Measuring Your Business Health

When your customers willingly pay the price premium you deserve…wow.  You did a lot of things well.  Let’s deconstruct them.

Pricing power, or profitable, value-based pricing is a trailing measure, but in many ways, it’s more important – and more instructive – than revenue. Yes, it’s a bit harder to measure, because measuring it means you know -- and measure --the right predictive behaviors.

Pricing is Profit

Every CEO, CFO, and CotB, knows that every dollar of price premium earned or discount avoided yields 100 cents in profit, while every dollar of sales grows profit by a few cents (less than eight, for the average public company). It’s funny how few sales leaders seem to leverage this knowledge into profit.  OK…it’s not funny at all.  

Customers will only pay a price premium (except for some short-term emergencies) voluntarily: when they perceive differentiated value in the seller’s offer – seller’s product or service. There are pricing consultancies who specialize in gaining short-term price increases, but that’s not sustainable, and not what I’m going after with my clients.

Thus, earning a price premium can only happen when:

1.    You Have Differentiation Your Customer Knows About – 

With deep customer insight, your product/service developers can build a differentiated solution to an important unmet customer value gap.  This requires knowing your customers, how they achieve that outcome now, and what you could help them do better than anyone else.  

Product differentiation (which includes services too), describes features or capabilities on which your offer differs.  Only sellers, not customers, care about product differentiation. Even so, measuring product differentiation is an important precursor to building a successful business.

2.   You Have Differentiation Your Customer Cares About – 

Differentiation doesn't exist if your customers aren’t aware of it.  Worse, feature and benefit marketing is unpersuasive—because customers don’t buy your products or services.  Talk to your customers about the outcomes your differentiated features enables, and you’ll get their attention.  

Differentiated outcomes are what your customers buy.  For example, with a product having longer service life, customers easily grasp “dollars-per-year”: price divided by service life.  However, many business disruptions –negative outcomes – could be far more compelling:  installation cost/time/risk/hassle, space allocation, cutover planning, training on the new system, validation and acceptance testing, downtime risk, etc.  Customers follow all of these easily, but seldom consider these outcomes without prompting.  Sell only dollars per year, and you’re underselling.

Develop metrics that score outcome-based content more highly than feature/benefit content.  Remember, customers don’t read your content to find out about you. They read your content to view themselves reflected  -- and “wearing” your solution .  There are metrics to measure how well your marketing does this.

3.    Customer has envisioned outcomes for themselves that stem from your differentiation. 

Story telling activates our brain’s “visualization center”. Visualized outcomes are more vivid than simple descriptions, thus more effective.  Even better than telling, “story building” consists of questions guiding the prospect to envision themselves achieving your differentiated outcome.  In story building, the customer writes, produces, directs, and stars in a movie about themselves.

Also: engage the parties responsible for your differentiated outcomes. Imagine that your service helps a client avoid risks.  Typical buying teams recognize risk reduction abstractly – thus without priceable leverage -- because risk “appears smaller than actual size” to everyone but the customer persona (often very senior) responsible for risk reduction…and who isn’t on the buying team.  Track how well you shape the buying team in your favor.

4.    Customer Has Thought through the implications of your value…monetarily

Spreadsheet-based ROI calculators are often a distraction to a sale, because they don’t follow the intuitive process customers use most frequently. They force a prospect to engage analytic processes.  Many consumer behavior experts claim that customers buy on emotion, and justify with logic. Giving a more detailed logical justification isn’t affecting the decision. It’s simply a more detailed justification (these are necessary during some buying processes, but don’t mistake them for the decision itself, just because you can measure it).

If you’ve been in business for any length of time, you’ve had someone walk you through a “back of the envelope” calculation of what an outcome is worth.  Elite salespeople do this with regularity.  It feels more natural to a customer, and mimics the most common thought process customers use.  It’s also a smooth, natural evolution from envisioning the outcome to measuring its magnitude.

Let’s go back to the longer service life example.  Once a customer has agreed that fewer replacement cycles means re-training their people less often, an elite sales person pulls on that thread. “What happens in the team? Do they find it stressful? What other costs do you incur? What about ____?"

5. Pricing power, the incredibly anticlimactic result of having done everything right.

When you’ve done all of those things with your customer, they envision themselves achieving an outcome worth X dollars.  If your price is less than X, they’re likely to buy (actually, your forecast accuracy goes up when you the value your customer calculates for your offer). If your price is significantly less than X, you are about to make them a hero.  The “price negotiation” stage becomes a formality: perhaps a purchasing person gives a shot or two to make sure they aren’t leaving money on the table, but everyone understands your value so well that there’s little conflict.

Here’s The Thing:

These build like steps. When you’ve quantified those outcomes monetarily, you had to do the previous steps pretty well; customers can’t quantify an outcome they don’t visualize, understand, or believe.  Pricing power is the result of well-coordinated product planning, product training, marketing, lead gen, sales, delivery, and execution.  

Where “revenue” is an important score to keep, wouldn’t it be nice to keep track of metrics that indicate “ability to earn profitable revenue”?

Contact me if you’d like to talk about it.  Or, pick up a copy of my book.