Excerpt from Chapter 3: The Profitable Technology Services Pricing (PTSP) System
The PTSP System
A friend of mine was hired to be the Vice President of Pricing Strategy and was thrilled at the prospect. Unfortunately, he found that his well crafted pricing strategies were discounted away in execution. He might have anticipated this, but there was no effective pricing information system that provided feedback. Building a tracking system helped, but it was actually the pricing process that lacked good controls. Better controls helped, but sales incentives were encouraging the discounting. Better incentives helped, but the sales structure kept the best sales people from working on the best opportunities.
Need I say more? Effective pricing is a system. It works best when the elements of that system work together well. You will be happy to learn, Three chapters into this book, that my goal is not to boil the ocean. (Actually humanity is doing a good enough job of that with or without my help.) But if we are going to manage pricing well, we need a 50,000 foot view. We need to be able to see the big pieces of the pricing puzzle. For those of you who know me and my love of physics, cosmology, space travel and science fiction, it should be no surprise that my vision of the system is “The Pricing Starship”.
Come on. You have hung in this far, honest it really makes sense. And if a few metaphors are stretched, well that’s the price of making this interesting enough to actually read.
Pricing Objectives – Creating Thrust
On May 25, 1961 President John Kennedy announced the audacious goal of sending an American safely to the moon before the end of the decade. Only the Panama Canal project in peacetime and the Manhattan Project in wartime compare to the enormous expenditures and effort required to make their respective visions a reality. Why
did the President establish this ambitious and costly enterprise? The answer is that it elevated American prestige during the cold war with the Soviet Union. This was a very visible demonstration of America’s strategic technological supremacy.
In the Pricing Starship, the metaphor is thrust. Stage 1 is Pricing Objectives. Objectives provide thrust. If you are engaged in any change management initiative, one of your first activities is to make sure the results of the endeavor will be worthwhile. Change is not easy, so the journey has to be worth the effort.
The good news with pricing is that financial results are often easy to demonstrate. Pricing improvements are percentages of revenues. So if you have a $100M service organization and you improve pricing by 1%, that’s a million bucks. And 1% is usually not that hard to find. In many cases the improvements can be a lot more.
Beyond finance, as mentioned earlier, price is a pillar of good marketing and good marketing strategy with implications for targeting and offering design. Pricing drives sales behavior and customer behavior. And pricing sets the stage for sales success.