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Author : Don Maher

What Good Marketing Is…and Isn’t

There’s a reason brochures, slide decks, and other marketing materials are called “collateral”: They’re secondary.

While thoughtful design and presentation are always useful, they take a back seat to what marketing is really designed to do, which is to add value to a business by directly increasing revenue and profitability.

Good marketing doesn’t require slick design—some of the most effective marketing can literally be scrawled on the back of a used envelope, if it convinces customers of the unique value of your products or services.

Here are some things all effective marketers do:

They specify and quantify the unique value their products and services deliver to customers in terms of how much money customers earn (and/or save) by purchasing them. If that value isn’t clear—or, worse still, doesn’t actually exist—they redesign their offerings with value in mind.

“Redesigning” doesn’t necessarily mean reconfiguring hardware. It means changing the “product,” which I define as the results customers receive. Different specifications, guarantees, delivery, payment terms, reliability, durability, and field support are just a few of the many ways to differentiate the same exact hardware into different products—at different price points.

If you find yourself competing on price more often than you’d like, I suggest you examine, specify, and quantify the unique value of your product or service. Then, offer different versions of that value at different prices. Doing this one thing can transform your sales.

They develop specific strategies to sell more products at higher prices. The strategies include objectives and timing, but more importantly, answer the question “How will we do it?” Details on customers, products, positioning, pricing, promotion, people, and the actions that need to happen—and when—are understood by everyone involved.

Note that this also includes making sure that all salespeople are clear on which team they’re on—that is to say, your company’s. Too often, salespeople cut special deals with customers that undercut not just your profits, but the relationships that exist within your company as a whole.

They compete where they can win. They know their products aren’t right for every customer and every opportunity, so they focus on offering the best solutions to specific problems, and creating a “better future” for customers who don’t have obvious problems.

They identify what good and bad business looks like, and save their company money and time that would be wasted chasing customers and opportunities they can’t win. Doing more and more business with a big but unprofitable (or low-profit) customer is a sure way to tank both morale and revenues.

They price their products based on customer value and position that value as an investment instead of a cost. It’s a lot easier to sell a product and a price when you can tell the customer something like: “For every dollar you pay me, you’ll get three in return.” Then, they back up that claim with strong business cases, data, and guarantees. Guarantees are a great way to close business and not terribly risky if you’re selling something effective and reliable (you are, aren’t you?).

They don’t make their customers think too hard. In conversations, pitches, and presentations, they provide easy-to-understand reasons why customers should buy, and the results customers get in return. They don’t get into jargon or micro details that customers really don’t care about.

They create demand by speaking and writing about how their products and services have helped customers improve their business results. They know that customers are much more interested in how you can help them earn or save money than they are in your new hex-head screw. They don’t want products or services, per se—they have a problem they want solved. Always be focused on how you can help them solve that problem.

They make it easy for first-time customers to buy by reducing the risk most customers feel when they’re about to buy a new product from a new supplier.

Like it or not, customers perceive risk in changing what they’re used to buying and doing. They will even tolerate big, expensive problems for years if the solution to those problems has too much risk attached to it. (Remember that old saw about people preferring the devil they know to the devil they don’t know—there’s a lot of truth in it, even though this sort of thinking isn’t logical.)

You can come up with all kinds of logical arguments in terms of why the customer should buy from you. However, if the customer perceives an unknown risk (and the customer always does) in buying, and you don’t address that risk early in the sales cycle, you will have a harder time selling.

You can reduce risk in a number of ways with small trial purchases, strong guarantees, and the right kind of proof that you can succeed.

They’re honest with themselves, their salespeople, and their customers.

A lot of what passes for marketing is little more than sketchy, exaggerated claims.

