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South Africa Tour: Introduction to value-led pricing


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These are the slide I used during my three-city, four-event tour with the Sage South Africa Accounting team.

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South Africa Tour: Introduction to value-led pricing

  1. 1. Introduction to Value-led Pricing Ed Kless @edkless
  2. 2. What is a Business Model? How your firm creates value for and captures value from customers. @edkless
  3. 3. “Disruptive threats come inherently not from new technology but from new business models.” - Andy Grove, Founder, Intel
  4. 4. A Tale of Two Theories (Business Models) Revenue = People capacity + Efficiency + Cost-plus pricing Current Model: Professional Service Firm New Model: Professional Knowledge Firm Profit = Intellectual capital + Effectiveness + Value-led pricing ↑ ↑ ↑ ↑ @edkless
  5. 5. Four Assertions 1) Growth without profit is perilous 2) Nonrival assets have more leverage than rival assets 3) Effectiveness is always and everywhere more important than efficiency 4) Value-led pricing is superior to cost-plus pricing for capturing value created by PKFs @edkless
  6. 6. Rival Asset Non-Rival Asset @edkless
  7. 7. From Revenue to Profit @edkless
  8. 8. @edkless
  9. 9. $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 Cost Price Value @edkless
  10. 10. From Capacity to Capital @edkless
  11. 11. Four Forms of Capital • Financial • Intellectual • Structural • Social @edkless
  12. 12. From Efficiency to Effectiveness @edkless
  13. 13. The Antithesis of Efficiency • This session • All continuing education • Knowledge management • Total quality service • Mentoring and coaching • Networking • Business development • Social media • Innovation • Pricing on purpose @edkless
  14. 14. From Cost-plus to Value-led pricing @edkless
  15. 15. @edkless
  16. 16. Two Basic Pricing Methods Cost-led pricing Product  Cost  Price  Value  Customer Value-led pricing Customer  Value  Price  Cost  Product @edkless
  17. 17. Unlearn • What you do (or have to offer) has intrinsic value • Business exchanges are like for like • Price is primarily a function of cost Remember • Intent counts more than technique • NO GUESSING! (Move off the solution) • Slow down for yellow lights Three things to unlearn & Three things to remember @edkless
  18. 18. 1. Listen 2. Assuage 3. Move 4. Close The four steps to move off the solution @edkless
  19. 19. I need to replace QuickBooks for my growing firm in need of a more flexible accounting solution. Is that something you guys can do? We can. Companies that out have outgrown QuickBooks are right in our sweet spot. Would it be OK if I asked you about what a more flexible accounting solution means in your specific context? Clarify – Example 1 @edkless
  20. 20. Clarify – Example 2 I’d be glad to offer my thoughts. Help me out. When you say you want to improve your financial reports internally and externally, can I ask what that means? We want to implement a more effective accounting system to improve our financial reports internally and externally with customers. Can you give me a demo of Sage Pastel? @edkless
  21. 21. Clarify – Example 3 The first thing that I’ll say about my experience is that everyone who asks for integrations with Sage Live has something slightly different in mind. Would it be okay if we talked a little about why you want to integrate so I can make my comments more relevant? I’m looking to purchase a new finance system that includes purchase order requisition and a personnel system that will integrate with our clocking-in system, and allows for the digital import of invoices with OCR. What options are available to connect to our systems to Sage Live? @edkless
  22. 22. Presumptive Clarify – Example 1 I’ll be happy to give you price once I understand exactly what you want to accomplish and at this point it would be presumptive of me to guess. Would you mind giving me some details about what you are hoping a new Sage Intacct- based system would do for you? I am looking for information about Sage Pastel, but I’ll be honest our main concern is price. Please tell me how much you would charge. @edkless
  23. 23. Presumptive Clarify – Example 2 Fair enough, Cloud is a hot topic right now. However, it would be presumptive of me at this point to offer my opinion since Cloud environments have different definitions. Could you give me yours? Our new IT director feels there are advantages to moving to a Cloud-based environment. I would like your opinion. @edkless
