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About Joanne Smith

Joanne Smith, President of Price to Profits Consulting, is the author of The Price Negotiation Playbook, The Pricing and Profit Playbook and Pricing in a Crisis Playbook. She is the former DuPont Corporate Global Director of Marketing, Pricing and Customer loyalty.  With more than 20 years of global business, marketing, sales and pricing expertise, she now works with B2B2C companies – around the globe – helping businesses develop world class pricing and profit strategies as well as training sales teams. Joanne is on the faculty for the Professional Pricing Society (PPS) and The Institute for the Study of Business Markets (ISBM) and is a frequent speaker at business conferences.

She is best known for her practical, pragmatic approach and her ability to build courage, confidence and conviction in businesses/commercial teams to take bold pricing actions.

During Joanne’s over 20-year career at DuPont, she managed several businesses, ran several manufacturing operations and lead internal consulting teams – business/marketing consulting team, Six Sigma teams and engineering consulting teams while living in the U.S. and Geneva, Switzerland.

Episode Highlights 

Links and resources

• Price to Profits Consulting– A boutique consulting firm that helps companies improve profitability through value-based pricing and strategic negotiation.
• The Price Negotiation Playbook: Joanne’s book on B2B price negotiation
• The Pricing and Profit Playbook:  Joanne’s book on how to price for profit
• Pricing in a Crisis Playbook: Joanne’;s book on how to price strategically in a recession or a crisis
• Guidepoint – An expert network platform that connects businesses with vetted industry professionals for on-demand consulting and insights.
• GLG Insights – A global consulting and information services firm offering access to expert advisors across sectors for research and decision support.

Interview Transcript

Shubha K. Chakravarthy: Good afternoon, Joanne. We’re so excited to have you on Invisible Ink today. Thank you so much for being here.

Joanne Smith: Oh, thank you for having me.

Shubha K. Chakravarthy: You’re one of the people I’ve been waiting to talk to for a really long time. But before we get into all the juicy stuff we want to talk about, can you just tell us a little bit about your focus on pricing, negotiation, and what about this field fascinates you the most?

Joanne Smith: Well, certainly I’ve been in pricing for about 13 years now. Just give you a little background. I’m a chemical engineer. I ran chemical plant sites. I ran businesses. I was an exec at DuPont. But really, the pricing area is the thing that excites me the most because we can make the most money. I don’t care how good you are at creating something new, if you haven’t learned how to get paid for it, you don’t have a successful business.

Building Confidence in Pricing

Shubha K. Chakravarthy:  So just to get us kicked off, one of the things I see – I work with a lot of technically brilliant founders who have technically brilliant products and yet pricing is a struggle in terms of getting that premium that the product should command. So why is that? I mean, do you have any insights on that, and is there like one thing that they could do to change that?

Joanne Smith: Yeah. So if I think about that, I find that most startups and even in really large companies with great technology, the folks do not tend to have enough confidence. They don’t have a conviction in the price. Did they really set a fair price?

And they don’t have the courage to risk the volume. So if you look, why do they not have those big three Cs—confidence, courage, conviction? I think it usually comes down to they do not have the skills. And they don’t have the willingness to walk away from volume. They want that volume. They’re so hungry for the volume. They’re more easy to give up.

It takes a bit of work to do a fair value price, to set the price. So you need skill there. Then you need skill on how to negotiate because you’ve got buyers that have been trained to throw everything at you and before you’ve done it, you’ve lost your confidence. Or if I had to do one thing, I would get my skills up in setting and negotiating.

Shubha K. Chakravarthy: So is there one thing that maybe a technical founder and we’re talking about founders who have maybe PhDs or they’re in deeply technical fields, is there something that can at least get them started and get them to see an immediate difference?

Joanne Smith: Certainly some of them are able to read books on this and can do that. And you’ve seen one of my books that there are certain chapters that go very deeply into the value price setting and then others that get at the negotiation. So those are good things.

But I will tell you, I have worked with engineers, PhDs, many and some of them really struggle without a little deeper handholding and coaching because every single example tends to be quite different in the value it brings. And how do you really do that full quantification that we need to set the fair price?

Value-Based Pricing Explained

Shubha K. Chakravarthy: So you talked a lot about value and value-based pricing. So I want to get a little bit into that because at least for the kind of founders that we serve and we talk to, a lot of it is new products, new to the world. So their first leg to stand on is that it’s significantly better in some way. And value is kind of like a baseline, especially if it’s very innovative and first of its kind.

Let’s say you’re an early-stage STEM startup. How do you even start identifying the core technical value that justifies a premium pricing? Can you just walk us through that?

Joanne Smith: Yeah. So, I’m assuming you’re talking about early like you actually have a concept of a product or an offer in play. You’re not just doing broad market research.

Shubha K. Chakravarthy: You have something very clear.

Joanne Smith: So clearly one, you’re going to be thinking about what is the next best alternative? If they don’t buy my thing, who are they buying? What are they buying? Are they just doing it themselves? Are they doing nothing? Because when we talk value, we’re always talking what more we bring versus what they would have done without us.

So as we’re looking at that, certainly you’re going to do some third-party research. Maybe you have some industry networks or groups or experts you can talk to. There are also groups that are consultant groups where you can pay for an hour of time and say, “I need an expert in polymer technology that’s worked in aerospace,” and they’ll get you that expert.

You’ll pay some money. GLG Insights, Guidepoint—those are companies like that where you can get an independent person to kind of give you ideas.  Ultimately, I think you’re going to end up talking to a handful of customers to really nail it down deeper.

And that is sometimes a little tough conversation, particularly for technical people that aren’t used to having that conversation, that may think, “Oh, they’ll never tell me if I were to ask. They’ll never tell me.” So here’s what we do.

