influence on price. Price competition (price war) can only work during the high growth phase of a business’ life cycle. At any other time, price competition is never a sustainable business model. Lowering price is the least sustainable competitive advantage.

If you discount to meet the numbers, you will inevitably kill your long-term profitability. It should not come as a surprise that few businesses (if any) have ever created a long-term profit strategy around discounts. Discounting demolishes the self-esteem of the sales force to the point that they themselves begin to question the value of the very products and services that they are selling. This is poison to an organization.

Business must focus on creating greater value for customers. Companies that focus on value, in dollars, delivered to customers are more profitable. Talking about anything other than real financial value is just noise.

Great new term: discount creep – the propensity of a company to begin discounting for good reasons and having it then become systemic. If you must discount by all means measure it. Holden and Burton suggest creating a “discount bucket” that is only allowed to be emptied over a certain predetermined time period.

Pervasive discounting is usually a function of poor customer selection. The authors cite a study which says that 79 percent of business-to-business companies respond in some way to all prospective customers. Going further they posit that there is not just an 80/20 rule for customers but a “20-225 rule.” 20 percent of customers account for 225 percent of the profit. Yes, kids, this means that 80 percent of customers account for a 125 percent loss.

There are only three, count ‘em, three, pricing strategies: skim, neutral and penetration. Skim only applies when you are clearly differentiated from your competition. Chances are, unless you are Apple, you are not clearly differentiated. Neutral pricing is used when you want to compete on something other than price. Penetration pricing is used when you want to establish a dominant position in a new market place.

There are four, count ‘em, four, buyer types: price, value, relationship and unknown (OK, they call these guys poker players, but I dismiss the analogy). Aside from the poor term, the book is worth reading just for this deeply developed idea.

Most companies think they sell to price buyers, they are sadly mistaken. The following sentence clearly excludes all professional knowledge firms from thinking they deal with price buyers – “Price buyers are very careful not to let themselves get committed to any particular supplier by making sure they have no switching costs.” Emphasis added. This is clearly not the case for professional knowledge firms. If all of your customers look like they are price buyers, it is because your sales force is not establishing trust during the sales process.

You need to be paid for your high value knowledge as soon as you begin providing it. The trouble is usually some demonstration of knowledge is needed to get you in the door. Their suggestion is to set a minimum price for knowledge.

A great strategic question for a company to mull is “What can will do (other than discount) that would force our competition to react?” Answering this question is not easy, but it does get to the very heart of innovation.

In conclusion

I thoroughly enjoyed this book and looking back on it has made me realize what an impact it made on me. Many of the ideas listed above have come to the forefront in my coaching conversations with Sage partners. It is clear that this book will continue to influence my thinking for years to come.

Always State a Value When Asked for a Price

This has been around quite a while, but I think it bears repeating.

Often times a professional is asked about cost, as in, “How much will this cost?” One of the best answers I have heard goes something like this – “Customers of ours who have saved and/or seen an increase of $V, have spent $P, but unless we can discover $V we won’t even send you a proposal.”

I personally believe that V should be at least three times P. My reasoning is that in the rare cases the price ends up being 2P, the value is still greater than price.

This is not a perfect answer and does not always move the asker off the cost question, but it is the only way I have seen that has a chance in moving them at all.

Virtual Seminar: Basics of Project Management

I will delivering a seminar on Second Life on the Basics of Project Management through the Maryland Association of CPAs on Friday, July 17, 2009 ay 1pm ET.

Description:

This course is designed as an introduction to project management for individuals who are involved with projects (customer engagements) but have no formal project management training.

Objectives:

Help the participants gain some basic project management skills

Major Topics:

  • The difference between goals and objectives
  • Three foundational assumptions of every project
  • The triangle of truth
  • A basic understanding of risks
  • The change request

Who Should Attend:

Anyone involved on projects (customer engagements)

Prerequisite:

None

If you plan on attending, please register and make sure you have created your Second Life avatar in advance.

Nothing Else to Do

I had a brief, but funny conversation with an attendee of the AICPA Tech+ Conference is Las Vegas earlier this week.

After moderating a panel entitled The Firm of the Future, he broached me during the coffee break and said, “You know, Ed, the funny thing about time and billing systems in many accounting firms is that they tend to collapse during the pressure of tax season. Of course, that is when we are the most profitable.”

I laughed, but he continued, “Sometimes I think we enter our time sheets during non-busy time because we have nothing else to do.”

Peter Drucker and Time Sheets

Recently, I have been plagued by people who claim Peter Drucker said, “If you can’t measure it, you can’t manage it.”

First, let me say that I cannot find this as a direct quote of Drucker’s other than continuous and unsubstantiated citations in many articles, blog posts, and PowerPoint presentations all over the Internet. If anyone has the direct knowledge of the book or published article wherein Drucker says these exact words, please let me know. Until such time, please do not attribute this quote to Drucker.

Second, in my research looking for this quote, I found the following:

Reports and procedures should be the tool of the man who fills them out. They must never themselves become the measure of his performance. A man must never be judged by the quality of the production forms he fills out – unless he be the clerk in change of these forms. He must always be judged by his production performance. And the only way to make sure of this it by have him fill out no forms, make no reports, expect those he need himself to achieve performance. – Peter Ferdinand Drucker, The Practice of Management, 1954, page 135.

All emphasis mine.

Does anyone now want to say that Peter Drucker would be in favor of submitted time sheets to measure productivity? I rest my case.