Your salespeople and customers aren’t idiots. People hate being misled or lied to. It’s off-putting and greatly reduces your credibility. Nothing establishes your credibility more firmly than being able to honestly say things like the following:

  • This is what we do well, and here is the proof behind that claim.
  • We’re not the best partner for you if you want to do x, y, or z. You may want to try [competitor product service or internal solution] instead.
  • We achieved that level of performance only once, but we’re working to duplicate the results.
  • Based on what you’ve said about the size of your budget, I don’t think we’re the right fit for your needs.
  • We offer a full guarantee for two years. If you’re not happy with the performance during that time, we’ll give you 100% of your money back.

If you remember nothing else about marketing, simply focusing on a) honesty and b) value will put you leaps and bounds ahead of most of your competitors—with or without a stack of glossy brochures.

Are Your Salespeople Reluctant To Sell High-Margin Products?

One of my clients is having an issue with his salespeople: They are reluctant to sell a certain product at the recommended price because the product’s gross margin is 80%.

And why is that a problem, you may ask? The salespeople firmly believe that:

  1. Any product with a gross margin above 50% is priced too high
  2. Gross margins above 50% should be reduced to this level or lower – with the difference passed along to customers in the form of lower prices
  3. The cost to build certain products “should be lower”
  4. Customers shouldn’t have to pay a high price just because labor and materials costs are high

How the scenario plays out

Here’s one way the scenario can play out: The client builds an equipment upgrade. Not only does the upgrade last three times longer than the previous version, it also dramatically enhances the performance of the equipment.

A typical customer who uses the upgrade will realize a yield improvement of 1%, translating to $1M or more in additional revenue each year.

The company priced the upgrade at $25,000, which represents only 2.5% of the marginal annual value to customers. Even if the upgrade were priced at $100,000, it would still be a bargain relative to what customers are getting in return.

But at $25,000, the gross margin is 80%: Way too much, according to these salespeople.

What are your salespeople thinking?

It’s interesting, when you think about it. The salespeople share – or should share – responsibility for running a profitable business. And they should know that higher-margin product sales are needed to offset lower-margin product sales.

But the reality is that many of them don’t know this. They feel an allegiance to their customers and erroneously believe it is part of their job to secure the lowest possible price for them.

Training, not termination, is the solution

It might be tempting to just go ahead and fire salespeople who think this way, but training is a better solution to the problem (not to mention the fact that my client would need to fire nearly a third of his sales force!).

You must actively teach salespeople to think about prices and margins within the context of total customer profitability.

Selling to a customer who contributes only 20% gross margin, for example, is probably a money-losing proposition for the seller. This is low by almost any standard, and after deducting selling and administrative costs, the seller is probably losing money on this customer – or breaking even at best.

For this reason, selling the 80% gross margin part for full price to this customer is the right thing to do. This particular customer is not nearly profitable enough to warrant a discount. In fact, you probably need to sell products with an even higher margin to this customer in order to bring profitability up to a reasonable level.

This lesson should be included in your sales training to help prevent the unhelpful mindset of “We can’t charge the customer more than twice our cost.”

What to do if they just don’t get it

When a salesperson complains about high prices and/or excessive gross margins, ask what kind of profit his or her customer is contributing to your company.

If the answer is less than 30% gross margin, or 10% contributed profit, ask how lowering prices will help to increase profits.  Finally, ask what specifically the salesperson is doing to increase gross margins and contributed profit.

If blank stares or nervous giggles are the only responses you get to these questions, it’s time to put on your teacher hat and review the lesson on total customer profitability.

And if the salesperson still doesn’t get it? At that point, steering him or her toward a different career (either within your organization or elsewhere) is probably the best course of action for all involved.

The #1 Thing You Can’t Afford To Leave Out of Your Pricing Strategy

If you remember nothing else about pricing, remember this: Pricing begins with cost, but is built on value.

More often than not, companies use a cost-plus-target-margin method (the “cost-plus” formula) to price their products and services.

They do this because this method is easy to use and also gives the people responsible for pricing a sense of precision: “I used an objective method to arrive at my price.”

