Jim Geisman: Pricing Isn’t Rocket Science – It Just Takes Some Work

Jim Geisman has seen nearly everything there is to see in pricing practice and has come to the conclusion that there is no right or wrong price, there is simply pricing that works.

It’s pretty easy to build a successful software company: Get revenues to cover costs with enough cash left over to invest in growth. The tricky part is to do pricing right so this happens. When pricing is done right – or right enough –you will generate revenue faster without spending too much to attract, close and retain customers. How can you get pricing “right”? It starts by understanding what goes into pricing and then getting all the interdependent pieces to fit together as seamlessly as possible.

In this short talk at Business of Software Conference 2013, Jim looks at four things you can do to make your pricing work better today. Highly recommended.

Transcript

Jim Geisman: Thank you very much. I, I appreciate you coming here to have a root canal, which is what pricing is to an awful lot of people. But before I, I get started on what I hope will be an enlightening talk, I, I want to comment on, on this conference. And one of the big takeaways I come away from. First of all, the energy in this conference is a lot different than any other energy I’ve seen in any other conference. You know, the age distribution, you know, it tends to be about average for what I see, but the energy is much higher. And, and I think Greg’s talk about depression, ADHD, bipolar, mental disease, or mental disorders of one sort or another just re-emphasizes the point that we’re in this together. Okay? And that’s one of the reasons why I’m trying to impart some pricing wisdom to you.

Pricing, as, as you can tell from my gray hair, I’ve been doing pricing for about five years, something like that. It’s normally a career limiting experience unless you’re a consultant. But pricing isn’t rocket science. It just takes some work and a bunch of other things, time, teamwork, judgment. Oh, yeah, luck comes into play, too. But as an old marine friend of mine said, I’d rather be lucky than good. And so, we’re going to examine various pricing practices in one form or another.

But first, I’d like to have you take a look at this. This appeared the New York Times a little while ago. It’s “The Ethics of Garage-Sale Arbitrage.” Somebody is selling a comic book or an item that the buyer knows to be extremely valuable. And the question before us is should you say anything to the seller? Who would say something to the seller about under-pricing there? Oh, an ethical man. What would you say? Oh, oh, you were just… Maybe I should say, who would say something to the seller after they paid the money? A different question, I suppose. Well, that’s sort of interesting, but let’s change it. Let’s change the situation.

Now, you all hear from your customers about high prices. You never hear about low prices. Right? And sometimes when they complain about high prices, they’re telling the truth and sometimes they’re not. So, the customer may not always be right. So, what happens is everybody worries about the wrong price. Geez, you know, is the price too high, it’s wrong. And then a whole bunch of people spend a lot of time grinding on the right price. Well, I may be slitting my own throat, but in the spirit of sharing with you, there is no right price. There is no wrong price. There are just prices that work. And when I say prices that work, I’m really talking about you understand who your, your target customer is. You understand what the value is that, that you’re delivering. And that value, by the way, if you’re in a B-to-B space, is usually economic. If you’re in the B-to-C space, it may make, you know, the person feel good or connect with people, whatever it is, but there’s some value.

And then what you do is you construct an offering, products and services and user experience. By the way, I, I, I loved the customer support presentation, but I, I heard an angry hatter, or maybe a mad hatter. I don’t know. But it was really a wonderful experience for me. And, and so, part of the offering is the, the total user experience. And, and then, of course, when you put this offering together based on together customer value, you have to take a look at it in the context of the market, you know, competition, you know, category maturity. And then, finally, what you do as sort of a sanity check is to make sure it’s gonna work in your business context. Is it gonna work with your economics? So that’s really the issue is finding pricing that’s gonna work in all of these dimensions.

What I found over the years is, you know, people screw up pricing in various and sundry ways. And by the way, pricing is, is really a tough decision. You know, as I pricing consultant, I grind over how much I should charge. Geez, am I charging too much? Too little? Such is life. Anyhow, here are four things that you can do, actually, tomorrow if you want to, to make your pricing work better. And, and we’ll talk about each of these.

Let’s look beyond price level first. SAP, wonderful organization, started years ago. Computing was very expensive. People were very expensive. Everything was very expensive. And you had to invest a lot up front. So, they set high prices and they got paid all in one big chunk. Well, of course the stuff wasn’t exactly right and you have to maintain it, so they, they developed a recurring revenue stream. So whatever price they charged supported, you know, their, their economic model.

