Rajesh had been a quintessential auto design guy for more than a decade. He started with Bajaj Auto in 1990. After finishing his MS from Alaska, he shifted south to Chrysler in Detroit. At Detroit, he joined the Ross School at U Michigan, Ann Arbor, to do his MBA. Post MBA, Rajesh was part of the M and A team at Chrysler. Ironically it was demergers that became his forte as Chrysler’s shareholders got busy splicing up the company and selling off parts. After the company had finished selling off most of its family jewelry, it decided to sell itself to the US government. There was a funds infusion of 8 billion dollars by the government, and they wanted management to come up with a plan. In any P and L forecast, the expense side is deterministic, and the income side probabilistic. Rajesh moved over to working on the side of probability. His work involved relooking the linear forecasting models that the company was using. A well designed car model would command a premium margin, the remaining had to make do with commoditized margins. His work also involved coming up with feature mixes and deciding what the mix would be priced at.

Chrysler was going through tumultuous times then. So when Rajesh received an offer from Simon Kutcher and Partners, he decided to join. Simon Kutcher was started by the eponymous Harvard University Professor – and specialised in just one thing, pricing. For a year, Rajesh lived out of his suitcase, as he jetted across the country, advising Kutcher clients on how to get their pricing right. Mythili, Rohan and Aditi, the spouse and young kids respectively, didn’t like the idea of having a weekend spouse/dad. So Rajesh shifted to EMC, a cloud storage company. This involved moving from Detroit to Boston. Cut to the present, Rajesh is still with EMC, though the company now is a division of Dell Services.

Rajesh believes that pricing cannot be looked at in isolation. The pricing strategy has to fit in with the overall strategy. What is it that the company wants to accomplish? Where is the company going? Mercedes will always have cars priced above the average, Maruti will always be the benchmark for the average. For a typical manufacturing firm, the costs set the floor to the pricing, and the ceiling is set by what you can get from the customer, in other words what value the customer perceives in your product. Pricing for services is a different matter. In a typical software product there are no variable costs, and so the pricing strategy is quite different. It’s the capital cost structure that sets the floor. The ceiling is set by competition. 

Doing it right the first time can make or break a products company. Because once pricing is established, it’s difficult to move away from. The initial introductory pricing has a role of setting expectations. For later upgrades – the benchmark will always be the previous generation pricing. For a brand new product, the company needs to understand the end customer’s value. Skimming is the extreme example in a value pricing model, where you charge what most customers can’t bear. But then you only want a few desperate customers, for whom your product is a God send. 

Now for the journey from strategy into actual prices. Rajesh talked about the concept of a price waterfall. The world of discounts – or the journey from list price to net price. If Dell wants to sell something at $ 20, it prices it at $ 100 and gives a discount of 80%. Most times, in the P and L account wise analysis, we tend to ignore off invoice discounts. On invoice discounts, like volume discounts are visible, and so tangible. But discounts based on target realisation, marketing fee, et al tend to be ignored, because they hit in, after the invoice has been prepared. Rajesh took examples from the audience members to drive home pricing theory. 

Pravin runs Prescient Technologies, an engineering design company. For Prescient, getting Eaton onboard as a client was important – Rajesh calls it the logo price – so the overall thinking on pricing was no-matter-what. After Prescient has delivered a solution to a client, their approach to maintenance support is a cost plus one. Say, maintenance requires a team of 3 engineers, then Prescient bills the client on a cost plus approach for these 3 engineers. Pravin believes that this transparency on his costs deepens customer engagement.  Rajesh’s question to Pravin: Is it just customer relationships that are going to drive upgrades? Rajesh pointed out that ERP companies like SAP charge almost 17 to 20% annually as support charges. And these charges just cover dot releases and tech support for problems related solely to the products sold. So from a Prescient customer’s perspective, there is possibly a lot more value in the support function.