The biggest problem with the cost-plus method? It doesn’t yield a price that captures the true value of a product or service. It can’t, because value isn’t part of the formula.

Oftentimes, a product or service that provides a great deal of value to the end user doesn’t cost all that much to produce or provide. Cost-plus-target-margin pricing will lead to this valuable product or service being tremendously underpriced relative to the benefit it provides – meaning that you’re leaving a lot of money on the table.

A second problem with using cost-plus pricing is that the initial price calculated using this method will be the highest price the product or service will ever command.

Think about it: As soon as a new product or service hits the market, buyers seek to negotiate and reduce that price as much as they can. As time goes on, less and less profit remains.

Before long, the profit margin has shrunk to far below the original target. And, in my experience, few companies can cut costs fast enough to keep pace with continually declining prices. It’s a race in which you start out behind and continue to fall farther and farther back.

The bottom line is this: You simply cannot afford to leave value out of the equation when pricing your products – nor should you.

Your products almost certainly have more inherent value to your buyers than the amount generated using a cost-plus formula. So why not use a different pricing formula that captures that inherent value?

Something like Cost + Margin + Value will get you much closer to the true value of your products and services – and will help you avoid both of the costly problems discussed above.

But how do you go about calculating the real value provided? Next time, I’ll discuss the sources of real value so that you can begin to capture some of that value in your prices.

Why you need a pricing strategy – Part 2

In my last blog, I listed a few reasons why businesses need pricing strategies. Following are a few more reasons why developing a well thought-out pricing strategy is so important.

  1. It forces a business to decide on the right combination of market share, profitability and revenue to meet its’ needs. This is something that, in my experience, rarely happens. Vague generalizations like “don’t lose any business on price”, or “we need profitable market share” are much more common (but not very helpful).
  2. It helps a business decide what products it will and won’t produce, because every product idea should have to pass the “can this product be built and sold in quantities and for prices that will meet our needs?” test. Most new product ideas go through the “built, sold and quantity” screen before they’re launched, but few are measured against the “price that will meet our needs” test.
  3. It helps a business decide up front on how it will price its’ products and services under what circumstances. Management, Marketing and Sales should know, prior to engaging with a customer, how much a price can be discounted relative to what circumstances, and if and how a product can be deconstructed or dumbed down to meet a customers’ unrealistic, hard line, low ball budget.
  4. It clarifies why prices make sense relative to direct competitors’ prices, substitute product prices, the cost of workarounds, and the cost of doing nothing.
  5. It defines specifically how to support and defend those prices in the field, with real customers and against real competitors. Unfortunately, this is almost never done. Generalizations like “our quality is the highest in the industry” are used far more often than hard facts like “our products yield 4% more than our nearest competitor based on x, y, and z data”.

In coming blogs, I’ll begin to show you how to build your own pricing strategy.

Why you need a pricing strategy – Part 1

Most companies don’t have a pricing strategy. Sure, they set list prices, but they almost never sell at those prices. Instead, they end up customizing prices for nearly every customer, product and purchase. This leads to a number of costly and serious problems.

First, salespeople learn that the list prices their employer gives them are only suggestions; starting points from which they can secure lower pricing if they work at it. Since this is easier to do than trying to convince the customer to pay more, they default to negotiating for a lower price from their own company, functioning like an agent for the customer in the process.

Second, tremendous amounts of time and money are wasted when pricing is done in an ad hoc, opportunistic fashion. More and more people (who all believe they’re pricing experts) start to get involved in more and more quotations and proposals. They want to determine or influence the price, or keep track of every change in the pricing process. I believe that if companies would take the time to calculate the amount of employee compensation spent reviewing and approving prices, along with the opportunity costs of not doing something more valuable, they would be absolutely shocked, and would begin immediately to develop a better way to manage their pricing.

In the coming weeks, I’ll outline more reasons for having a pricing strategy, and then show you how to develop a strategy that works.

