Taking the above conclusion at face value, it forces a hard choice – drop the price and hurt margin, or maintain the price and sacrifice sales. Rock, meet Hard Place. That sort of choice can stymie decision-making, causing you to loose valuable time before acting.
That’s what happened to an equipment rental company that was facing that very choice.
Rental income was good, but a key to company success had been selling off its used equipment. This practice provided healthy margin support. It was a very successful strategy for years – then their used equipment sales tanked. All indications were that price was killing deals. In the simplest analysis, options were now available in the market below prices that met their minimum margin requirements – sometimes way lower.
Was this analysis correct? Absolutely. Was it the full story? Not in the least. Running and re-running the numbers, price-checking the competition, and agonizing over the harsh decision between revenue and margin delayed action and didn’t solve the problem. Investors got antsy. It wasn’t until they got deeper with their customers and data about them – in the form of an Attribute Study – that a third way was revealed.
A hallmark of their used equipment sales program had always been their certified refurbishment program. This is because when they started selling used equipment, everyone assumed the obstacle to purchase would be worries about the wear and tear on rented equipment. So the company banked on an expensive refurbishment approach. It worked. People bought. So it was considered necessary. But when the “pricing” crisis hit and forced them deep into customer preference analytics, they learned that the highest level of refurbishment was important to only a small number of customers. For the rest, it just needed to work – it didn’t need to shine.
Read this article to go deeper on tools for customer price preferences.
Leverage our Win/Loss Interview Guide to make sure the team responsible for packaging is hearing from both customers and non-customers about what they value when they decide to buy. The answers will help you begin solving both your price and packaging problems.
This is where the most basic type of product packaging differentiation could have saved a lot of heartache. A simple “Good/Better/Best” approach would have allowed the costs of the most extensive refurbishment to be paid by only those who really wanted “just like new.” “Better” would work for most, and “Good” could be good enough for the bargain shoppers. Each type of customer could get what they wanted, and the company could get the margin it needed on each sale.
This is a great example of the truth about packaging – packaging is the flexible flip-side of price. It can be a great way to get your customers what they want and to get you the revenue and margin you need. But only if you understand what your customers truly value.
Software Makers Should Have Packaging Figured Out- But Do They?
Much has been written about packaging options for software. If you are a software CEO, your company probably already offers a few packages – maybe several. However, we see time and again that packaging approaches have been designed without a deep understanding of customer needs and desires. That always leaves money on the table, and leaves you vulnerable to the competition and shifting market conditions.
Take for example the research software company that had a variety of tools to help Sales & Marketing. To accommodate different budgets, their Product team had packaged their tools into Good/Better/Best sets. This approach seemed successful during their high-growth phase. Each set sold well, which seemed to confirm they had nailed packaging. But when the growth slowed – and all the other usual suspects had been called out and shot – the CEO told the Product team to “fix the problem.” And dropping the price was NOT an option.
Click here to learn how SBI approaches pricing strategy.
The Product team – being made up of Product people – redoubled their efforts on the bells, whistles, UI/UX, latency, etc. The products DID improve – but sales did not.
It made no sense. They had industry-leading tools. Each package was still to selling (just less). Customers were satisfied. But their competitors were selling more without substantially lowering prices.
The “Customers were satisfied” issue drove them crazy. They knew their users really well, down to their favorite button shape and preferred method of payment. What they didn’t understand were their non-customers: those who decided not to buy. They took a step back and looked at their whole customer base of Sales & Marketing users. When they took a deeper dive into customer characteristics, they found that 83% of their users were from the Sales side – only 17% from Marketing. Even though their Marketing users were satisfied, marketers were buying at a much lower rate.
To their credit, the Product team set aside their assumptions about how well-packaged their tools were and got knee-to-knee with a lot of Marketing NON-customers. It turns out the company offered all the necessary tools, but Marketing needed some tools and not others, and at different times than Sales. The company created two new Marketing packages (Better/Best versions) targeted to Marketing personas – and sales took off. As a bonus – since Marketing people are Marketing people, after all – their new customers spread the word like wildfire.
What’s Your Problem?
So how do you know if you have a pricing problem or a packaging problem? The truth is they are two sides of the same coin – you can’t be in optimal pricing position without savvy packaging/versioning, and you can’t package your products optimally without knowing the price points that will sell.
So what’s the secret for success on both? A deeper understanding of your customers and your non-customers. Maybe your customers don’t need everything in the package. Maybe different types of customers need different package choices. Maybe customers from different market segments will pay more than others, and should have a package just for them. And perhaps your customers are savvy enough that a la’ carte is the way to go. You’ve got to know the answers. So get out there and go deep.
Okay, But How?
A full attribute study is the emerging best practice: matching up all the possible attributes of your products (those that you think about and those that you don’t) with all the attributes your customers – and non-customers – value. And how much they value them. In priority order. By type. By segment. By market. It is not an easy task, but it provides incredibly robust and useful data. With that information you can package precisely what your customers value (a best practice), and it will enable you to take the next step and package according to your corporate strategy (an emerging best practice).
Sound overwhelming? Try this novel ideal for a starting place. Most companies do win/loss analyses. They ask their customers and prospects why they bought – or didn’t. Most often these analyses are done by Sales, Sales Operations, or Marketing.
Try taking a different approach. Give your Product group the task of performing the win/loss analyses for the next quarter. That will make sure the team responsible for packaging is hearing from both customers and non-customers about what they value when they decide to buy. The answers will help you begin solving both your price and packaging problems.
If you don’t have a win/loss interview guide, Leverage our Win/Loss Interview Guide.
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