Number one, we do not talk to procurement and the buyer. The buyer probably won’t tell you or even if he wanted to, he probably does not really know the unhidden needs, the opportunities, in the product line or the operation. So we’re probably going to go to technical people if we can get ahold of those or operations people, if we think our invention is really around helping a manufacturing run smoother.

Business people, if we think we’re helping the product be better so they can grow with it. And I do two things. I go for first open-ended questions and then I follow that up with hypothesis-driven questions. And the questions are really meant to say, what are those problems or opportunities you’re facing that if we could help you fix, you could make more money. You could run your operation more cost-effectively or you could sell your product or grow it better because it would be better.

So that’s what I’m trying to get at. I am not in any way talking price. I am literally talking value. And so I ask those open-ended. What would be those things? Some people will answer them easily. Others, you don’t get too far. That’s when I pull out my hypothesis-driven where I have already made some guesses that I think perhaps yield and durability. Oh, that’s probably important in this industry.

And I’m going to say something like, “Our research indicates that most customers would really value an improvement in yield and durability. Are either of those interesting to you? Is that important to you?” And then you get, “Oh, which is more important? Well, let’s talk about that. Tell me why that’s important. Tell me how it’s caused you a problem. If we could take that out or cut it in half, what would that be? What would that do for you?” So we’re listening, and to the extent we can get them to quantify, that’s ideal.

That’s harder. But even there, at times we can hypothesize, “Well, is your yield more like a five to 10% bad yield or is it more like 20%?” And sometimes they will at least tell you the ballpark and you can dig in and get closer and closer. And then the next customer you’re talking to, you’re even tighter. “Other customers have told me it’s in 5 to 10. Is that the same with you? Little more? Little less?” And you can begin to get in a ballpark. You do not need perfection.

Quantifying Value and ROI

Shubha K. Chakravarthy: So what I’m taking away is basically you hit on the primary value categories- yield, efficiency, whatever the case might be. Once you’ve got a fix and a lock on that, you then start digging a little deeper and say, “Okay, how can I put some boundaries on that? And how can I start to quantify it so that I’ll be in the ballpark of realism and credibility when I go and start talking about this?”

So, if it is an unproven field, is there anything you do differently? Our founders are typically working on innovations that are completely new to world and there aren’t any true alternatives. So I’m just curious if you had practical tips that they could follow to figure out what these buckets are and how to prioritize them for the specific customers they talk about.

Joanne Smith: Not sure if I have a great example of the answer here. But I’ll tell you, typically when we are bringing something new to the world, people undervalue it because they can’t even picture it. They’ve never seen it, they haven’t held it. And they usually will undervalue it in their minds until they can actually put their hands on it in some way or something similar to it.

Those are times where probably more pilots are going to be needed in order to really test it or a conceptual model something. But you’re still going to have to go through value and use pricing techniques which we talked a little bit about. We didn’t take all the way through what those techniques are but at the end of the day, you’ve got to be able to say, “These are the features that I have that are different. And because I have this different thing, here’s the problem you have I’m going to solve. Here’s how much I’m going to solve it. Here’s how you’re going to make money because I just helped you solve this issue. And then, of course, we’re going to share that money that we saved you. Part of it goes to me in price, part of it goes to you in your pocket.”

Shubha K. Chakravarthy: I love it. So I know that you go through in great detail in the book, what the steps are for value-based pricing. Would you mind just giving us a high-level overview so that we at least know where to start?

Joanne Smith: Yeah and I pretty much just talked through it. What’s the alternative? And sometimes for your guys, it may be they do nothing. They don’t even have anything then the total value is from doing nothing. Or they do something manually.

And so you can save them the cost of manually doing it by doing your technology. But what is the alternative? What do we bring that is better? And we got to learn how to quantify it in the customer’s benefit, not in our internal talk which is our features. And there may be things we don’t do as well.

We might have to subtract a little value because we got you longer durability but in so doing, we lost a little bit of corrosion or whatever might be your other thing. So it’s the net of those things and we literally have to take it and say, how does the customer make money?

Their cost is reduced. They’ll have less labor. They can run one shift instead of two shifts to make the same amount of product. Therefore, they’re saving this kind of labor over the year. They’re saving a million dollars. We’re going to charge 300 in premium and they’re going to get the rest in profit. So those are the predominant steps. There’s some segmentation to narrow down, so you’re not doing it except for very uniquely within a region, within a market, an application and pricing it more that way.

Shubha K. Chakravarthy: So that brings up a couple of really interesting points. One is this whole point you make around quantifying value, which means at some point it has to go back to ROI. Because I’m going to put out some amount of money to buy your product and then I’m going to get some money back. I’m just curious from your experience, how do you build credibility in your ROI estimates? Because by definition you’re probably going to have to use estimates.

Joanne Smith: Oh, without a doubt, you’re using estimates. And so generally I usually build a mini value calculator, just a small one for my needs because when I start this, I’m going to make certain hypotheses or guesses. And I’m not going to be right. And I want it kind of built so it’ll do the math.

So when I say, oh, their yield wasn’t 10%, it was 15, I’m changing one number and it’s flowing through my calculator. But when I do this and I present to a customer, I usually will have a page or here’s my key assumptions that went into it. And I don’t need to nail down everyone but the major drivers. I assumed your revenue is 10 million. I assumed you’re running 24/7 around the clock or your yield today is roughly 10%.

I’m telling them, here’s the key inputs and this is the value case that it looks. So they could literally say to me if they wanted, oh, it can’t be 8% yield.You should be using 12. Oh, boom, 12. Here it is. So that’s how I like to set it up. It’s the easier way because you’re learning. And early days, I’m using a range because I’m guessing.