There is a big difference between setting and capturing better prices

It’s one thing to set prices from the coziness of the home office. It’s another thing entirely to capture those prices in the field, dealing with real customers and competitors.

If you’re interested in capturing higher prices, there are things you can do to improve your chances.

First, your marketing materials, customer presentations and sales process itself must be geared toward conveying value at every step. Value that’s clear and compelling and based on how your product or service helps customers make more money and/or save more money using your products relative to:

  • Your competitors’ products
  • Substitute products (such as multiple products currently used to perform the job that your one product will do).
  • Work-arounds
  • Doing nothing at all

Second, your salespeople must be trained not only in how to sell the products, but also in how to sell the products at desired prices. In other words, they have to be able to clearly articulate how products were priced, and why the prices make sense relative to the above.

Third, a company’s management style and culture must support higher pricing. Top down commands such as “close those orders now”, “don’t make the customer angry”, and “don’t lose any business because of price” send a clear message to salespeople that price just isn’t that important.

Fourth, compensation must reward higher pricing and profitability, and not as one component in a sea of 10 or 20 other compensation components. For any company that wants higher prices, I would suggest that half of variable sales compensation be based on selling products and services at or very close to list prices as long as those list prices have been accurately and sensibly determined. And for sales below a certain percentage of list prices, I suggest that sales people earn next to nothing.

Fifth, compete where you can and should win. Identify target customers who truly need what only your products can provide. These customers are not only more likely to pay more, they’re also more likely to be satisfied with your product.

Finally, learn how to negotiate better agreements with your customers’ professional buyers. Please take a look at my previous blogs for more information regarding how to do this.

Capturing better pricing looks like a lot of work, but the results can be well worth it. Many companies can realistically increase average prices by 5% within a year or two, and those price increases go straight to the bottom line. I don’t know of any other marketing investment with that kind of payoff. Do you?

How to hire salespeople who can sell value

We’ve all heard people complain that “our salespeople can’t sell value”. Sometimes, the fault lies in engineering because the value doesn’t exist, or with marketing because the value exists but hasn’t been explained very well. At other times, however, the value clearly exists, but it’s not being sold and properly paid for.

I have an opinion about this that I’ve formed over 25 years in marketing and sales, and it’s something you can potentially use to hire the right kind of sales people for your company:

The criteria and thought processes that salespeople use to purchase products and services for themselves, is frequently the same criteria and processes they’ll use when selling your products and services.

Specifically, salespeople who consider price the most important factor when purchasing products for themselves tend to offer greater discounts and lower prices to their customers when selling. Conversely, salespeople who recognize and pay for value-added products tend to be better equipped to sell the value of their employers’ products and services and capture higher prices.

Over my career, I’ve managed hundreds of salespeople. With only seven exceptions, the cheapest salespeople were the ones who gave their customers the lowest prices and largest discounts.  And the value-oriented salespeople almost always sold products and services at higher prices-sometimes much higher prices.

I’ll never forget a customer meeting during which one of our value-oriented sales people told the CEO of a billion dollar integrated circuit manufacturer that his (the sales persons’) job wasn’t to give his company’s products away, and that the CEO would expect his sales people to say the same thing to his customers’ when asked for an outrageous discount.

Anyone can sell products at deep discounts, and if your company is the cost and price leader, you can hire pretty much anyone to sell for you. In fact, you probably don’t need salespeople at all. On the other hand, if you’re a high-value provider, you should be interested in hiring people who can sell that value.

The next time you interview a person for a sales position, ask him or her the following questions:

  1. What criteria and process do you use when buying products and services for yourself?
  2. Give me some examples of high dollar purchases you’ve made, and how you decided what to buy.
  3. How do you typically respond when one of your customers asks for a deep discount?
  4. How much do you typically discount the products and services you sell? On what do you base the discount?
  5. In which of the following areas do you typically spend more time: negotiating with your customer, or negotiating with your own company?
  6. Walk me through a few examples of recent negotiations you’ve conducted and tell me what you were thinking during the process.
  7. How often do you sell at list price?
  8. What specifically do your products and company do better than any of your competitors? How much is that worth to customers, and why?

