We are currently working with a mid-market VAR/MSP on their business transformation process. In addition to looking at their sales team structure and size, we are also examining their overall profitability. Our first question was to determine how they set the price for their client offerings. Like many companies, they look at the cost of providing their product or service, determine the minimum required GP, and set the price accordingly.
Our next question for them was whether they were happy with the GP they are making. Their answer was ‘there is certainly room for improvement’. So how should they be pricing their products and services to maximise their profitability? We believe that the best approach is to adopt a 3 tiered model of Good, Better, Best pricing to not only improve profitability, but also to improve client satisfaction.
So what exactly does this all mean?
Too much choice
It is sometimes thought that more choice is automatically going to lead to more sales. But this is not always the case. The Columbia University Business School (Watch the Sheena Iyengar TED talk video here) ran experiments to see how people would react to different levels of choice. Would there be a correlation between choice options and sales?
In their experiment, they went to a grocery store and set up a jam tasting booth, firstly with 24 varieties of jam (extensive choice) and then one with 6 varieties (limited choice). All consumers were offered a coupon to receive a discount if they tasted and then bought the jam.
What they found with the 24 choices of jam:
• 60% who passed stopped & tasted
• Sampled 1.5 jams on average
• 3% purchased
What they found with 6 choices of jam:
• 40% who passed stopped & tasted
• Sampled 1.4 jams on average
• 30% purchased
The conclusion was that “less is more” as the number of choices was overwhelming for most people, and this resulted in no choice, “even when it goes against our best self-interest”.
Good, Better, Best pricing
Having a three tier pricing strategy is another well researched pricing approach. This is also known as “Goldilocks Pricing” as you want to price and steer the buyer to the middle ground that is “just right” or the ideal offering.
The research around pricing choice and psychology will generally show that if 3 similar items are priced high, medium and low, 66% will pick the middle or medium price. Of the remaining 33%, 1/3 will pick the higher price and 2/3 will pick the lower price. The final price splits will be high 11%, medium 66% and low 23%.
To implement a good, better, best pricing strategy, first start with the “better” or standard product offering. Make sure the product configuration of features, added value or services is your sweet spot for market aligned customer demand. That is, it is attractive to the buyer, but is priced to be comfortably profitable for you.
For the “good” offering this must not be a “bad” or unattractive offering. It will most likely be a bit simpler or a de-featured version to appeal to either the budget conscious buyer that still finds your brand attractive, but does not need or can’t afford all the features in the “better” offering.
Defining the features to include in the “best” offering is best done by doing some research into your sales data as a starting point. Look for where you have created a bespoke offering a couple of times prior around the core product with options, add ons, or additional services and then “productise” this so it is repeatable.
The exact price points for each of the offerings will be determined by what you are or are not including in the “good” or the “best” categories. However, as a guide to price setting for each of the tiers you can use the proven strategy of less 15% for “good” and plus 40% for “best”. While you can go higher with the “best” offering, the “good” offering should be relatively close to the standard or “better” offering. Remember you want to steer the choice to “better”, not to “good” by making the entry price point too low.
Add ons and options
Today just selling hardware or software licenses is a tough low margin and competitive business. Building a good, better, best set of customer choices has 3 primary benefits.
• Allows you to differentiate your solution and better match customer requirements
• Will speed up decision making
• Will improve the overall margin of the complete solution
Channel Dynamics has a range of Calculators we use in our sales and business skills training programs, and we are constantly surprised that salespeople that are paid on GP do not understand or maximise the margin opportunity. Below is an example of a solution sale calculator, which speaks for itself.
The telco industry has been doing this for ages as there is no money for the dealer in selling the phone, which is why they always offer bundles and accessories. In fact, they make more GP from selling the add on case than they do an iPhone.
Using this calculator or something similar it would be easy to build a range of good, better, best options that will be more profitable for you and provide a better customer outcome.
What this means for the channel
1. Too much choice is a bad thing
While we all like to be able to make choices, as we saw sometimes that too much choice is not conducive to a quick sale. The number of options vendors provide around a product or a software license can be confusing and mind numbing. Smart solution providers understand what are the really important and valuable vendor or service options are and focus on these. This is the real value add of being a solution provider, not just a supplier.
2. Productise for predictable margin
Often due to the speed of everyday business customer solutions, quotes get built using the same or similar bill of materials that had been either provided previously to the same customer or to another customers in a similar situation. Unfortunately, this is done without checking all the contributing product margins or service delivery requirements for a final quantifiable and acceptable “blended” margin. The end result is potentially a customer solution that may work, but does not provide optimal return to the solution provider due to some of the included components or options.
Therefore, the next step is to “productise” the most common options so they can be easily included in a customer quote to create good, better, best alternatives. As a repeatable or modular offering the margins will be known, ideally optimised and the solution more easily able to be quoted.
3. Use quoting templates to provide 3 tier pricing wherever possible
Today many VARS & MSPs use various semi-automated &/or integrated quoting tools such as ConnectWise, Salesforce etc that include quoting templates. Therefore, it is relatively easy to build and quote as a good, better, best offering for a range of solutions once the “productisation” process has been completed for the various options.
The use of quoting templates will reduce the amount of time taken to produce a quote, to produce potential re-quotes due to mistakes and ensure good, better, best options are always included.
4. Maximise the blended margin approach
As we pointed out building the options and seamlessly adding them onto your core offering is the best way to improve your margin and customer satisfaction. Therefore, do the business preparation as part of the productisation and templating to understand the overall profitability of the solution.
• Work out what combinations of these products and services you sell most
• Productise these options and set Good, Better and Best pricing options
• Enter these options into your quoting tool to produce quoting templates
In doing this you will start to optimise your profitability, improve your quoting processes and most importantly increase your client satisfaction in the process.