Eigenworks is shopping for a product. Over the last few months I've been looking to license some software from a vendor. The price is not astronomical, but it's a significant chunk for a company of our size. If we license the product, the vendor will get a share of any profit we earn from the use of their product.
Over the last couple of weeks I was talking with the sales person about this purchase, and his responses made me wonder, again, just whose team is he on?
The Buyer Conversation
Buyer: "How much is your product?"
Seller: "$10,000 plus $1500 in maintenance and support, then we take 20% of your net profit. But if you really want to buy, I can get the up-front cost down for you substantially."
So right there: He's started discounting! The CFO's ears are burning already.
Buyer: "Well that would be great because $10,000 up front is too much for me to spend. What can you do for me?"
Seller: "I could cut that in half."
Buyer takes note: He cut the price in half before I even flinched at the price.
Yes, dear reader, I had this actual conversation with an actual sales person working for an actual software company, in the last few weeks.
Is this your pricing strategy?
Now perhaps, just maybe, possibly, the VP Sales, PM, and CFO have gotten together and decided that the street price will really be $4,000, or even less, but if they start with a $10k price and just discount the heck out of it, the buyer will feel superior for having negotiated such a discount. This is a possibility, and I could even go along with this strategy under some very specific conditions.
For example, perhaps we are seeding the market and we decide to give the product away for $1 for the first 3 months, but retain the $10k price to project value and protect the renewal fee. Yes, I could certainly support that strategy, again, under certain assumptions and with certain market conditions.
But I don't think this is a coordinated strategy. This sales person is acting alone, perhaps even with the help of his sales manager. I can just hear the dialog in the sales meeting:
Seller: "People just won't pay $10k for this product. I don't even think I can get $5k for it. I think we should give it away for free."
Manager: "I know, I know. I'll take this back to the product manager and the CEO. See if you can get $5k, but don't go lower than three grand."
The rest of the conversation convinced me that this sales person is acting alone.
Buyer: "This pricing doesn't make sense. You should give me this software and the royalties will more than make up for it."
Seller: "I know Alan. I've been telling these guys the same thing for months now. No one will pay for this product. I haven't sold one copy!"
Buyer takes note: Sales person wants to give this to me for free.
During the rest of the conversation, the seller told me that his company doesn't really understand this new market that they are in. They are taking a product from a different market and porting it to this new market, and they just don't get it. The economy has made the company look to go after short-term revenue rather than thinking about the big picture, he says.
I could continue, but the point is this: This seller is not happy with his company, and he's hurting the company's reputation, and revenue stream, with every word he speaks.
How do we monitor selling and buying conversations? How do we really know what is being said to our customers? The sad truth is that we really don't know; in most cases, especially in B2B sales, we just don't know. I'd like to have a tap on the line and a notice that says "this call will be recorded and monitored for discount prevention purposes."
The price is set in the buying conversation
This is a caution to product organizations: when you hear reps complaining about price internally, they might be secretly eroding your street price by disclosing too much to your customers. They may be right, or they may be wrong, but regardless, the decision is not really theirs to make.
How can we fix this?
There are ways of measuring whether this is happening or not. Unfortunately it is not an easy task. You need to spend time speaking with buyers, and gain their trust so that they will open up to you. You need to talk with them about the buying process, not their final decision. What alternatives did they have, and what would they have done if discounts were not offered? Do they have ways of measuring cost/benefit of a purchase, and did the sales person help them do this? Who controls the purse strings? (Hint: It's not usually your evaluator.) Was the business case presented to the person signing the check?
If you don't learn the answers to these questions, your sales people will set your prices for you.