  24. 24. Bonus Content: Marston’s Circle of Scope @edkless
  25. 25. Yellow Light – Example 1 I have a concern. If we have no evidence or sense of impact of the problem, is it possible that somebody, somewhere is going to seriously question the validity of this project? The customer is pushing to move ahead with developing a solution to solve the problem without identifying the evidence of its existence and impact on the organization. @edkless
  26. 26. Yellow Light – Example 2 I have a concern. It seems the cost of a solution may be larger than the problem itself and it makes little sense to continue moving ahead. Am I missing something? You believe the cost of the solution your customer is asking for is larger than the cost of the problem it is intended to solve. @edkless
  27. 27. Yellow Light – Example 3 I have a concern. I don’t know if your CFO is like our CFO. However, at our company, even if everyone thinks there is a problem, there needs to be a business case backing up the request before he will allocate money. Could that be a possibility here? Your customer does not want to take the time to develop a business case for the solution because, “everyone knows it is a problem.” @edkless
  28. 28. The Five Golden Questions – Getting to Value Recognize a “measurable” word • Revenue • Cost • Customer satisfaction • Quality • Performance • Productivity • Et al. Ask Mahan Khalsa’s Five “Golden Questions” • How do you measure it? • What is it now? • What do you want it to be? • What is the value of the difference? • Over time (usually one year)? @edkless
  29. 29. A 1% Improvement in: 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% - Fixed Costs + Revenue - Variable costs + Price 2.7% 3.7% 7.3% 11.0% 1.5% 2.5% 4.6% 7.1% McKinsey AT Kearny @edkless
  30. 30. “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.” -Warren Buffet @edkless
  31. 31. @edkless
  32. 32. Presuppositions • Defined value • Completed a scope or at least an agreed upon set of objectives: • Deploy… • Educate… • Provide… • Convert… • Develop… • Integrate… @edkless
  33. 33. Van Westendorp’s Model • At what price would this customer think this is too expensive and not buy it? • At what price would this customer think this is expensive, but most likely buy it? • At what price would this customer think this is cheap, but still likely to buy it? • At what price would this customer think this is too cheap and not buy it? @edkless
  34. 34. Dan Ariely – The Economist sets price @edkless
  35. 35. The Numbers Two options Three options Selected Price Revenue Selected Price Revenue One year, web only 68 59 4,012 16 59 944 One year, print only - - - - 125 - One year, print and web 32 125 4,000 84 125 10,500 Total Revenue 8,012 11,444 43% Production costs 32 30 960 84 30 2,520 Profit 7,052 8,924 27% @edkless
  36. 36. @edkless
  37. 37. Seven Ts to Offering Choices 1) Terms 2) Timing 3) Technology 4) Talent 5) Tailoring 6) Transference 7) Travel @edkless
  38. 38. Create choices C •B+ •Convert… •Integrate… B •A+ •Provide… •Develop… A •Deploy… •Educate… @edkless
  39. 39. The Baron Joseph von Neinbach Model WA HF PF C B A @edkless
  40. 40. Questions to ask before setting price • What does the customer think the value of our solution is? • Have we done a complete scope document/project plan? • With whom on organization chart am I dealing? • Who referred this customer to us? Why were we referred in the first place? • Do they have any time sensitive deadlines for the completion of this project? Why do they need to do it now and not in six months? • Who’s paying for this? Are they spending other people’s money? • Do we have any competitors? If so, who? What price information do we have about these competitors? What is the price of the next best alternative offering? • How profitable is customer’s company? How long have they been in business? • How busy are your resources? • Have they engaged with someone else prior to us to do similar work? Who was prior firm and why are they changing? • How sophisticated is the customer? • Does customer add to firm’s skills or markets? • Do we like this customer? What is the state of their restroom? • How do we help reduce the customer’s risk? @edkless
  41. 41. The Proposal Item $ V •G+ •Convert… •Integrate… G •T+ •Provide… •Develop… T •Deploy… •Educate… @edkless
  42. 42.
  43. 43. Thank you!