Asking these questions won’t guarantee you’ll hire the right person. But the answers will give you a sense of how the person sells and thinks, and may increase the odds that you’ll hire someone who is a good fit for your company, products and strategy.

The market sets the price

Ask marketing and salespeople about profitability and many of them will tell you that finance, manufacturing and operations bear the responsibility for making sure that their company is profitable. They’ll go on to tell you that a business has control over expenses, but not over pricing because “the market sets the price”. But is that really true?

In consumer markets where products are nearly identical and prices are easy to compare, the market does set or at least heavily influence the price of a product. But in industrial markets where professionals negotiate prices for differentiated, high-value products, letting “the market” (otherwise known as professional buyers) dictate prices is a recipe for disaster.

As sellers, we need to constantly remind ourselves that the buyers of complex equipment and services are well trained and far more sophisticated than the typical purchaser of a consumer item. These professional buyers have every incentive to mislead us regarding:

  • The value of our products to their company
  • Their feelings about our companies and how we do business
  • The size of their budgets
  • The price of competitors’ offerings
  • The specifications that competitors’ products can meet
  • Their willingness to actually use competitors’ products

Everyone in marketing and sales has heard professional buyers say things like:

  • “Your product is no different or better than anyone else’s”
  • “Your company is hard to deal with”
  • “Your price is way over our budget”
  • “Your competitors are all meeting our target price; (your company name here) is the only exception”
  • “We’re ready to buy (insert name of competitors’ substandard product here) unless you lower your price

Each of these statements is made with one goal in mind: to lower a sellers’ expectations regarding prices.

Note: Even when an order is lost for reasons that have nothing to do with price (i.e. an executive at the customer is friendly with an executive at your competitor), professional buyers will usually tell the salesperson that he or she lost the order because of price. Why? Because buyers want sellers to be absolutely convinced that their prices are too high so they’ll work even harder to lower prices in the future.

My experience strongly suggests that in most cases we have far more control over prices than we think we have. This has been proven with products like the latest $90M lithography tools (for which customers initially said they’d pay no more than $20M), and products like the $7M Applied Materials Endura PVD system, which was successfully launched into a market in which customers were used to paying about $2M per system.

In truth, marketing and sales are as responsible for profitability as any other function in a company, and they deliver their share of profitability by convincing customers to pay more money for products and services. That’s a big part of their job. And excuses about what the market will pay are many times just that; excuses.

Sometimes, second place is the best place.

Imagine two capital equipment suppliers competing for a $10M, 10 system order from a large customer. Both suppliers have 50% gross margin targets and 10% net profit targets, which they can only achieve by selling their products at list price.

Supplier A wants to capture 100% of the business. They want all of the revenue, they want it now, and they’re prepared to do what it takes to get it.

Supplier B, however, isn’t as interested in absolute revenue or market share. Their goal is to capture 20% to 25% of the business at a high level of profitability.

On the surface, you might conclude that B is conservative or doesn’t care as much about growing its’ business. But B has a plan, and as you’ll soon see, will end up with more profit, from far less business, than A.

B knows, as we all do, that very few customers will award all of their business to one supplier, regardless of what that supplier offers in terms of:

  1. Discounting
  2. Over-aggressive specifications
  3. Annual price reductions
  4. Supporting the business for years at little or no profit

There’s simply too much risk in terms of inadequate performance and loss of negotiating leverage, for most customers to select only one supplier.