There was company here, there was a fellow here last year, Bob McNeel, who had a company that, years ago, wanted to compete against AutoCAD. And AutoCAD was selling for, I don’t know, 1,500, 2,000 bucks, and what he wanted to do was come, come out with a product that was sub-1,000. So what he did, and by the way it’s called target, target pricing, what he did is he said I’m gonna come out of the $700 price point and then I’m going to gear my whole company economics around that. Okay? And when you run the volume numbers, you know, it’s, it’s a low touch business, it’s a much different business. So the price point was tightly integrated with the business model.

And, and here’s another company that, that did something a little different. They were, they’re in the business of taking orders for local restaurants. And originally, this was reported in the Wall Street Journal by the way, originally, they were on a subscription basis. You know, the restaurant would pay 25 bucks a month, whatever it was, and nobody was biting on this. They, they wouldn’t buy. Finally, the light went on. And what, what they did is they said we’ll take 10% of the order. Okay? So from the, the customer’s viewpoint, there was zero risk. Right? And everybody signed up. And now, they’re doing quite well. So in that case, it wasn’t the price. It was the metric, how they were charging for stuff.

And then, finally, let, let’s talk about these two people. Sales Force, they revolutionized the CRM, SFA, whatever you wanna call it, business by coming out with extremely low-priced products. Well, that’s pretty easy to do when you raise $200 million, you can do whatever the hell you wanna do. Right? Dropbox, on the other hand, a little different. They also raised a lot of money, but what they did is they gave stuff away free. Now, let me tell something. If you have people that are using your product and they are not paying for it, they are not customers. I don’t know what they are. They’re users. They’re something else. But customers, by definition, pay you money. So what you really wanna do is find somebody who has an urgent problem and is willing to pay to get out of the hole. I won’t tell you where this came from, so.

So, one of the ways, now, now we’re into, we just went through the target customer, now we’re managing the perception of value. So, one way you can manage people’s perceptions of value is by talking about the economics in terms they understand. Okay? Now, a lot of people go after cost savings. Now, how many people pray for cost savings? Oh, I didn’t… How many people pray for more revenue? Oh, thank you. I’m, I’m glad this is a religious bunch. So, so I think, I think the real, the real issue here is whatever it is that you do, assuming you’re doing B-to-B, because if you’re not doing B-to-B I am a lousy consumer and I can’t tell you very much.

But if you are doing B-to-B, swing your messaging around generating revenue. Okay. Because that’s something that people are very concerned about and that’s something they will pay for. And if you start talking about the revenue implications of this million-dollar piece of software or this $10,000 a month, you know, service that you’re offering, the revenue will set a very high anchor and people are more likely to pay that nominal price. On, on the other hand, there are, there are still other considerations cuz it isn’t all just the economics of revenue or costs, you know, there’s the implementation, the timing and, especially, the risk. And, and the risk has an awful lot to do with how people will perceive value. So I’d, I’d like to talk about that because the perception of value and risk, you know, they’re related. And there are some other psychological which we’ll get into that are interesting, at least to a pricing geek and, and may even be useful to you.

So, we’re gonna play a game. You have two choices. You can come to me and collect 500 Euro straightaway, or you can flip a coin and have a shot at 1,000 Euro or nothing. How, how many people would flip a coin? Okay, not very many. Oh, you people are gonna cost me a lot of money. Well, now, now, we’ll play a different. Okay? I will give you 1,000 Euro and you have two choices. You can straightaway give me 500. I like that one. Or you can flip a coin, in which case you may lose it all or you will keep, you will lose nothing. Okay? You’ll get to keep the 1,000 Euro. So now, how many people would flip a coin now? Jesus. Are, are we awake? What’s going on here? I have never seen this reaction before. Of course, you, of course, you flip a coin. You know, you, you wanna give away 500 Euros just like that?

Speaker 2: Yep.

