Passionate About Customer Satisfaction

Just before the holiday, we launched Vendavo’s annual customer satisfaction survey. How do we measure this? We use the Net Promoter Score (NPS). NPS is based on the idea that every company's customers can be divided into three categories: Promoters, Passives, and Detractors. By asking one simple question – How likely is it that you would recommend Vendavo to a colleague? – we get a clear picture of our customers’ view of our performance.

This is the third year of the survey, and every time I sit on pins and needles as we eagerly wait for responses. What do our customers think of us this year? Have we made improvements since last year? Will they promote us? Is someone a detractor? Why? Will our NPS be higher than last year? Are our customers satisfied? Who is unhappy? Where do we need to improve? Okay, it’s not eagerness - it’s definitely anxiety, and it’s not just me. 

Our relationship managers fret about it (in fact, for any Detractor response, we go into investigative mode and talk to them immediately).

Our functional leaders ping me on how we are doing mid-survey.

I read summary reports every two days. I calculate the NPS daily.

Our CEO reads the interim survey report as if it were a favorite classic Tarzan story. 

The point is we really care about the results and each individual response.

It struck me as we near the closure date of our survey how much emotion a great company should have for its NPS results. If you are not going to get passionate, fired up, and pulpit-y about what your customers are saying, then don’t survey. At Vendavo, we are very passionate! 

I want to see action – improvement plans for areas we need to fix.

I want conversations – with our customers about the topics we need to improve.

I want gratitude – for our customers taking the time to respond and tell us how we can do better.

As we study all of the responses, determine correlations in the data, read every text response for patterns, and calculate metrics and trends, I can tell you that our Net Promoter Score increased year-over-year. A NPS greater than 50 is considered exceptional, and Vendavo’s is well north of that. Yes, that’s great, but we have work to do, first by creating improvement plans per function to respond to what we learned from our customers. For Vendavo, it’s about taking action on what our customers are telling us – doing our level-best to be better.

If you are interested in hearing what our customers say about us, you can check out our customer videos.

Pricing for the Amazon Kindle: Part II

In this two-part series, I am exploring three classic pricing aspects and how they relate to the Amazon Kindle. This second post will focus on on cost-plus vs. value-based pricing and volume pricing.

Cost-Plus vs. Value-Based Pricing

We all know that cost-plus pricing is sub-optimal, as it misses the opportunity to realize as profit the value inherent in the offering at the price the customer is willing to pay.

On a recent flight – as is my customary practice – I had my Kindle and iPod in the seatback pocket and, while waiting for the electronics-are-okay chime, got chatting to my seatmate. He complained that Kindle books don’t cost much less than paper books. This is clearly a layperson’s thought process – that pricing is cost-based. He was talking only of variable COGS, of course; had he allocated the fixed costs of the R&D and infrastructure to the number of books sold thus far, perhaps his view may have varied. But that’s not the point.

What this tells me is that Amazon is missing the opportunity to sell the value of Kindle versions of books.  Selling the value of one’s offering is key to every commercial activity. Having potential customers focus on the price and not the value indicates that the value proposition is not sufficiently compelling and/or voluminous to lodge in consumer’s minds. 

 

Volume Pricing

There are several creative pricing options that Amazon could explore for e-books. For example, if the goal was to drive volume and adoption, how about offering a heavily discounted price to re-purchase e-versions of all of the paper books purchased over the past 12 months? Offering cheap e-book versions of what customer already owns drives usage of some of the value functions that a Kindle device has over a traditional paper book – search, annotation, bookmarks and sharing. It‘s clear that an increase in the number of books a Kindle owner has on their device directly improves the utility of the device, therefore this would driving more sales in the long run.

Amazon could also think about offering a product similar to Amazon Prime for e-books to entice more purchases. If a Kindle book averages $10, offering 60 books for $500 might be attractive for the consumer, and acceptable within Amazon’s margin governance structure. 

While aggressive discounting, when improperly evaluated relative to the price-volume trade off, can be a sub-optimal strategy to an organization, there are benefits available to schemes where the customer pays upfront, similar to the reasons that stores and restaurants are so heavily involved in the gift certificate business. First, the vendor gets the revenue immediately for future purchases – and the time value of cash even when cost of capital is low, can be very attractive. Second, there are high rates of non-redemption, which add to operating income.

Pricing for the Amazon Kindle: Part I

As an avid reader – and avid pricing guy –I’m fascinated by the approach Amazon is taking to pricing books for the Kindle device, and the opportunities they have for pricing. In this two-part series, I will explore three classic pricing aspects and how they relate to the Kindle. The first post will focus on Segmentation and Bundle Pricing.

