Situation: To date, a company has performed a single set of services focused on collection and delivery of a stream of raw data to its clients. The CEO wants to add a consulting service based on the expertise that the company has developed over the years. The CEO seeks input on both how to position this new service, and how to organize it, either within or separately from the current business. How do you expand your business model?
Advice from the CEOs:
Consulting services can be offered at a premium to current services because the company will be offering analysis and recommendations for a solution, instead of just raw data. Intelligence is more valuable than raw data.
Offer the consulting service on a project rather than an hourly basis. For example, price a project at $10k for the consulting package instead of $200/hour for data collection and reporting.
To add weight to the consulting offering, provide final reports and recommendations as a professional, written document supplemented by a presentation.
Test the concept and early options for the consulting service with existing clients.
Create a new division for the consulting service so the customer sees it as an additional option and value that the company provides. This will change both the branding and image of the business.
To increase the opportunity for success, develop a full business plan for the consulting model.
Focus on the new consulting business with the same discipline as the current data business.
Situation: A company has a key relationship with a major corporation. They recently completed work in Phase I of a multi-phase project which was fraught with difficulties. Now they are evaluating whether and how to proceed with Phase II. Do you continue a difficult partnership?
Advice from the CEOs:
What made Phase I difficult?
Initial work was done to original specs and on time. The partner then asked for additional work and a change to the original specs, but would not agree to pay for these changes. As a result, the company lost money on Phase I.
What alternatives exist?
In brief, you must fundamentally change the terms of engagement. You can convert everything to time and materials, so that when the partner makes changes or asks you to make changes, they pay as they go.
A second alternative is to reconstruct the project as a waterfall project with a fixed price up front. You agree to X iterations, at Y cost per iteration. Each iteration has a deadline and the work completed as of each deadline constitutes the final work on that iteration. You charge for additional iterations if the partner wants additional work after the final negotiated iteration.
A third alternative is to set a price that is 2x your estimated price, recognizing that there may be a need to change specifications during development. You will provide documentation of your time and effort. If at the agreed end of the project you have not used all of the funds budgeted, you refund the difference to the partner.
Adjust how you communicate with the partner as you renegotiate. Do not assume that silence constitutes agreement. Provide written documentation of your understanding at the close of each negotiation and invite them to correct any misunderstandings. Require that both sides sign this documentation to confirm agreement. Do not proceed until there is clear mutual understanding on all key points.
Purchase and use software to track any changes to requirements during the project. This will enable you to document both the changes requested and their waterfall effect on other portions of the project.
Situation: The Company sells customized products and pricing has been per product/per customer. A large client has proposed to purchase product rights across a number of products and uses. The technology is early in its expected 5-year life span. How should the Company set pricing to this customer?
Advice from the CEOs:
Start with a series of questions:
What is the value of your technology to the customer?
How much competition do you face?
What other solutions are available to the customer?
Based on this framework, ask contacts within the customer company open-ended questions that will reveal what is important to them including:
Planned use of the technology, and
Any protections that they seek.
You need to understand these before you can make decisions on pricing.
There are several pricing scenarios:
Set up a scale with a declining pricing driven by volume.
A large lump sum payment now, non-transferable if the customer is acquired by another company.
A large annual fee to cover a preset number of uses and volumes, with small increments for additional purchases.
The final arrangement will depend on the priorities of the customer.
Find out what the customer is willing to pay, but you set the terms.
Ask what guarantees they desire to protect their position. This includes:
The customer’s key risk factors.
Whether they want exclusive or usage rights. Exclusive is worth more.
Situation: The medical device industry faces uncertainty due to potential changes in reimbursement, increased regulation accompanying health care reform, longer FDA approval timelines and the economy. How does this impact strategy for an early stage medical device company?
First and foremost it puts a premium on focus. We compete in a market dominated by large incumbents. When introducing new products in the past we would have blanketed the market to maximize early market share. Now we are being much more selective in terms of where we compete and putting more effort into targeted geographies.
This focus is accompanied by more caution and control of spending. We will only hire a new sales rep, for example, if we are assured that there is a significant customer base in the market that rep will serve.
Similarly, we are being much more cautious in our capital equipment decisions, and if an employee leaves we do not automatically replace that individual.
In terms of price planning, where in the past we would have counted on annual price increases, we now plan for the potential of prices decreasing over time to reflect new pressure on reimbursement and cost containment. As another example, in 2012 there will be a new tax on medical device companies. We assume that this will reduce our margins where in the past we might have passed it on to the buyer. Reduced margins will also impact our new product investment strategy.
The big change in long-range planning is that we are focused on slow, sustainable growth – maintaining both gross and net margins and profitability. This is a major change from five years ago when our focus was on maximizing rapid market penetration for new products. We want to be self-sufficient financially and thus avoid having to rely upon future fund-raising rounds.
Situation: The Company struggles with differential pricing. They want to be fair to clients but feel that a one-price policy limits growth. What tiered pricing models work, and how are they rationalized?
Advice from the CEOs:
Differential pricing by client demand.
For high value services, you must have a compelling value proposition.
Research comparative premium pricing for similar value propositions and set prices accordingly.
For price sensitive clients, offer two alternatives:
Senior staff services at one price or associate services under supervision for a lower price. Let the client choose between price and quality.
Differential pricing by market risk.
Early stage clients want high service but may not be able to pay bills. This justifies a premium price, as you are not assured of collecting for services. The differential is a risk premium that covers non-payment risk.
Well-established clients are less risky, and support lower pricing due to a lower risk of non-payment and are assigned a lower risk premium.
Differential pricing for bundled vs. non- bundled services.
If a client purchases individual services, then there is a set cost for each service.
However, if a client wants to purchase a bundle of services, then it is reasonable to discount the bundle. You are not necessarily charging less for the bundle, because you have now received additional business at a lower acquisition cost. Your “discount” reflects the savings that you have enjoyed in reduced marketing and sales cost.
Key Words: Pricing, Pricing Models, Fairness, Value Proposition, Service Pricing, Market Risk, Bundled Services, Risk Premium