Monday, April 19, 2010

Pricing B2B Solutions with Customer ROI

A recent article "How to price IT products in 7 steps" by Arpon Kar caught my eye about how vendors should use ROI to properly price solutions. At Alinean, and previously with Gartner and Interpose, have been working with vendors on creating ROI tools for use in engaging customers for the past 9 years, and from this experience, can say that many B2B solutions are not priced correctly because an ROI analysis is not done prior to setting price.

According to the article, the author recommends the following 7 steps:

1.Decide the various unique benefits from your product, such that there is no overlap.
2.Quantify the objective of deliverables for each benefit, by discussing the same with your client.
3.Map each benefit to its monetary value from the client’s data (or industry average).
4.Ask the client how much percentage deviation is acceptable from the quantified objective of deliverables mentioned earlier.
5.Discount the monetary value of each objective with the deviation percentage.
6.Sum up the discounted benefits.
7.Discount that sum by the operating profit margin of your client, and quote the calculated price.

In creating ROI tools, and using the set prices, there are dozens of instances where the benefits of the solution were not quantified and compared to price. As such, looking at the savings versus costs, the products were priced too high. For these solutions, only in the best conditions could the customer could obtain a positive return on investment (where the benefits / net costs were positive), and in most situations, the savings did not exceed the investment, resulting in a negative ROI, and no payback period (the time it takes from kickoff to where the investment is recouped by the savings). In a world where economic buyers now require payback in less than 12 months from deployment, and ROI > 150% in most instances, the producs were unsellable.

The teams quickly repriced after these exercises, but quantifying the value proposition and ROI up front could have saved change costs and issues as all of these were post launch.

In some instances more recently, solutions are being priced too low. One recently for a product lifecycle management / simulation solution has ROI > 1000% in almost every deal and only using hard dollar savings. Clearly room for higher pricing, or perhaps a more stratified offering.

We all know that intuitive pricing is valuable, competitive pricing essential, but this article does stress the importance ROI plays when pricing, and one which should be followed as a best practice by any product manager. Good article.

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