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Wednesday, October 28, 2009

Enterprise pricing -- how to collect $100 for $10 in real value

I prefer to sit in the big seats in the front of the plane. How do airlines get away with charging five to 10 times the price for the trip to the same destination as the economy seat travellers pay. (Of course, I never actually pay the real business class fares, but many do. Why?)

As a business owners I want to run for the hills when I see signs of "enterprise pricing". As a marketer, I drool. Nothing is better for increasing your margins than the ability to disassociate the actual cost of your service from the decision-making process to purchase it.

"Enterprise pricing" is the ability of business-to-business marketers to grossly inflate the price of their services because the decision-makers are not spending their own cash. Instead, they are using their company's resources.

Take business class airline fares for an example. Does it really cost the airline five times the amount to provide the service in exchange for a bigger seat, some extra service, and a little food?

Of course not. But the people sitting in the big seats in the front of the plane are rarely spending their own money for their tickets: They are able to charge back the costs to their clients or just have the company's "travel department" pay the fares.

Notably, "business class" seats are much more reasonably priced on resort destination routes, where individuals might choose to spend some of their own money to have a little luxury. (This suggests one advantage of starting a business in a resort destination, but that is another topic.)

I see this phenomena in many other places and one sign of it occurring is that the service can support the cost of sales representatives. "The more selling that goes on, the less value there is," is my purchasing decision-making motto. For example, our service for page turning software,, charges about $200 a year for a great package of resources. But you can step up a little and pay $3,000 for a little more for "Yudu Pro" -- and have the guidance of a sales representative. Of course, this is the "enterprise pricing" at work.

Enterprise pricing works primarily in the business-to-business space when you are dealing with managers rather than owners, but you can sometimes see signs of it in the consumer marketplace, usually for insurance claims. If you can find a situation where consumers don't need to use their own money, you can inflate the prices -- of course to the limit that the business (insurance company) paying the bills allows this gouging. The gaming that goes on here is undeniably intense.

As a marketer, of course, you should ask the question about whether you can disassociate price and value sufficiently to earn a decent margin. Here things get quite interesting.

If business-to-business, enterprise marketing pricing is prevalent in other sectors, why does it seem construction businesses do better in the consumer rather than business-to-business space? I've heard stories of painting contractors accepting fees of 30 cents a square foot for new home construction (in bulk), compared to $2.50 a square foot for residential work. Obviously, the business-to-business contractor in this environment is working virtually for free.

The answer in part is the power relationship and the relative importance of the cost to the company purchasing the service from the company selling it. And here is the key formula to success in collecting your enterprise pricing: Provide a simple, bundled, and easy-to-manage maintenance service rather than new construction in the business-to-business space and you can collect that lucrative enterprise pricing income. (In other words, if your service is purchased by a general contractor whose business is buying sub-trade services, you will find it hard to earn a margin, if you can connect with a corporate manager who doesn't full-time manage construction costs, you may make a fortune.)

You may be scratching your head about this blog entry, but I urge you to reread it several times and begin thinking differently about your pricing, margins and market. Yes, we talk elsewhere about branding -- the art of through marketing creating a perception of value that justifies higher-than-base pricing.

But spend some time as well, thinking about how decisions are made, and if you can figure a way to disassociate the your service pricing from the personal responsibility of the decision-maker (and get around the various corporate defenses of "abuse" of this practice), you may find you have enough spare cash to take many vacations sitting in the big seats in the front of the plane.

Of course, the passenger next to you (me) might be there because he has learned to find the loopholes in "enterprise pricing" and has discovered the bargain right under your nose.

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