Segmentation

I have a friend called John. We were at school together. We’re similar in many ways. But for a vendor to treat us the same would be to miss an opportunity. While we are both bibliophiles, with similar tastes, a friend and I differ in one important respect: I am a collector. I like owning paper books (see picture above) and I actively want to put the book on my shelf, re-order my system, log the item in my book database (a terrible confession: I even considered implementing the Dewey Decimal System in my library). I travel a lot, so I also want the convenience of having a great number of options on the Kindle device in my laptop bag (and indeed the Kindle app for my iPad). 

Bundle Pricing

Amazon is missing the opportunity to offer me a bundled price. If the paper book and the Kindle version are both $10, I’d happily pay something more than $10 and something less than $20 for the both. 

My friend is an academic, a minimalist, a hyperactive multi-tasker, and a technophile. He doesn’t care if he never touches another paper book again. He would, I’m sure, gladly pay more for a Kindle version because it offers so much more to him. Indeed, for him the drawbacks of a paper book mean that he actively doesn’t want them. Even $1 would be too expensive for him, when you consider their place on his value-equivalence chart. 

Customer segmentation can be a great deal of work; in Amazon’s case I would suggest that it’s well-worth doing. Kindle is clearly a core part of operating strategy – it takes the front and center spot on their homepage, is a cornerstone of their media events, and has seen massive investment thus far.

Still, while the Kindle comes in many different sizes and price points, it’s a loss leader. Amazon isn’t segmenting its customers where it counts – with regard to content they sell for Kindle.

There are book-lovers, like me; there are frequent travelers; there are people who live in tiny apartments; there are people who love technology and simply must own the latest and greatest. These segments have different value propositions, and should be treated differently in the messaging and pricing. And the great thing is that data is available for all these things – and Amazon almost certainly has a great deal of it.

Tune back for the second part of this series, which will focus on cost-plus vs. value-based pricing and volume pricing.

The Significance of the Start Price

I picked up “Priceless: The Hidden Psychology of Value” by William Poundstone and read it during my summer vacation. There are a few neat ideas in it which I intend to share over my next few blogs. As the title indicates, it deals with the psychology behind price; often this is thought to be the exclusive domain of B2C, but even in the most complex B2B sales situation there is still a human buyer who will review your price. This book has insights into how prices are perceived and evaluated.

One of the key concepts is the concept of a price “anchor”. This is basically the first price mentioned by either buyer or seller. It’s extraordinarily hard to shake loose from the anchor price or Start Price as we will refer to it, even if it is fairly ridiculous. There are many experiments to back this up. Once you understand this, you see how the concept of Start Price is very significant in B2B pricing.

Most pricing teams invest heavily in optimizing the Target Price, and conventional wisdom says that giving your sales teams a target to aim for is good practice. But because B2B sales cycles usually consist of several rounds of negotiation, what should the opening offer be? The experiments tell us that the buyer is subconsciously influenced by the Start Price, even in later negotiating rounds. Economic theory is trumped by psychology.

Do you have a methodology for recommending a Start Price? In many companies the Pricing Department doesn’t and the Pricing Software doesn’t support it. Since you never recover from quoting a too-low start price, it should be pitched as high as possible, but not so high that the buyer won’t take it seriously. A price that is not taken seriously does not become an anchor and you effectively have no Start Price. A simple but valid approach to Start Price is to go for a high percentile in the segment (e.g. 90^th percentile). You have confidence that the buyer won’t laugh (since someone once paid it), but it should have the subtle effect of signalling to the buyer where the final price should be.

The book also has a section on why prices ending in .99 are endemic, and as you turn the book over, you discover that the retail price is, in fact £9.99.

 

Taking Off With Customer Loyalty

One of the most rewarding aspects of my role as Chief Customer Officer at Vendavo is visiting with you, our customer, to define the next steps in the pricing journey, to build upon a trusted relationship, and to foster loyalty. I log many airline miles and hotel nights to achieve this goal. Even today, I am sitting in a dreadful place – in an airplane waiting on the tarmac due to a flight delay. As I wait, I reflect on a travel delay I experienced this past summer.

I had made it to my interim destination and was faced with yet another delay (summer weather in the Midwest is the business traveler’s bane of existence). As I fretted about backup plans to make a crucial customer meeting the next day, the Marriott called me. They were concerned because I had not checked in yet and wondered how they could help. Long story short, the Marriott ensured I would have a room when I arrived, and when I did so, they were ready with room key in hand and a delightful attitude. Not once in 15 years of traveling has that occurred - it was such a simple and personal gesture from the hotel’s night manager. While I was already very satisfied with Marriott, this experience confirmed me as a lifelong loyal customer.

With this example in mind, I examine our customer loyalty and how to continually foster it with Vendavo customers. 

First, why is loyalty important?  It’s important because this is the type of relationship we want with you. In our annual customer satisfaction survey, we measure your real experiences with us. Those realities tell us about your perceptions. Perceptions drive attitudes, attitudes drive behavior, and we want to foster loyal behavior during our lifelong relationship with you. It is a complex path, all starting with our everyday experiences with one another.