And if you have no idea then I want you to use a range that is like, well, the yield is 2 to 20. Maybe six months into your thing, you can get it down to, oh, it’s 5 to 15. So using a range is not bad. And especially we do the math through it, and if it turns out the low end doesn’t look like a very attractive product then we got some questions that say, do we kill it or do we go learn to make sure it is at least not this bad that there is enough money here.

Shubha K. Chakravarthy: That is very helpful. And one other related question to that. So there might be products, let’s say especially in energy related or similar industries. There might be multiple use cases, and there might be multiple segments where a different source of value is the most important.

Going back to your example, there might be one where they care about nothing other than yield improvement and another one where, I don’t know, some reliability or performance factor is more important than anything. So when you’re starting out, you’ve got this bucket of maybe two or three significant benefits that this new technology’s going to bring you. Do you have any tips on how you could use this discovery process or this estimation process to even pick their core segment? I’m just curious what you think about that.

Joanne Smith: Well, I do think you’re right that there can be different needs. More often than not, those different needs might be by different application. So if you were going in the automotive industry, are we talking about something that helps a dashboard? Is it about the lights of the car? Is it about the coating on the car?

They’re all going to have different value. And sometimes if it’s like a polymer, it might go into many applications but have different value. So it’s more likely that if you can do some level of segmentation in your mind that these types of applications are more likely to be more about durability while these types are more about reliability, you’re going to probably do better.

When I first do my value in use, I have a tendency to try and pick the market segment and the types of customers in that segment that probably have the most value. That niche up at the top that would be willing to pay for more things. So then I have my value calculator built in a better way. And then if I decide to go into lower value groups that only like part of that, I can turn the switch on.

I can just go to my calculator and put zero in for this one and look at what is just the value of that piece. And then there’s a whole other can of worms one opens if we go to a market and we’re like, “hey, what if you really like everything, I’m going to charge you more. If you only like a little bit, I’ll charge you less.” That doesn’t work. So we have to have fences in between it. So if you’re talking to aerospace and automotive, those are two different buyers and groups will probably never talk. And go ahead.

You can probably price differently. Other cases, you might have to do it by some sort of a bundled package or a branding of a good, better, best type of product but something that makes it look different. If you are getting a lower price, you are also getting lower value. You don’t get to just say, “Well hey, I’d love that. Yep. But I don’t pay for that. I want the durability. So cut the price in half.” No, no. If the product has it all, you either want it and you pay for it or choose to go buy elsewhere.

Shubha K. Chakravarthy: Got it, and I’ll come back to that because that was one of the things I love the most about both of your books because the one theme that came through loud and clear to me is: no matter what, don’t compromise your pricing integrity.

Like if you’re going to pay more, you’re going to get more. If you’re going to pay less, you’re going to get less. And we’re never going to compromise on that. I just want to highlight that because that was the clear theme that I think the one thing, if I could take away from the book, it was that.

Joanne Smith: And that is, that is so true. We don’t want your listeners to take it as complete black and white. There’s always a little wiggle room in negotiations but the concept of, as I know my fair price, you want a lower price, you better give me something like a whole lot of volume, two of your manufacturing sites, not just one. Or I’m taking something away and you’re not getting all that value.

Shubha K. Chakravarthy: We’re going to dive into that in a little bit. But I want to close out on one other thing which to me was a big takeaway from what you just talked about in terms of the value case.

It seems to me like, especially in the case of a new product and you have a technology that could be deployed into multiple markets, it feels like building out this value sheet or the value calculator, as you called it, is almost it should precede even market selection. And it should guide your market selection because you should have a pretty informed view of where you’re likely to have a customer who wants to pay you more because it’s worth a lot more to them, although as the owner or the creator of this technology, you might not have that perspective, that market lens. I’m just curious what your thoughts are.

Joanne Smith: Yeah. And typically if I’m working with a company, I use a simple technique early on where I really just have them now list maybe the five market applications or segments that are like top of mind. And then I have them give me a rating of one to five. Five being really good in terms of, do I think that’s a big market, a little market?

And then which ones I think likely have the highest value one. All the more features. And usually it’s fairly obvious here. Aerospace is going to want more than automotive’s going to want more than a bicycle. Because they can’t afford anything to go wrong, if you will.

So we use that and then we home in on one or two of those segments that are big enough and likely to receive the higher value. Once we’re in there and we’re in value in a given segment, you still have customers in the exact region of the world, in the exact application. And some of them are willing to pay for that higher value and some are price buyers.

You don’t want to get caught up in price buyers because generally if you’re bringing something new on the market, they are not going to pay you fairly. You need a little understanding as you begin to talk to them. So you weed out price buyers and you’re really working with those that are very much into value.

Shubha K. Chakravarthy: So it sounds like one of the big guiding principles, especially for new products, is to be very conscious about not chasing the price buyers. Are there any indicators like when I’m first starting out, I’m going to talk to all these people. I’m not quite sure who’s going to buy or who’s not going to buy. I think there’s value for all of them. How do you spot a price buyer in the wild?

Joanne Smith: So here’s a couple of ways that might come out. If their product line tends to be the low-end product line in the market, they might tend to buy a little cheaper. If their brand is a high-quality reputation, they’re more likely to make sure they’re buying in a way that helps their reputation and doesn’t do any harm. So that’s maybe one signal. The next is, if you get into a company and the buyer tries to say, you can’t talk to anybody but me.

Shubha K. Chakravarthy: You mean procurement, right? When you say the buyer.

