The Perfect Invention

As I make my way through airports I often come across a person who is walking along talking out loud and for an instant I think he is talking to me; then he turns and I see his blue tooth ear phone. Although a good invention, it’s not the one I had in mind. My dream invention is similar in size to the blue tooth device, perhaps a little smaller, but what it does is allow me to instantly know the highest price my prospect will pay for what I’m selling. It gives me the value of my offering at that moment in time. Then I can decide if this prospect is worth pursuing or not and I’d never leave another nickel on the table.

Since I don’t have that device perfected yet I have resorted to another approach for pricing personalized marketing programs. I calculate the value of my solution based on input from the prospect. Then I know how to price it.

Here’s how Paxar did it. With a surplus of retail shopping bags, Ohio-based retail supply house Paxar Americas decided to use direct mail to reach customers who only order supplies every several years.

•         Program objectives:

•         Reduce inventory of retail shopping bags

•         Improve typical 1% response rate for mailings

Paxar worked with Early Express of Dayton OH to develop a program to meet these objectives. Early Express did their homework and found the following information about previous campaigns.

Campaign Metric	Historical
Audience Size	3000
Response Rate	1%
Number of Orders	30
Average Order Size	$900
Total Opportunity	$27,000

Now Early Express knew that they could help Paxar improve on this performance by using a personalized direct mail campaign. They design a simple postcard mailing that included the recipients name and a list of the items they had purchased in the past.

Paxar knew that their program would improve upon the 1% response rate. They chose a conservative estimate of improving the response rate to 4%.  Plugging the new response rate into the table yields a program that provides $108,000 in revenue and a whopping $81,000 increase in value over the static approach.

Campaign Metric	Planned	Net gain
Audience Size	3000	--
Response Rate	4%	3%
Number of Orders	120	90
Average Order Size	$900	--
Total Opportunity	$108,000	$81,000

How much would you charge for an extra $81,000 in sales beyond what you paid previously?  What would the customer be willing to pay?

A rule of thumb is that you can easily get 10% of the revenue increase or if it’s a cost savings you can get 25%. Knowing exactly how much of the revenue increase you can get requires you to know what their costs are for the extra product sold.

The critical point here is that you have arrived at a possible price for your services without ever thinking about costs.  Once you have the price you need to circle back and make sure it is profitable for you. 

What if your response rate turns out to be higher?  Some service providers link their price to performance and take the risk, whereas most of the time the customer will take the risk. Your track record will help you select the appropriate values to use. If you don’t have a track record you can grab a copy of Caslon’s Response Rate report from the resources section of the PODi site (www.podi.org) or you can download similar case studies from the case study database.

While we can’t offer the value calculator ear phone, we can offer Excel-based value calculators and you’ll find them in the Strategic Solution Sales S3 Council section of the Caslon site (www.caslon.net ) and they are free for PODi members.