Second, when and what are those experiences where loyalty gets built? Whether it’s my loyalty to the Marriott or your loyalty to Vendavo, at the core, it’s a question of how we have treated one another. It’s not about blind loyalty; it’s about earning it. Loyalty happens when we deliver with one another – when we both hold up our end of the agreement. Loyalty happens when things get rough, and we work through the problem together. Loyalty happens when you know that we will solve your problem. Loyalty happens when we have worked together on multiple projects, when those solutions delivered value to you, and when you talk about those positive experiences with others. Loyalty happens because both of our teams step up with exemplary service, because they are dependable. 

The plane is preparing for takeoff, and as I head to visit one of you tomorrow, I’ll be ready to ask you about loyalty because the benefits are mutual – it’s the foundation of a successful relationship.

Pricing the Catch of the Day

I was in Paris last week and came across this seafood restaurant, Le Bar à Huîtres. A highly innovative place, serving salmon “fumé dans sa cloche” where the raw fish is presented under a glass dome filled with woodsmoke, and Oysters (the eponymous huîtres) served in steaming dry ice. Unfortunately, this exotica was outside my price range, but what also caught my attention were the iPad menus.

The pictures and general feel of the menu is reflected on their website, but as a professional pricer, I think they missed a couple of tricks. Surely one of the big benefits of the interactive menu is the ability to replace the classic “Catch of the day…….Market Price”, with the details of the actual catch and the real price. But surely the real killer app for a restaurant specialising in the freshest seafood is dynamic pricing. As the chef gets down to the last couple of sole, or the last batch of scallops, surely a price update to reflect their relative scarcity could be sent to those fancy gadgets? And if the clientele are not tempted by the skate at €25, then the price can be quietly cut to stimulate demand.

Now in this example, the distance between kitchen and diner can be measured in metres so a price signal can be easily communicated from the supply chain to the customer. But in many businesses, we should be aiming to have the same efficient signaling mechanism to price lift in scarcity and price cut in abundance. I’m not advocating iPad empowered sales reps (though that day will come faster than you think), but target prices which reflect the capacity shifts of our plants or supply chains.

Also, just as the maître’d nudges us on to more profitable wines, our sales people should be nudging their customers on to more profitable lines.

“Sir, if I might be permitted to make a suggestion…”

 

Crowdsourcing the Sales Guidance Problem

I came across this excellent website, ancientlives.org, where you can collaborate with Oxford University in transcribing ancient Greek texts. The University has literally thousands of fragments to examine, and it has taken the approach of crowdsourcing: breaking up a complex problem into many tiny pieces so that it can be parcelled up into little packages that anyone can work on if they have a spare 15 minutes.

There are similar collaborative efforts on the web for transcribing old weather charts, classifying galaxies,  folding proteins and searching for aliens.

So what does this have to do with Pricing?

In order to crowdsource, a problem needs to be capable of being sliced up into small pieces, and a mass of well-informed potential collaborators should be on tap. So in pricing, the collaborators should be our sales teams and we could set up some clever website like the ones above. Sales people could sign on, be given a sample scenario and prompted to price a few products, based on their knowledge of the segment. However, this is unlikely to work: no time, no incentive.

But, if we look at our historical invoices, we can view them as a crowdsource experiment that has already occurred. The actual invoice price is the output of a sales rep who evaluated the market, the product, the competition and came up with the best price. The price on the invoice is the data point we need: we now just need to aggregate and analyse. In any crowdsourcing project, you learn to assign more weight to more experienced and more dedicated participants (in Ancient Lives, I am still flagged as a novice) and this makes sense when you analyse prices too: More experienced reps will get higher weight than rookies. This is what B2B Pricing Software does: automatically hunting through segments, and proposing a target for maximum profitability.

Now I’m back to Ancient Lives, to decide if that 2500 year old smudge is a Beta or a Lambda!

To Communicate or Not to Communicate – Price Changes

What Netflix could have done better… and how the banks did the right thing for once

WOW!! Another company finds out the hard way “what not to do when it comes to pricing”.  Netflix took “bold” steps over the summer to divide their subscription services along with the price hikes for these subscription services.  Netflix went from one bundled subscription service to two distinct offerings:

1. Streaming movies over the internet              
2. Old-fashioned DVDs in the mail 

And a price change from $9.99 for the original bundled service to $7.99 for each service or $15.98 for the new bundled subscription

What Netflix failed to do was communicate effectively:  

• Why were offerings and prices changing?  What was the rationale?

            o   Pre-sold and communicated effectively, consumers can accept price increases. 

            o   Poorly communicated, price increases feel sudden and capricious.