Joanne Smith: Procurement, purchasing, the buyer. If they’re all about, it must be with me, I have to be in the room. We’re not allowed to tell you that. We’re not giving you that kind of information. You could be almost sure there’s a good chance that they care about price and they’re not going to pay you for value. Real value players, the ones you want to partner with, they believe you can help them win.

And they believe the more we share together, the more we’ll create a better solution. So they’re going to be more open with data. They’re going to be a little more honest. Those are going to be your better partners to choose because at the end of the day, if you deliver, they’re going to pay you fairly.

Shubha K. Chakravarthy: And to the point in delivering when you still don’t have a proven product. I’m just curious if you’ve ever had pushback on your ROI like, okay you’re telling me this, these fairy tales that you’re going to give me 5% and there’s natural skepticism. Especially in an unproven technology.

How do you give credibility to your ROI and to the fact that you are actually able to, other than a pilot, really get into but I was just curious if you had any other tips or thoughts on how to make that more credible.

Joanne Smith: So first of all, you get that pushback no matter what. When you put your value case up, proven or unproven, they’re going to push right in. And that’s a good thing because you’re talking value, you’re not talking price. So that conversation is very helpful and you learn a lot.

Where do they push back? Where do they challenge? Because maybe you’re not quite right. But at the end of the day, if you don’t have it proven, if you haven’t proven it to yourself, then you’re going to get a whole lot lower price. Because part of value pricing, when we figure out, oh we’re going to save this much.

If there is uncertainty, like we’re not really sure we’ll actually deliver this, we’re going to get a small piece of that pie. So the more we have data or endorsements from another company that really lends some level of certainty in the customer’s mind, and maybe you can get away without a pilot.

If it is, instead of using steel, I’m using titanium and we all know titanium has greater corrosion, blah, blah, blah, then you may not have to prove that out. It’s just going to be obvious in the fact that it is a better metal. But otherwise some level of data other, otherwise you’re going to just get less price and you’re going to depending on how risky it is to pilot it or even try it, you got a hurdle potentially.

Handling Pushback and Negotiation

Shubha K. Chakravarthy: Got it. Which brings us to this fascinating topic of negotiation. It’s a tough thing when you’re going out in the market. So one of the things that founders, at least from experience and from talking to others, pushback is a big problem,. You’re going out with like a little baby. It’s untested. Any tips on, to start with, how do you steel yourself as a founder to expect and to tackle pushback on price?

Joanne Smith: Alright, well first of all, you’re going to get it. So that’s just life. If you are talking and you should, as a founder, you should be talking to the people in the operation who get the value. If that’s technical people, business people, operations people and you’re getting them hopefully to be advocates for you.

Because the number one reason that a buyer actually makes a decision is who in the user group or their bosses advocate for a particular supplier or technology. So you’re going to absolutely need that on something new. And most buyers also do not want to do anything that harms their operation or shuts their operation down. So that can work against you if they’re afraid to try it, because what if it goes wrong?

How much damage could it do to their operation? And how do we do that pilot in the least risky way for them? But once again, I go back to that value story. The more you understand your value story and can tell it, it’s going to give you the confidence as the founder for these kind of conversations. The more you have the advocates of the people who really value it in the operation to say, your technical people are telling me that this is a real issue. They want to do it, you’re going to get that pool.

Now, I may be making a side comment here for most of what you guys do, your technologies, I’m going to guess the buyer is not actually the decision maker. They’re not the decision maker. They’re going to sound sometimes like they are and they’re certainly going to be the one that negotiates the price and tries to trick you into getting lower price. But they are not the decision makers. It’s too risky, it’s too important. It’s going to be somebody who actually understands the risks and the benefits there. So despite what they say, get your advocates, understand your value case and negotiate from that position.

Shubha K. Chakravarthy: You talked about some of the core building blocks. The value case is a big one, being prepared to defend and having advocates on the inside as the other. So you have as many of these building blocks in place. Let’s say, going in. Is there a structured way that- how do you prepare for this kind of pricing discussion?

Joanne Smith: Oh, okay. Yeah. I always do a negotiation checklist, formal one. And actually before I even do that, I do a prequalification checklist to make sure I’m not wasting my time talking to a customer that is like, I’ve got like no chance of winning. So I have a little bit of that and I say that may not apply as much on startups but many companies when they’re going to buy something new, they put it out for bid.

And they’re required, they have a procurement policy. So you must get three bids or you must get four bids. So any kind of larger companies at least are asking to bid all the time when they already know who they’re going to pick. They’ve already specked in somebody but procurement says you going to go out on bids. So I tend to qualify to make sure I got a chance here. And then negotiation checklist tends to be- What are they doing? What’s their alternative today? What are my strengths and weaknesses versus that alternative? What are the toughest questions they will ask me and on my value how will I prove it?

And then what’s my opening offer? Will I have concessions or not? What’s my walkaway position where I just won’t go and I will leave? So that’s the checklist, and I’ve kind of said it as if you’re doing one negotiation conversation and you’re done. No, it is often in these more complex things, you’re doing the first ones and we’re selling the value or agreed on the value and the price might come later once we understand what value, what features they like.

Because we might be able to turn them off. We might have to come back, think about it, come back with instead of three modules, two modules, some different things. So you may be spreading these conversations out, but the concept flows like that in my checklist.

Shubha K. Chakravarthy: This is really interesting because what I’m hearing is, we definitely have the value list and the value case and getting the advocates but it sounds like even once you have those preparatory pieces in place, the actual negotiation is a multi-stage negotiation.

And the sense I’m getting is that you get them to say yes to the stepping stones through the price. In other words, you’re building a bridge to price. And the first bridge is value. And then the second bridge is yes, you have an advocate within the company who’s going to advocate for us.

