EP35: Samuel Saavedra – Why You Should Not be Afraid to Raise Your Prices
Samuel Saavedra is a pricing professional and commercial deal architect with strong supplementary skills in contract negotiations, contract management, program management, bid management, and proposal response. His strongest industries are Fintech – Financial Services, Telecom – Data Centers and Cloud Services.
In this episode, Samuel talks about how he uses his data center cost models to create the infrastructure cost behind payment offerings, and how he leverages his pricing expertise to develop waterfall analyses across the service portfolio to address revenue leakage and declining margin points, and how data analytics tools help him in adding insights into transactional data.
Why you have to check out today’s podcast:
- How to come up with good pricing for cloud-based products
- The goal of waterfall analysis and why companies should do it
- Why you should not be afraid to raise prices
“Don’t be afraid to raise your price.”
– Samuel Saavedra
01:33 – What got Samuel into Pricing
03:06 – Why cost-plus pricing is not enticing
03:50 – Samuel explains how to calculate a software development cost
04:54 – How to partner with companies and gain a percentage of profit through the years you partner with them
06:20 – Challenges on monitoring the actual profit a customer gains for partnering with a software vendor
07:47 – Product Pricing: basis and factors
09:02 – Describing the build-run-cost model of a data center
13:07 – What is cloud-based pricing all about
14:30 – What makes waterfall analysis fascinating and why not many companies are doing it
16:33 – How to go about the waterfall analysis
17:53 – What things to take into consideration when you use data analytics
20:46 – His best pricing advice: “Don’t be afraid to raise your price.”
20:53 – Why you should not be afraid to raise prices
“When it comes to enterprise banking software, the way it’s typically priced is there is an annual license for the software. Then, there’s going to be a base price, like say, it gives you so many millions of payments or wire transfers and so on. And then there’s going to be tiered pricing.” – Samuel Saavedra
“Cloud-based pricing is all about elasticity, scalability, capacity, et cetera. So you figure out what that is based on your assumptions of the customer’s uptake, number of transactions, number of customers growth over time. So you model that. Then they, in turn, come up with their numbers of uptake and growth over time. Once you’ve got the nitty-gritty out of the way, then there’s the actual pricing, which is as you know, what is their perception of the value you bring.” – Samuel Saavedra
Connect With Samuel Saavedra
- Email: email@example.com
Connect with Mark Stiving
Full Interview Transcript
(Note: This transcript was created using Temi, an AI transcription service. Please forgive any transcription or grammatical errors. We probably sounded better in real life.)
Samuel Saavedra: Don’t be afraid to raise your price because so many studies show that, I think, what is it like, a 1%, 2% raising of your price across the board can really uplift revenue by what net? 5%, 6% something like that. And it’s just, it shows confidence to the marketplace and your customer base. It says, Hey, I’m bringing value here and contrary to what you might expect, no my prices don’t have to go down year over year. In fact, it should go up based on the additional value innovations that I bring you.
Mark Stiving: Welcome to Impact Pricing, the podcast where we discuss pricing, value and the special relationship between them. I’m Mark Stiving and today our guest is Samuel Saavedra. Here are three things you want to know about Samuel before we start. First, he is a pricing practitioner who’s tackled a lot of interesting problems and I can’t wait to talk about a lot of those. He’s currently a program manager in pricing for Fiserv and he was the commercial pricing manager for Vodafone in the US. Welcome, Samuel.
Samuel Saavedra: Thank you, Mark. A pleasure to be here. A pleasure to speak to the legendary developer of Impact Pricing.
Mark Stiving: Oh, thank you. How did you get into pricing?