Speaker 1: Yep? I guess it wasn’t your money to begin with, that’s what it is. You know, but, but the point is if, if we were economic human beings, and only economic human beings, whatever choice we made in the first case, we’d do in the second case cuz they’re absolutely identical in terms of expected value. But the problem is we’re human. That is sometimes a big problem. And as humans, the pain of loss is much greater than the pleasure you get from gaining. People, when the come out of the casino, they remember their losses for a long time. When you play the stock market, just another form of casino, how many, well, people brag about how well they did, and they forget about their losses. But when they go home and they talk to their significant other or they look in their bankbook, believe me, they worry about that. And the point is that we are human and we have these, these things that work, that are subliminal. And in terms of your business, you oughta take this into account. And that’s one reason why people tend, when you were selling a big piece of software to somebody, they see the risk, the downside, and they over wait that, and therefore, they’re reluctant to pay the price. That’s what’s happening.

There are other factors at work. Loss aversion, that, that’s an example of loss aversion. But a practical example of this is if you go into a car dealership or if you’re, you’re putting up a pricing page and you’ve got product with a whole long list of features. The best thing to do is to present the high-end product and, and talk to somebody about that so that they can kind of see themselves in the high-end product. And then you say, but for less money, we can give you less. And, and they won’t be dramatic, but people will tend to buy the high priced product a little more than they would if you hadn’t done that sort of trickery.

I talked about anchoring high. And the example I just gave is an example of high anchoring in terms of features but doing that in terms of price. And by the way, if you’ve heard the expression never be the first to offer a price in a negotiation, it’s not a bad, bad idea if you are the first as the seller because, all of the sudden, what happens is people will see whatever concession you make as much more reasonable. Okay? Even though we all know you’re being totally unreasonable and you’re getting more than you deserve.

There’s also the compromise effect. And that is give people choices, not so many choices that they’re overwhelmed, but choices that allow them to say, mm, uh, I’m not a luxury goods buyer, but I’m not a cheapskate either. Bang, I’ll be right in the middle. And that’s why you often three-tier pricing, five-tier pricing, something like that so that people have a way of avoiding the ends and going, going for the middle.

And the other thing you can do is you can point to one of the products and say, ‘This is the one that everybody likes. By the way, it’s the one in the middle. It’s the best value. Everybody does it.’ Because, you know, we’re members of a herd, and there is a bit of a herd instinct. All of these things are not going to turn the trick for you. But what the do is they really nudge people in the right direction. And if you have that constant nudge, people are more likely to trade up, they’re more likely to pay more. This is also described in “Predictably Irrational” by Dan Ariely, which is just a fun read. “Nudge” is all about choices. There’s another good choice book called “The Paradox of Choice” by Barry Schwartz. And “The Paradox of Choice” says don’t give people too many choices. And that includes your sales force, if they have to configure deals. Okay.

Now, one area where you don’t add value is with technology. Technology uber alles doesn’t work. It works when it works. This, I thought, was a really telling quote. “Technology means nothing unless it enables a differentiated customer experience. Nobody goes into a restaurant because they have a mobile app.” Okay? And, and the fact that you’ve got some fancy technology doing something, if the something it does is nothing, nobody’s gonna buy it, nobody’s gonna care. So I think, and I can’t remember who said this a few, yesterday, I think it was, just because you can do it technically, doesn’t mean you should.

Okay. Processes. How many people do agile development under whatever name it is? A lot of people? Good. And how many people have flawless products resulting there from? Oh, gee. Well, how, how many people don’t have a development process and have great products? See these people? These, these people either lie or they’re, they should be committed. I don’t know which it is. It’s either that or they’re off the scale geniuses. The point is that in, in development, you really do need a process. But even if you have a process, you make mistakes. So, if you do pricing without a process, you’re really hosed.

But I also wanna say something about agile. Agile, in whatever form it is, is wonderful because, number one, it forces you to make some decisions about the business value of features, even if it’s only qualitative. That’s very important. And it’s especially important when you’re interacting with a customer getting feedback on how those features are implemented. Because when you’re talking, or actually when you’re listening to what the customer has to say about your product, you probably oughta be listening for “what’s the economic value that this feature delivers?” How does the customer talk about it? Because that’s the sort of stuff that can get cranked into your pricing. And here’s the process that we, we use in pricing. And by the way, a lot of this stuff we’ll be talking about in more detail tomorrow afternoon.