Joanne Smith: Perhaps happening all at once. We’re talking normally to the advocates or the people. We’re learning the value from. What is the value? What is their needs? We’ve been working with them probably, “hey, we’ve got this kind of design.” Usually there’s at least some give and take happening there. So that is naturally occurring.

And then you’ve locked in on your value story and you’re going to likely have to bring it to a procurement person. Maybe the advocates could be in the room, that’s ideal. Sometimes they won’t allow that. That tends to happen.

But if that’s the case, or maybe they’re now going to a upper level, they going to go to the CFO, the CEO, who hasn’t been in those conversations. Then I have my value story lined down and I go to my advocates and I say, “Hey, I’m meeting with Joe next week. Here’s my story. Can you tell me a little bit about him? What can I expect? Where is he going to push back? Is this going to resonate?”

And they’ll often help you hit the landmines, clean them up a little bit. So you’re better prepared when you go into talk to higher level folks and/ or procurement. And really the big deal is understanding their needs. Do they need everything you’re bringing or can you change the offering? And then we get down to price. At times you’re ready to do price in the same conversation.

Understanding Pricing Strategies

Shubha K. Chakravarthy: So now we come to the big.

Joanne Smith: You’re not. At times it’s, I going to think about this because I’m going to do a little redesign in some fashion or a bundle or I was thinking we were doing one line of your plant. You’re talking about doing 10 lines. I’m going to think about that volume piece and to take a little bit of time to digest that and set up a second meeting is not a bad deal.

Shubha K. Chakravarthy: So then at some point we come to the price.  Like the 800 pound gorilla in the room. So we have to start at some price. We have a sense of value. Let’s say there’s a hundred dollars of value. Where do you set the price? Where do you start? What are the good practices to be smart about that? People are going to push back. How do you prepare for that?

Joanne Smith: Yeah. So if we build up the value case and they can see it. Then typically what share do I get of that pie. The two dominant and I usually look at about 12 features but the two that dominate what I’m going to do is likely to be number one, what is the certainty that they’re going to get the benefit that I said?

And number two, how quickly will they get it? So I know I just designed a new reactor, their new catalyst and immediately their yield is going up as soon as they begin using this. We’ve done enough tests. We know it’s a done deal. I’m going to probably get 50% or maybe 45.

On the other hand if I’m saying and when you do this, your product’s going to get better, you’ll be able to grow. You’re going to get 5% more volume and you’ll be able to price higher. Oh, that’s going to take time to build up that market.

And they don’t know that, that’s certain. They can say, “yeah, yeah, that might help me grow, but I don’t know. Now I might be getting 30%.” And you get into information technology software. It can be a much a little bit more difficult and a much lower amount because in general, your software isn’t solving everything. It’s usually a piece of a solution. And so it gets a little trickier sometimes to be able to do a software. What is the share of the software? And it can be a smaller amount.

Shubha K. Chakravarthy: My guess is and I could be wrong, but at least in some of the cases, my guess is that software would be more of a cost reduction play versus a revenue enhancement play, although  you know obviously that.

Joanne Smith: Well, let me think about that. I would guess it’s more about operational efficiency but there are software if you bought a pricing software system that helped you price better and then you can say, “well, I mean, you could price that out the roof.” But then the software’s not doing it, because you still need salespeople. They have to be skilled. They have to have confidence. So you don’t get it all because you’re not the sole creator of that value.

Shubha K. Chakravarthy: Very well taken point. So it sounds like 50% of the value created feels like some kind of a natural ceiling.

Joanne Smith: Like it’s a default. It would seem fair. We say we’ve created this value for you. Let’s take a fair share. You get half of it. I get half of it in price. In reality, it’s very rare that we actually get 50%. Because in reality the certainty and the timing, and there may be switching costs and there’s a little risk and there’s some specification work they have to do.

There’s a number of little things that, more often than not, it could be anywhere but let’s say 35–40% would be a good assumption more often than not until you do the analysis.

Shubha K. Chakravarthy: And to that point as a founder, I’m going in. I’m new to this. I may know the domain very well. I might know the manufacturing processes but I’m going to be handling people who do this for a living and who have been negotiating prices down since the dawn of time.

So it’s a very heavily, badly matched game in some sense. What are the tricks that buyers will play and how can especially new founders with new technologies put up some defenses and protect some of their margin as they got into this pricing game and deal with very experienced procurement people or buyers?

Handling Pricing Objections

Joanne Smith: So first all, go in knowing that probably 90% of the time they tell you your price is too high, it’s not the case. It is not your price. It is one of two things. One, you could have maybe not communicated your value story well enough, so it feels unfair because you didn’t communicate.

And we solve that with communications. And the other half, it’s tactics. Their job is to undermine your confidence, to get you to come down further and further. And especially if you’re a startup, they know you are hungry. You need some volume, need some credibility. They’re going to work that against you as long as they know it works. And they’ll be watching your body language and what you say and how confident you are.

But when  your value and when they push you for lower, if you can stick to the, “Right, this is a fair and appropriate price. If you need something lower, maybe we have a lower option for you and we could help you. Or maybe if only price matters, we’re not the best partner, we’re not the best solution for this application.”

But when you can be in a position where you might actually say something like that very nicely. “I get it right. We’re a high value. This is fair and appropriate. But if  low price is what you’re about, probably not a good match at this time.” It kind of stops their games. Because if they really want it then they’re going to be like, “Well, no, we can still talk, we can still go there.”

The other trick that I tend to play is, one, I’m trying to incent them on why it is so good. But at the same time if I need to, I’m going to subtly be talking about the downside of not using me. So, “You don’t want to buy from me? You don’t want to pilot with me? I get that, because some of your competitors—they do want to maybe work with me.

