Marketing: February 2006 Archives

I heard this amazing interview of Marc Fleury, CEO of JBoss Inc., an open source software company that produces a product called JBoss. The interview on ITconversations.com discusses open source software, where the market is heading, who they serve, and the value they deliver. I'd strongly suggest that you listen to it. It illuminates a lot of areas not just on software but on business as well. But there was a curious phrase that caught my interest - "selling peace of mind".. and it made me wonder:

Is there such a market segment or is this just another gimmicky phrase?

How do you price a product or service to this segment?

I feel there's some truth to this.. Customers (especially belonging to the Baby Boomer/Geezer age-groups) do want peace of mind from their suppliers, including B2B suppliers Here's a two step approach to be followed to determine the value of your customer's "peace of mind". The FIRST step: Take a look at your product from the point of view of a customer. How much does it cost her to deal with your company, get information, buy from you, install/implement in her company, follow up and fix quality problems, get service from you and so on.. you've probably done such calculations when you tried selling solutions. You could get this information from the client herself. Some of these are quite tangible - like the cost of post sales service; but some are very diffuse - such as the sales cycle, information gathering and so on. Use hard financial numbers where possible, and make educated estimates where no numbers are available. This total sum is the cost of doing business with you. Now pick out those cost headers that could be avoided and/or are a nuisance. The sum of these costs is the premium above the "base price" that a customer would "willingly" pay your competitor to get peace of mind ~ simply because the customer is already paying this to you! This premium needs to be reduced of course but to what level? Here's how - The SECOND step: Look at sectors that are highly efficient - computer hardware, supply chain logistics for food etc. These sectors used to be highly prone to glitches and other quality problems. Look at profit margins in this business. They're razor thin. But there are some companies even in this business who take on more of the "customer's share of wallet". These companies also price sharply, but they enjoy a little premium.. Calculate this from their financial statements. US companies typically give details of their gross margins. This premium can be described in terms of percentage of price. You should aim to reduce your own "peace of mind premium" to this level. That's all! Naturally, you would not need to reduce your price drastically, but you could reduce your costs?? Eventually price erosion will hit your business as well; it makes sense to redesign processes that give your customer her "peace of mind" at an affordable price..? If you are selling bare bones products, you could create embedded services around your product and price them to the value of the customer's "peace of mind" premium!

There's an interesting article at the New York Times on this, suggesting that it's not fair, and some patients are being left out. Avastin in the US is a drug produced by Genentech that's used to control Colon, Breast and Lung Cancer. It's prescribed in late stage cancer, along with other treatments, and has proved to prolong life. It's priced at $8800 - $9600 per month. Most of this money is paid by insurance companies but patients have to make co-payments of $10000-$20000 per year, to pay for the rest. Genentech uses the following reasoning for this list price. Statements in the NYT were:

But executives at Genentech and its majority owner, Roche, are now using a separate argument — citing the inherent value of life-sustaining therapies. If society wants the benefits, they say, it must be ready to spend more for treatments like Avastin and another of the company's cancer drugs, Herceptin, which sells for $40,000 a year. "As we look at Avastin and Herceptin pricing, right now the health economics hold up, and therefore I don't see any reason to be touching them," said William M. Burns, the chief executive of Roche's pharmaceutical division and a member of Genentech's board. "The pressure on society to use strong and good products is there."

and

Dr. Susan Desmond-Hellmann, the president of product development of Genentech, which is based in South San Francisco, Calif., said that Genentech had set Avastin's price based on "the value of innovation, and the value of new therapies."

Well, value based pricing was bound to occur at one time or the other in the pharmaceuticals business - where in a way, you place a value on a human life. But let's try and see what the value is to the different stakeholders in this situation The patient: Well, the patient wants affordable treatment, and this is not affordable to the wide majority of the insured, and the uninsured. There are alternative treatments that cost less. The doctor/hospital: The doctor wants a favourable outcome, but many feel that the drug is overpriced and perhaps may raise the cost of oncology treatment across the board. The insurance company: Would definitely like the price reduced and the drug prescribed for more treatments. Genentech/Roche: Would definitely want the high price, since

developing new drugs costs money

shareholders need to be satisfied

this provides cash to fund opportunities to buy other innovative companies

This is absolutely necessary to run a sustainable business. (Genentech had sales of 6.6 billion last year and it's stockprice has doubled; but the stock is trading between $80 and $100 per share since June) Society/the economy: If a patient earns $20,000 a year after taxes, and spends it (on savings, investment and lifestyle issues for e.g.), and given a retail interest rate of 7% in the long term, he or she generates a money supply in the economy worth $20000/0.07 = $285,700. (Caveat: I'm not an economist, and the economics I remember from graduate school is rusty). If the patient lives another 6 months and has a productive life, it more than pays for the treatment. If the future of healthcare is in personal genetic medicines, this could be a harbinger of times to come - you may have to decide the value of your life, and pay for it. Wierd, sad and in a strange light perhaps even fair? And that's only considering the folks who can pay. What of the billions of people worldwide who cannot?

But we won't see it for a while.. I chanced upon this link on Yahoo's Tech Tuesday, and thought hmmm.. a lot of this stuff that Vista is supposed to have - already exists in Tiger. 1) Bidirectional software firewall, 2) windows services hardening 3) hard-disk encryption 4) User account protection 5) Internet explorer 7 with tabbed windows, antiphishing features, running in "protected mode" 6) instant desktop search using extensive indexing 7) automatic software updates 8) windows media player upgrade 8) windows photo gallery 9) DVD maker 10) parental controls 11) better backup software 12) quick setup and installation (around 15 minutes) Well Well.. all I can say to prospective customers of this upgrade is - Welcome to the world of OSX Tiger. You'll probably get to enjoy what we currently have been using for the last year or so.. Kudos to the team at Microsoft. And here's a link to the original Tech Tuesday article

Diabetics (of a certain type) need to take frequent insulin injections, a process that is painful. Terumo Corporation and Okano Industrial Corporation, both in Tokyo, Japan developed a process to produce a painless needle. The pain is reduced to that of a mosquito bite. Now what would be the value of this, and how would you price it? In the complex multilayered world of healthcare where the payor is usually not the care provider or the patient, you need a more rigorous approach to quantifying value to all stakeholders and not just the patient or the hospital. Different stakeholder groups want different things - the insurance company wants loyal policy holders, at low cost. The hospital wants more referrals, repeat visits, and a brand for clinical excellence and efficiency at a reasonable cost. The patient wants a no hassle, painfree experience. All these elements can be quantified statistically, and a value can be assigned for each. Using this value, a price can be developed for different market segments. But beyond all that, this is an incredibly cool idea, that deserves a moment of applause. To read more about the product, click here: Painless Injections | Science and Technology | Trends in Japan | Web Japan There's even a video on the CNN.com website with an interview of the inventor.. Do take a look at it.