Sujit runs a skill assessment company, Interview Mocha. The initial model was to do video interviews, the reasoning being that behavioral challenges are best  checked in interviews. There was too much competition in that space, so later on the company pivoted to skill assessment. It started by building a DIY platform for skill tests – but realised that customers wanted ready made solutions, so it started working on populating the skill assessment databases. In the quest for growth, IM was leaving a lot on the table. It was IM’s customers who nudged the company to raise prices. The initial pricing model was a per test based one. Licences were user specific. The attempt at IM now is to move away from publishing list prices on the website. The earlier set of customers was mostly SMEs. Now it is mostly Enterprise. For an enterprise customer, the buying is happening on behalf of a department. In the pitch made to the buyer, the indirect benefits are emphasised more. As you hire better skill-fitted employees, the employee turnover reduces. That is a major savings for organisations. Another benefit is the time the hiring guys save using IM. The test cost is a small fraction of the saved dollar salaries. This is the value of the tool. Forget my cost – look at what your savings are!

Sujit also talked about how they vary pricing by geography. The applications to selection ratio for US clients is very low compared to Indian clients. In India many more techies seem to be interested in testing the waters much more of the time. So Indian clients end up using IM tests as a rejection tool – meaning that they will put many more candidates through the funnel to get a few out. Respecting the additional volumes, IM gives a 40% discount per test for Indian clients Vs US ones. IM is now looking at getting into the English skills assessment space. The current market leader, Pearson, has a product which is skimming the market at $100 per test. Sujit plans to get prices down to a Google inspired $ 1 per test. Rajesh calls this the winner-takes-all approach. As market penetration of their English tests increase, IM will end up getting tons of data for its AI / ML engines to become better.  

Alok Dugar runs SI Fintech, a Managed Printing Services company. Alok has developed an innovative tool which he uses to decide on pricing. Customers are first quizzed about the mission criticality of their printers, the printing load and sundry other things, for the tool to come up with a per page rate – and a monthly charge. Rajesh felt that scaling can be a problem for SI Fintech. I personally feel that as long as the tool output is not  being modified on a case to case basis by Alok, it will not be a problem. SI has 200 clients at an all India level – and is growing. So the real challenge will be to get the sales team to start generating quotes from this tool, without Alok’s intervention.

The simplest pricing model was of Anil Jhamtani’s Elcab. Cables are a pseudo commodity business. 70% of the selling price is accounted for by copper prices. Rajesh assumed that Anil would have something like a copper surcharge built into his pricing, the way courier companies flex pricing by having a fuel surcharge. A surcharge is a variable based on inflation. But Anil uses a flat pricing, that is changed every time there is a change in copper prices. Interestingly, it’s the fluctuations in LME copper price that determine Elcab’s margin. The lag between falls in LME prices and customer price gives Elcab the intermittent margin boost. Goes without saying, the lag is much lesser when copper prices rise!

The conversation then shifted to the channel partners’ role in pricing. Prasanna Walimbe runs Reval Technologies, which has a product for investor relationship management. Prasanna gives a very lucrative deal to its channel partners. But advanced tools used by clients get paid for directly to Reval – with no cut to partners. For Alok, different channel partners take different levels of risks. Partners who take less risks get a lower revenue share. The channel partner who takes higher risks, gets a higher share. Sujit’s experience with channel partners was quite different. His channels partners, Microsoft and E and Y, are thousands of times bigger than him. The new model for Microsoft is a pure online sales one, direct sales are actually discouraged. The platform for online sales is  Azure – the AWS equivalent at Microsoft. Azure growth has been the real driver of the share price growth at Microsoft. Microsoft benefits as more and more users switch to the Azure cloud platform, which they will if more and more solutions are offered on it. 

There was an interesting debate about the ubiquitous bell curve inside organisations. Alok believes that if a company has a clear vision and a shared culture, the deviations tend to be quite low – and the bell curve much flatter. The bell curve on margins was discussed. Most entrepreneurs assume that they have better margins with smaller customers and lower margins with larger customers. But there is no direct proportionality between margin and size, because costs of support are quite different for different customers. Today margins suffer because of the way sales teams are incentivised. If your sales guy has a target which is purely revenue driven, then he would tend to discount more.  By this time the audience appetite had changed from pricing to food. So they were treated to a frugal meal of idli-sambar. Must thank Alok for the desserts – Natural’s chikoo and coconut ice cream. High time for Rajesh to start thinking of following in Simon Kutcher’s footsteps. Hopefully Rajesh Rengan and Partners will use geographical pricing – and discount prices for Indian customers!