And maybe if I’m working with them and I got something pretty cool, they’re going to have an advantage over you.” So I’m not just going away, I’m going to your competition. Now, I’m not saying it quite like that. I’m going to be very nice about it.

If we can’t work this out, if we don’t come up with partnership terms we both agree with, we understand maybe in the future we can do business. But there are others in your industry that have really been excited about this value. You were my first choice. But I will go and work with them because perhaps they do value what we bring in a deeper way.”

Shubha K. Chakravarthy: Which comes back to the point of, make sure that you have others to go back to. So you have to be working those conversations.

Joanne Smith: Yeah. So you can have that, but at least identify. You don’t have to say, “I’ve already been talking to them,” because if you’re in a pilot phase and you’re really looking for that one partner to pilot with or maybe you have to do it with two, you don’t want to do endless pilots.

You want very limited pilots. If you can’t get on a price, or they are insisting that they need to see all your cost or all your ingredients and your formulations or data that you should not be sharing. Then you have to have that backbone to say, this is not the right partner. Because if they are nickel and diming me for cost and information that they do not actually need scientifically to do a safe pilot, then they are doing it to try and learn something that they’re going to use against me by either giving it to a competitor or trying to do it themselves.

Then you are better if you can’t come to that sweet spot, to say, ” Wait, I get this. We’re coming at this from two different things, two different ways. You’re asking for data you do not need that we think is inappropriate—it’s proprietary.”

Shubha K. Chakravarthy: Move on.

Joanne Smith: We really appreciate your time, but perhaps it’s better if we look at some of the other players in your market that like to work with us in a way that is more aligned with our values or something.

Which usually scares them and they back down. Because they know that they’re asking for things they have no business having. And when you call them on it and they realize you really would consider walking away, you’ve got some leverage.

Shubha K. Chakravarthy: So just a couple questions on like, what I’ll call frontal attacks on you from a pricing perspective. One is, you come in, you do all the bona fide things, you build a case and then they’re like, “Knock off the price by 20%,” like just in your face. And you’re just sitting there like, “What?” What do you do to deflect that?

Joanne Smith: Oh, right. “Our price is fair and appropriate.”

Shubha K. Chakravarthy: That’s it?

Joanne Smith: Well, I keep it short. I keep it sweet and I say nothing. They know when they say that it’s a game. And they’re looking to see—are you scared? Are you wiggling? Are you tensing? Are you going to bite on it? Are you going to say, “Oh, well, maybe 10”? If they’ve asked you for something appropriate, then I’m willing to entertain it.

If they’re just like, “No, we just want 20% off,” I’m generally not going to bite on that apple. And if I feel like I have to, it’s again, it’s a give and take because price is often two to three times bigger at getting in earnings than is volume. So you give up 20% discount off of your price? Probably they better be giving you 60% more volume than you thought. And they’re probably not.

Shubha K. Chakravarthy: So it’s fair to say, “Yeah, we’re happy to consider that if you’re going to give us 3x the volume of what we’re talking about and give us a guarantee.”

Joanne Smith: Yeah, you could go that way. They probably say, “Oh yeah, I will,” and then they won’t anyway. So you still have to be real careful about whether you can ensure that.

Shubha K. Chakravarthy: So if you can have contractual protections, then.

Joanne Smith: Yeah, some volume commitments or you’re going to go 100% on these three manufacturing sites or whatever. So the proper give and take. But rarely 20%, it’s hard to come up with a give. And that’s a lot of price to give up unless it is literally in your few pilots and for a very limited time or a limited number of units or volume where you’ll do something because you need.

In exchange if you do a pilot, we give them better price. It is in a clear written exchange for X data, Y data, maybe endorsements in writing that you can use with others, with a clear understanding. It is not the commercial price and you only get three months, one month—whatever the minimum it actually takes to prove something out.

Not the minimum they want that could convince you that you don’t have to do it six months. You going to do it a year. No. We’re going to know a whole lot sooner than that whether it’s working. We’re not piloting for you to have 100% certainty with an R-squared of 97 or something. No.

Effective Pilot Agreements

Shubha K. Chakravarthy: Which brings us to this question of pilots. A lot of the technologies and the founders that we work with, they’re piloting new things and there’s always that—it’s almost an indispensable step between your lab scale and your commercial scale. You going to prove it at one plant, one whatever. You’ve talked quite a bit about some of these protections. Are there other things in terms of, like, what’s an ideal structure for a pilot agreement that puts the startup in the best possible position to negotiate for a fair price as they go into full-scale contracts?

Joanne Smith: So depending on what you’re doing. This can perhaps change wildly. If I was just selling chemical and I could sell one tank car, that would be different than if I had to build them a million dollar or multimillion dollar physical piece of equipment.

But I like to get one pretty clear upfront on the length of the pilot and the scope. And it is the minimum to prove out the concept. It is not the end-all, be-all, if you will. If it’s really big, get a lawyer involved because there are so many tricks they can potentially do. Now, if you pick the right partner, less likely they’re going to do a trick. Might be a letter of intent.

If it’s a really big deal to work together, it is certainly NDAs or CDAs, non-disclosures, with very restrictive — you cannot use anything that you learn from this. Any data that you have, you have to throw it away within three months of the pilot. Only these five people can have access to this. You might even have to get to that level of walling off the people that are allowed to see certain data, if it’s really needed to give it.

And then we’re going to be kind of clear on the timing or the amount of units. Then they might not have every bit of data they want but you get the commercial price. And if they’re not happy, if they think no it’s probably not all that, they don’t have to buy.