First of all, any complicated problem benefits being deconstructed. You know, I mean, it’s a hairball. Pricing is a hairball. I’ll tell you that. I almost put up a hairball on the slide, but you know, I didn’t. I’m sorry. Will you forgive me? Okay. The point is what you do on pricing has a lot to do with your business model, has to do with who the target customers are, it has a lot to do with the willingness to pay. It depends on how it’s packaged. It depends on how it’s delivered. And, and everybody gets into the mix. And that’s why teamwork is really important here, because often what happens is people don’t understand the interrelated nature of pricing. They come out with a product. They try to slap a price on it. And the product was geared for the wrong customers who are not willing to pay the price for this particular package of features. You, you get the idea.

So, in order to deconstruct that, it pays to sort of break the problem apart. And what we do is we have three layers. We talked about the license model, the transaction structure, what’s going back and forth. And then, finally, once you know what the “it” is, you can set prices. If I say, “how much?” your first question oughta be “for what?” And if you, if, if I can tell you what “it” is, then we’re in a much better position to put a price on it. And in fact, when you peel back, you know, you look under the hood, the license model consists of the terms and conditions and the metric, what you charge for. That’s crucial, because if you mess that up, you remember the, the get grub example. Your business can switch completely if you choose the right metric and the customer can relate to it. Okay. Especially when it lines up with the way they generate revenue.

The terms and conditions, you better have a pretty good idea of how you wanna charge for stuff, you know, what are the limits to what you’re gonna do contractually. And then, finally, in, in the transaction structure, you know, there are bundles and there are deliverables. We focus an awful lot on product. And, and putting together bundles of features into products is very important. But the other deliverables are equally important. The other deliverables are the services, the experience in general.

And then, finally, once you’ve done that sort of basic homework, then you’re in a position to put a price on stuff. Okay. And of course, there’s a list price and there are discounts, and you wanna be sure to figure out why you’re discounting because it’s your money, why give it away?

And then, finally, once you’ve gone through this, this exercise, then you’re in a much better position to do big deals. Big deals are usually custom configurations of, in this case, standard components. And if you’re able to put together a big deal that’s economical, both to you and the customer and do it faster than the competition, chances are you’ll win.

So, here’s your to-do list. Look beyond the price level. Focus on the right customer. Manage the perception of value. Have good processes. You with me? You got that? And I have one more to add. This’ll help with the to-do list. And, and that’s Neil Davidson. And it was actually Neil who I had an interaction with about the book, who introduced me to that character over there. Thank you. Thank you, Neil.

So I think it’s appropriate to close this, this thing up. We, we got cards and a lot of you recognize W.C. Fields, a lot of you don’t. But that’s okay. W.C. Fields was a comic back in the ’30s and he had a very droll sense of humor and this is him playing cards with a farmer. And the farmer says to Fields, “Is this a game of chance?” And Fields says, “not the way I play.” And that’s the way it oughta be with your pricing. So, thank you. And that little goodie in the lower right, if you send me an e-mail or give me your card, that’s the pricing model I was, the monetization model I was talking about, and it’s got a little more descriptive text around it. Thank you and we have about seven minutes worth of questions.

Audience: Hi there. Hi there. My company sells digital libraries, which you can think of as a giant bag of books. The question is, is it a mistake to offer the pricing as one time purchase for the giant bag, pay off the bag over time and subscribe to the bag of books all in one page?

Jim Geisman: That, that is a very interesting question because it gets into subscription, perpetual, and, and what we’re really talking about is a payment stream. Now, two comments. First of all, the payment stream that customers will be willing to lay out depends very much on what they experience. So if they, if this is a, you know, a bag of books that are reference books that people will go back to and these reference books are refreshed, a subscription model probably makes sense. Okay. Now, relative to should it be subscription or one-time. Frankly, I don’t really care. Because if I go to a car, a car dealer, those wonderful people, and they, all they care about is moving the iron. So they don’t care whether I pay cash, whether I finance it, whether I lease or rent it or whatever. Okay? So I think that the point is that a subscription model, you can degenerate that into a one-time fee. It just may be very high and people won’t pay it. But you can, you can certainly do that. I, I think in the case of a bag of books, that if, if you were adding to the bag periodically, then I think a subscription model makes some sense, because people are getting constant value from it, and not only that, you can stop it. Now, there are issues, like in The New York Times, you can subscribe, you, you can see the Times everyday, but in order to go back in time in, in their archives, you have to have a subscription. So I think it really depends, and you know, I’m sorry to say it depends, but it depends. Was that helpful?