So, after all is said and done, A ends up with 80% of the business; close to its’ goal of 100%. However, A does not end up with $8M in revenue, $4M in gross margin, or $800,000 in net profit. Because to capture 80% of the business, A quickly agreed to a 15% discount, which brought its’ total revenue down to $6.8M, its’ gross margin down to $2.8M or 41%, and its’ net profit down to zero or worse. In addition , A has now set the tone for giving even deeper discounts to this customer in the future.

B plays the negotiation game very differently. B initially offers no discount, and patiently waits out the customers’ 1) made up stories about how all the other suppliers are doing everything the customer wants them to do, and 2) unrealistic demands for lower prices. B is convinced of the value of its’ products, and is reluctant to give them away at a cheap price. Slowly and methodically, B finally settles on a 5% discount. However, they offer no future specification improvements, price reductions, or low profit service. B ends up with total revenue of $1,900,000, gross margin of $900,000, and net profit of $90,000. In addition, B’s future support costs will be negligible; something A shouldn’t plan on.

Now, Supplier A may have had perfectly legitimate reasons to go for a low or no profit order. Perhaps this customer is so influential that other customers will buy A’s products as soon as this order is made public. Or perhaps the customer is going to help further develop A’s products, adding more overall value to A’s business. There could be hundreds of legitimate reasons that A had for taking this order. But profitability isn’t one of them.

Before entering your next major negotiation, think about the scenario above, and about what you’d like to achieve. If you decide to go for maximum market share, ask yourself if it’s worth what you might have to sacrifice to get it, and then compare that with winning a secondary, but more profitable position.

One of the biggest wastes of marketing and sales resources is time and money spent pursuing the wrong customers and the wrong opportunities.

Do you ever wish your marketing and sales people would capture more profitable business: the kind that adds the requisite profitability and results in happier customers? Well, they can, if they:

  1. Define your company’s best prospects: companies that not only need your products and services, but can afford to pay for them as well
  2. Define the prospects that aren’t and may never be a match for your services and products because they can’t or won’t pay for them, and don’t need the unique attributes that make your products special
  3. Devote far more time and money pursuing the best prospects, and little or no time and money pursuing the worst prospects

Unfortunately, many companies have a hard time distinguishing between good and bad business. They believe that every prospect can be a customer, given enough sales time, presentations, and wining and dining, and that “giving up” on any prospect is like admitting defeat. This is a costly belief.

Any sale that will require significant effort, money and time to win should have to successfully pass through a number of “good business” filters, a few of which are listed here:

  1. What changes are driving the need to buy anything at all, let alone your product?
  2. Why is the prospect interested in your product or service? The real reasons, not some general, made up B.S. like “we want to go in a different direction”. The answer to this question is particularly important when dealing with a prospect that has been using “Brand X” for years and may only want a quote from you to use as leverage against Brand X to get a lower price.
  3. Is the opportunity really funded? If so, how much money has been approved, by whom, when is the money available to spend, and is the funding contingent on anything?
  4. Can the prospect really afford what you’re selling? A prospect that claims to have a budget of only $2M to buy a piece of equipment that typically sells for $3M is doing one of the following:
  • Pulling an old-school negotiating trick (“let’s throw an outrageous figure out there as an anchor and see how the sales person reacts”)
  • Demonstrating that he really can’t afford your product
  • Trying to establish that price is and will be the most important criteria when dealing with this prospect

No amount of negotiating is likely to close a gap this big, and the time and effort involved aren’t worth it. The best response to the prospects’ budget statement above isn’t “great, let us see what we can do to get you a better price”. No, the correct answer should be something along the lines of “this product is worth considerably more than $2M. If you’re only able to spend that amount, we won’t be able to work with you on this project. If you can increase your budget to $3M, we’re ready to talk with you further”.

Every minute your people spend chasing bad business represents lost money and time that you can never recover. Even worse, those minutes represent lost opportunities to pursue better business.

Use your experience to determine who your best prospects are, and then apply all of your marketing and sales effort toward making those prospects your customers. In addition to making more money, you’ll enjoy more satisfying customer relationships in the process.

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