But normally, if we’re only getting 30% of that value, they don’t need 100% perfection on whether you delivered it fully because they’re already getting the lion’s share of the value. So then we tend to start to try and stand firm and not have them try and nickel and dime us for every little option that they can try and talk us.

“Oh, the yield improvement was not 10, it was 9.8.” Doesn’t matter. The price is reasonable enough. And we have to remember, we’re both in this, we both have equal risk in some ways. They’re going to maybe try and put every bit of the risk on you. No. This is enough value. It’s attractive for you that both of us are going to put a little skin in the game and take a little risk that you’re going to get the value, I’m going to get the price.

Shubha K. Chakravarthy: I think going in you know that there’s risk, you know there’s a chance things could go south. So therefore you’re likely to give a little bit more on the pricing because that’s the nature of the game.

How do you set up for like a commercial full-value price so that they don’t beat you down to it? Just say, “Hey, you gave us X, Y, Z.” Like, how can you protect yourself as a founder and your startup’s value or your product’s value?

Joanne Smith: First of all, that pilot price, you’re very clear. This is not the commercial price. This is a pilot price in exchange for this kind of data. And it’s three months, and then this is the price. Normally by then, you already have your value case, so you know what you want — a fair price.

So you may already be able to say, “This is the fair price. Unless we learn something wildly different in this around our value, that’s the price we’re going to do.” Now, maybe if it turns out it’s even way better than you thought, you probably aren’t going to — at least in year one — take them up even further.

You’re going to do that for all the other customers. So you might give them a little bit of a break there but I tend to be pretty clear about it. And if I’m writing any contract at all, it’s verbally in there. Now again, if it’s more like chemicals, you can easily walk away.

When they play games, you can say, “I get it. If this is not of interest, we think it is. You can go back to using what you’re using.” Now, if you built something unique for them and you put in millions of dollars, that’s generally not. They know you. You can’t walk away without huge suffering.

But they also know probably it’s a huge suffering on their part because there was installation costs and they can’t switch back easily either. So there’s a risk. If you were to walk away and take a financial hit, they’re going to take a financial hit. Once again, I think if you hold the firmness and fairness and you get your advocates, if it really came down to hardball, most of them are not going to take advantage. Most of them add in cost to themselves as well.

Shubha K. Chakravarthy: You talked about chemicals where “Hey, it’s X thousand dollars per ton,” or whatever the case might be — kind of take it and leave it. But in many of these technologies, especially in energy and so forth, you’re not quite sure what the pricing’s going to be because you have a hypothesis on what the value is.

You have a strong reason to believe but the reason you’re doing a pilot is because you didn’t prove the technology at that scale and you’re going to prove it at that scale. Are there things you can do to set it up so that you will negotiate the price on certain proven results that come out of the pilot and therefore build yourself some flexibility? Like, if things go extremely well and were 10 times better than what you — I mean, not 10 times, but significantly better than what you’re expecting — how do you protect your upside?

Joanne Smith: Yeah, I think there absolutely is a chance where you can say, “Here’s the assumptions and here’s the pricing.” However you want to do it. You can say, here’s the base price assuming an energy savings of this. If the energy savings are more than 10% greater than that, we will scale that up.

You can build a formula. And if they’re less, we will price less. So you can actually do some level of formula or step change. If the energy’s between here and here, it’s this. If it’s here and here, it’s this. I think any of those are fine. In your pilot. You can also agree that whatever you come up with, you’ll give them the best price when you go for year one.

And as you go out and you get their endorsements and you get the other businesses, you can get the proper price. But you may give them a year of saying, “We agreed on this. I’ll just guarantee you I won’t price anybody below you. If I do, I’ll drop your price for that year as my pilot.”

Shubha K. Chakravarthy: Kind of like a most favored nation clause, in some sense?

Joanne Smith: Yeah, exactly. But very limited in its timeframe, and only if you need to go there.

Shubha K. Chakravarthy: So you don’t walk in offering that. It sounds like you need to have almost like a list of negotiating chips in terms of, “This is what I’ll give and in return for this, what’s good value for me is getting X, Y, Z,” whether that’s increased volume or what other things would it be helpful for a founder to ask for in return for any give that they would be willing to offer?

Joanne Smith: Yeah. Well, in some of these more complex ones, I always want to think: what’s all my risk? What could go wrong? What’s all the things I would want? And then I often will do it: if I was a customer, what would I be saying are my risks? What are my wants? And my heart is always to come up with a fair sharing of value, sharing of risk.

So I’m not trying to take advantage of them. And if you pick the right partner, at least your advocates are not trying to take advantage. Procurement still might but the advocates will hone them in if you use them right. But I tend to use that so that I’ve thought about enough to cover my bases in terms of and certainly volume, number of sites or share, whatever that may be. Pricing is your big, your big knob.

Shubha K. Chakravarthy: And one last question on that — whether in the context of pilots or more broadly, when  the startup decides to scale up, have you seen attempts of maybe inappropriate asks or just power plays in terms of, “Hey, give me exclusivity,” or “You won’t sell” Like, how do you handle that when there’s such a big power imbalance between, let’s say, a Fortune 100 company.

Joanne Smith: Right, exclusivity might clearly be one. You could limit the time. I’ll give you exclusivity for one year or two years. Rarely do you need to do that. And you would have to weigh your risks. That may be such a big company. They’re taking up all your bandwidth and your learning curve anyway. You’re willing to do it.

Or you can make a tweak to the product and call it a different product anyway and go out to others. Maybe it’s not quite as good. But yeah, I’m always limited in exclusivity unless having one large customer is a pretty big deal, it’s not a bad thing for a year or two. And there are places where that could actually make sense.

