Why are some customers paying more than others?

The first question though is: “how do I know if some customers are paying more than others?”

It is not surprising that when I go into a new client  and ask which customers are paying the highest prices, the answer is usually that they don’t know. This is because they are used to being asked who is the biggest customer by sales value? This is not the same as which customers  are  paying the highest prices.

To get to the answer you have to compare customers against some sort of volume / service benchmark so that you are comparing like with like.  Setting this benchmark isn’t always easy because when it comes to B2B services  customised changes are often made to the service and the moment you start doing this comparing like with like becomes difficult.  But this benchmarking progress is the only way you will get the  transparency that enables you to:

  • Improve the lead qualification process;
  • Identify  profitable customers;
  • Identify hidden discounting.

So it is worth doing and once you’ve identified the higher paying customers you can then address the question- Why are they paying more?

Some customers pay more than others because:

  • They are new and unaware of market rates – you can get away with high prices once but you can be sure they will start to look around before long and certainly when you try and impose a price hike.
  • Super Salesman/woman has sold into them very well – on value rather than price – and the customer perceives a higher value in your product and all that comes with it such as after sales service and account management  than they perceive in competitor products
  • They do not buy on price alone and understand the value proposition of your product and so offer little price resistance to even your weakest sales execs. i.e they buy without being sold into.

Understanding why some customers pay more than others allows you to do two things:

1. Identify and learn from your best sales people. Look at their qualification process, you can guarantee they have a good idea of how to identify the best prospects and  this is an important part of choosing the right segmentation in item 2 below, but beware of listening to too many anecdotes regarding what makes a good customer- use them to validate the objective findings and vice versa.

2. Objectively Identify the characteristics of customers who you’ve established buy on value rather than price. You can do this by segmenting your best customers along objective lines such as:

a. Size: turnover, employee numbers

b. Vertical market e.g leisure, electronics, automotive etc etc.

c. Geographical location.

These are just examples, you will know what segmentation is most appropriate for your customers.

Having segmented your customer base you can then build a profile of your preferred customers and direct the sales force accordingly.

Hopefully, since higher paying customers are usually also the easiest customers to service you will also have freed up account management resource in the process.

Are you pricing-in the true value of your software product?

When looking at software pricing strategy, one thing I’ve found is that people fail to focus on product definitions and the value proposition for each element of what they sell. The reason for this is that there is an urge to bundle all functionality in a box and say “look at all these extras” In fact they might as well say “look at all the value we are giving away”.

If developers would step back and see how they could productise functionality in their software they would see the true value in what they have built and then price accordingly.

One approach to achieving an insight into the customer perceived value is to ask customers:

 How do you use our software?

and then ask

What would you do if our software wasn’t available?

This latter question allows you to cost their next best alternative option and if it is more than you are charging you may be missing an opportunity to price higher for similar businesses.

Are pricing improvements politically too difficult for CEO’s

My experience in the software pricing and the B2b services sectors has been that CEO’s understand the straight to the bottom line impact of better pricing but when they consider internal and external resistance (Sales execs and clients) the whole thing looks too difficult.  I’ve found though that once you show them the variability in the prices they are currently getting and that some existing customers are currently paying higher rates they are more willing to revisit their pricing strategy. This exercise also helps to identify customer profitability issues.