• Netflix also failed to do their homework.  How would  customers feel about these pricing changes?

             o   Netflix took a huge misstep by not recognizing the emotional connection subscribers have to the red envelopes. Netflix assumed that most subscribers have high speed internet and would rather just stream movies than wait for the red envelopes.

Netflix presumed subscribers wouldn’t care or didn’t need to know the reason for a price hike; which was just a few more dollars than what they were already paying, Netflix sent out an email laying out the new services and prices without any explanation, this definitely came as a very cold and out of touch company.  Even when a close friend of Reed Hastings, the CEO of Netflix said “That is awful, I don’t want to deal with two accounts.”  Mr. Hastings ignored the warning, believing that chief executives should generally discount what their friends say.

The same week Netflix’s folly was uncovered, major U.S. banks (Bank of America, J.P. Morgan Chase & Co. and Wells Fargo & Co.)  were paying attention to their customers.  Banks were testing the rise in prices for debit cards to offset their lost revenue and they discovered that consumers are highly sensitive to price changes right now given the current economic conditions where the 99% are watching how they spend their money.  Based on consumer input the banks decided to not pursue their price hike especially since the whole “Occupy Wall St” movement is in full swing across the country.

The banks, in contrast, had communicated why they were planning on raising their prices: Banks noted the new fees were designed  to offset lost revenue.   Indeed, in response to new federal limits on debit card swipe fees, are expected to cost U.S. banks almost $6.6 billion a year in lost revenue, many banks have eliminated or scaled back debit-rewards programs, added monthly fees for checking accounts and raised minimum balance requirements. The banks tested out what they knew is a sensitive topic, and ultimately made a decision that will earn them some level of good will and customer loyalty.

Eventually, Netflix did away with the two product approach but still will not roll back its prices to $9.99.  Netflix has lost customer loyalty and perhaps future/new subscribers at least in the short run in addition to over 800,000 customers who realized that there are other options for video rental besides Netflix aka “Netflixodus”.  The annual negative impact of “Netflixodus” has cost Netflix almost $96 M (800,000 customers X $9.99/month X 12 months).   Conceivably, Netflix will be patient and heed to a close friend’s advice the next time they want to make a drastic change in their product offering.

Moneyball: How Data Trumps Expertise

Moneyball asks the question: can a statistics-crunching machine really understand baseball better than a man?

For decades it had been accepted that spotting potential baseball stars was an art best performed by veteran scouts whose instincts had been elevated to near mystical levels after years on the road watching endless college and high school games. An alternative approach, pioneered by the Oakland As in 2001, relied on computer-driven analysis of previously neglected statistics to identify players that were under-valued and ignored by other managers.

The A’s started winning with the resulting team of misfits, and fans hailed the manager (played by Brad Pitt in the movie) as a visionary; a card counter in a casino full of fortune-tellers. The availability of in-memory analytical tools had suddenly brought advanced analysis into the baseball back office.

Those same tools can provide a similar winning strategy to Pricing Managers, allowing you to pass better financed rivals in the quest for profits. Instead of pouring over on-base percentage and slugging percentage, pricers are cranking up their analytical engines to look at Price Yield, Cost-to-Serve ratios, Price Realization, Defection Risk and a host of other metrics to come up with the optimal plays. Gross Margin? That’s old school.

Trouble is the cat is out of the bag and everyone understands the principles – you need to do this before your competition does. You don’t have Brad’s good looks to fall back on.

Pricing Forum: BD Presenting in Amsterdam

Only 6 days until the Executive Forum on Pricing and we're getting really excited! To continue with our series of short blogs previewing Wednesday's customer presentations, here is a sneak-peak of what you can expect from BD.

Customer: BD

Becton, Dickinson and Company (BD) is a leading global medical technology company that manufactures and sells medical devices, instrument systems and reagents. Founded in 1897 and headquartered in Franklin Lakes, New Jersey, BD does business in nearly 50 countries and has 29,000 employees worldwide. The company's customers include healthcare institutions, clinical laboratories, industry and the general public. BD was on of the first companies to sell U.S.-made glass syringes.

BD Diagnostics, one of three business segments, needed manage a complex business model with over 3000 active product categories across instruments, consumables software, and technical services, with highly diverse customer segments. At the same time, BD needed to respond to pressures on its margins coming from healthcare cost containment measures and competition.

Teoman Resat, Business Analyst, and Rudolf Prestele, Financial Controller, will both be speaking in detail about BD's implementation of Profit Analyzer (PA) from Vendavo, which launched with 50 users in December 2010. Given the nature of the business, this involved a high level of complexity, including the extraction of data from several non-SAP Software and a large number of measures and dimensions.

To hear the entire story behind BD's pricing journey, come join us in Amsterdam from October 4 - 5th and listen to Teoman from BD speak live!

Click here to request an invite.