Strategic Recommendations for Founders

Shubha K. Chakravarthy:  Got it. So we’ve talked about a lot of things. We’ve talked about value, we’ve talked about price negotiation, we’ve talked about how to graduate from lab scale to pilot and then set the stage for a successful commercialization plan.

If you were to take a big step back and say, for an early stage founder who’s trying to bring this technology into the market, what are the three must-have actionable recommendations that you’d suggest they start with?

Joanne Smith: Again, I would do the value and use price setting and I would do it early on. Maybe it’s in rough and dirty ways early on. Just to make sure you’re not investing in somewhere you’re going nowhere — it doesn’t have a good value.

And then do the market validation throughout that lifecycle, so you get better and better. So when you’re ready to go to market, you really have a crisp value quantification understanding, so you can sell that value. When you really know what you’re worth, you have so much more confidence and where to move on and off, because it’s value-based. But what you definitely don’t want to do — do not walk into a customer and ask, “What would you pay for this? What would you be willing to pay?”

They have no idea what they should pay. There’s a teachable moment. If you just asked anybody, they’re going to guess and their guess low because they want to lower. That value quantification offers such teachable moments that we can shift people from realizing why they should pay more than they would’ve thought, when they recognize the totality of the benefit, when it’s quantified in front of them. So don’t go there.

Shubha K. Chakravarthy: So step one, do the value case. Any other recommendations that you’ve seen work well in practical life?

Joanne Smith: Kind of talked about all of it but other than to say, if this is not your field, to use a consultant or take a training course to help you go through it and clean it up could be a really good thing because doing value pricing is a little scary.

Especially for technical people who you think, “Oh well, they’re good at math, they’re going to be able to do this easily.” But they get caught often in, “Well, I’m not 100% sure this is the right number.” The vagueness. They can’t manage the talking sometimes to the customers — it’s uncomfortable. And they’re not always as good with financial sheets to understand how the financials play and whatnot.

So I work with a lot of large companies, as an example, that do innovations all the time. And when I teach those groups, it’s always an applied training. Bring your product in and we’re going to do it over six weeks because I want you to do some work in between. It amazes me how many engineers or chemists struggle unless it’s a very simple case. Yeah, maybe I’ll put one other thing out there.

Shubha K. Chakravarthy: Yes.

Joanne Smith: There are times when I think, even if I can do my value case and the return on investment’s huge, it’s great. I love it. I always want to think about what might be some of the strategic challenges or barriers that would stop me from getting what I know is a big investment.

And every now and then I have worked with an innovation that’s put in two years. They got this great return on investment and then the barrier stops them because they didn’t think far enough along. So I’ll give you an example here. Let me see if I can say this without giving anything away.

They were building a piece of equipment that was going into the farming community and it had a multi-year return on investment that was really phenomenal. But the price to buy it upfront and stick it in a barn was enormous. And most of these farmers are cash poor. So it doesn’t matter that in five years they’d be making a lot of money. They just don’t have the money today.

That should have been an obvious thing they could have seen. And suddenly this huge market, they could only go down a national farmers, farming groups that are huge enough to have that capital wasn’t very attractive. So, sometimes thinking out those strategic barriers that we’ll have to overcome.

Shubha K. Chakravarthy: And have you seen things that work to do that? Like, is there any kind of approach or a method or something that would trigger?

Joanne Smith: I do it in my training and normally I have the group brainstorm but I’d also normally give them lots of different examples because it can come from all angles. It can be, I’m selling to a distributor who’s selling to a tier one who’s selling to the OEM and my value’s down there at the OEM but I can only talk to the tier one. How am I going to make that happen?

And sometimes the OEM makes real money and what you gave just costs the tier one. The tier one makes less money in the way your product works. Now you’ve got somebody actively in the middle of the supply chain working against you.

So I usually want to let them brainstorm but I give them a lot of thought starters of different issues to try and stimulate all of those kinds of things that could go wrong, that if we don’t think about and figure out a way how we’re going to. Can we jump over that hoop? Most of the time you’ll configure a way. Every now and then, it’s killed projects.

Shubha K. Chakravarthy: So it sounds like, at least from the example that  you gave me. It sounds like a good place to start would be to do like a mental play of what needs to happen along the value chain for this product to get from wherever it’s sitting at in your facility, down to the place where it’s actually going to get used by the user,  including those middlemen and all of those folks.

Joanne Smith: You understand the value chain. And by value chain, I don’t mean just supply chain but who gets the value. And if it is not you and your direct customer, that’s easy. But if there’s players in between or there’s industry influencers, then you going to think about whether they will be an issue and an issue that’s manageable. Then we can wait and deal with it later. A big hurdle? Check into it early.

It’s not just supply chain. It can be around your cost. It can be on the customer side. If it’s big investment, if it’s a capital investment you’re putting forward, then you going to be thinking about the types of customers. Do they have the cash flow? Are they likely to spend it? There’s other bigger challenges there.

And most of the time, the startups — you can’t finance the other guy. You just don’t have that kind of capital in general. So you don’t have as many tricks up your sleeve to overcome unless you were a huge company.

Shubha K. Chakravarthy: Got it.

Conclusion and Final Thoughts

Shubha K. Chakravarthy: So Joanne, you’ve shared a tremendous amount of knowledge and a lot of insights that I’m sure will help a lot of founders. Is there anything else that I should have asked that I didn’t?

Joanne Smith: No. I think you asked an awful lot. So I think we’ve covered.

Shubha K. Chakravarthy: And you’ve been incredibly patient and generous. So I want to say thank you very much for sharing your insights. I found it hugely helpful and I know that our founders will as well. I want to thank you for all the time that you’ve taken with us.

Joanne Smith: Oh, absolutely. My pleasure.