Audience: That was great.

Jim Geisman: Okay. Yeah?

Audience: What do you think about incenting people to buy sooner, what are some things that work? Does price work to incent somebody? And then if they don’t buy by that, if they don’t buy by that timeframe, how do you handle that situation?

Jim Geisman: I, I think time-limited deals make a lot of sense. And, and that by, by the way has to freemium. I mean, there’s nothing wrong with limited trials, 30-day trials. I, I think if you wanna drive somebody in, you can offer extra product. You can offer a lower price. But if you put a timeframe on it, you know, that tends to nudge people in the direction of, of acting sooner rather than later. So, here, you get a call from Boeing three weeks after your offer is expired and they wanna buy. You say, “okay.” You get a call from me three weeks after, you say, “sorry, it expired.” So by having a timeframe, by setting boundaries on this, you can maintain the boundaries or slip the boundaries. But with no boundaries, you’d have no choice. Okay. So. Helpful?

Audience: You, you talked about this, this technique of having different pricing tiers, three or five choices, and how people tend to the mean, the average, and I’ve seen that on a lot of, a lot of sites. What happens, though, when your software, the variable that affects pricing, isn’t additional features where the consumer or, or business can choose which features they want? What if it’s something like bandwidth or number of seats or, or number of minutes, if you’re selling, selling cell phone plans? In other words, it’s not, it’s not a choice that the person making the, the buy decision has so many employees so they have to buy a plan that can accommodate the number of seats they have or, or in our case, we sell property management software, so the variable is how many physical properties do you manage? That’s what drives our pricing. So how do you employ that tactic that you talked about when, when that’s how your pricing works?

Jim Geisman: You know, well, one of the things you can do is you can still tier those, you know. We’ve got 50 property packages, 100, 1,000, that sort of thing. And you know, by the, you know, by the way, there are some, some issues about gaming, gaming the pricing scheme. So if, if, for example, I, I have this property management software, I may, once I sell a property, I’d take it out and I’d put another property in instead. Okay. So you wanna avoid those sorts of games. So sometimes, what happens is people set capacity limits, could be bandwidth, number of things. And, you know, by the way, you can also use archiving as, as a way to avoid this gaming thing. You know, but I think whatever you’re scaling variable is, it’s always a good thing to give people some packages so that they understand what the scaling variable is. And I, I would also urge to, to some other things in addition to that to sort of nudge people in the right direction. It could be support. You know, at the low end, its e-mail. At the high end, its telephone support. You know, that sort of thing.

Audience: If, if we were gonna bring you in to work on this stuff, how much would that cost us? Sorry.

Jim Geisman: Let, let me ask the critical question. When and how much? No. But forget about that. The, the point is I think it is always a good thing, if you’re in the service business, to ask the customer how much they think they want to invest. Because if you’re in the services business, I can, I can swing the scope around, I can swing the depth around. Okay. And I can meet almost any budget. And it’s not a negotiation. It’s, it’s a, is it bigger than a breadbox or smaller than a blimp hangar, what the hell are we talking about? And then, and then I think that gets you into a pretty good discussion, which I’ll be glad to have with afterwards, or, or any of you for that matter.

I’ll, I’ll be happy. I’ll, I’ll be around and can take more questions later, cuz we have the lightning talks. So, thank you very much.

Jim Geisman

Jim is widely known as one of the top software monetisation experts in the world and was recently recognised as the top B2B software pricing expert by OpenView Labs.  

He was the former director of marketing for Apollo Computer, and an original member of the IMP team—the team that actually built and tested the Internet Messaging Protocol on the ARPANET project, which later became the backbone of the Internet we use today.

Jim was on the Executive Committee of the MIT Enterprise Forum and chaired the Forum’s Start-Up Clinic for over a decade. He was on the Board of the Harvard Business School Association of Boston and is currently on the Board of the Professional Pricing Society.

He is a passionate guitar player and motorcycle owner. He graduated from Tufts University with a master’s degree in Engineering, and received his MBA from Harvard.

More from Jim.

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