Samuel Saavedra: I kind of fell into it. I had been doing proposals as a contract employee at BellSouth Long Distance and, because I have a writing degree from NC state, that’s a long story. So I write very well and that’s required in the proposal management. And so this pricing team was a man down. They had worked with me on bid management and they said, hey, you want to learn pricing? I said, sure, I don’t know anything about it. And they said, oh, it’s just cost plus you hit a button and get the banana. That’s what they told me. And so we did that. And this was at the time when BellSouth was broken up into several corporations, regional bell operating companies. And so they basically dominated the respective geographies and they had gross margins over 80% net margins, probably still in the 60’s. And so it was just like they would pick up orders off the fax machine. They just, they owned all the circuits, all the telephony. It was just like shooting fish in a barrel. So it was cost-plus. I left there and I went to a joint MCI Worldcom as it emerged from bankruptcy. And there I learned bottoms up pricing, you know, um, add up all the units, do P&Ls, do forecasting and two historicals in terms of, you know, your, your cost allocations. So I learned to be a proper pricer at MCI and then Verizon business bought them. So I just stumbled into it. Yeah.
Mark Stiving: All right. And you do know that I despise cost-plus pricing, right?
Samuel Saavedra: I suspect you do. Yes. And I come to despise it as well cause it’s lazy. It doesn’t address industry verticals. It doesn’t address your customer. It’s just lazy. Anybody can do, you know, cost times 1.45 or whatever. It’s just, it’s lazy.
Mark Stiving: Pick a random number. Let’s use that at the multiplier.
Samuel Saavedra: Exactly.
Mark Stiving: Okay. And in fact, just before we started the recording, you told me about some value pricing that you did. And the question is, if a corporation decides that they want to charge for software, custom software on top of a project, how do you figure out that pricing?
Samuel Saavedra: Well, it’s going to be a combination of things. You need to figure out their time horizon. You need to know the type of features that they want to develop and in what order. So you need to know their time horizon, the features, the deployment strategy. They might want 12 features, they might want 20 features. It’s a wishlist. So you have to get them to nail, to commit to, you know, three or four of them at a time, say per quarter because that’s going to impact the complexity of your work effort. And then most important, you’re going to need to know what is the impact on their business, what problem are they trying to solve? Which means what value are you bringing? Right? What pain are you addressing with your software? Because that’s intangible. You can say, we’re gonna make this for you. There’s our work effort, but because we’re meeting you very quickly, we’re helping meet this need. This is the premium you’re going to pay for it.
Mark Stiving: You actually called it a premium. And earlier you said, you actually gave me a percentage. What percentage did you give?
Samuel Saavedra: Anywhere from 5% to 10% more, if you can give it. So rather than, you know, most people use software say, five years corporations before they go through a major refresh. So rather than, I won’t use words like a gouge, but some companies call it partnering. They partner with you for five years. My approach is to suggest we get an increasing percentage for the first two years. So there’s a famous Swiss banking company that is based in Switzerland. They do software. They specialize in software for credit unions. And they have that same approach. They estimate you’re going to gain so many $100,000, whatever, a year, a quarter of additional revenue because of their solution. They know you can’t afford them. So they say, hey, we’re going to take a 5% the first six months, 8% the next six months, assuming you hit your growth targets, 10%, 12% so they partner with you, but yet they’re also profiting with you for the first couple of years. Does that make sense?
Mark Stiving: Yeah. Not only does it make sense. It seems fair.
Samuel Saavedra: I think so.
Mark Stiving: The biggest challenge I see with pricing like that is oftentimes it’s hard for the vendor, whoever the software vendor is, to be able to monitor how much money the customer is actually making because of their software.
Samuel Saavedra: Yeah, it’s true. That depends on a couple of things to financial controls and reporting that the vendor has, you know, their reporting methods and how sophisticated they are about revenue breakout. And number two, the involvement of their finance people. So it’s been my experience. If you have a CFO or a CPA or somebody involved in signing the scope of work, because CPAs, in particular, are sensitive to doing bad things and you know, they’re regulated and so forth, they’re going to make sure that you get that you get paid…
Mark Stiving: Yes. CPAs are a lot like lawyers. We want to make sure that we’re mitigating as much risk as we possibly can. What I’ve always found that works really well, is if I could understand the value that I’m going to deliver to the customer, and in these cases, we’re actually talking about dollars, how much more revenue or how much more profit do I think my customer is going to get? If I could understand what that number is going to be and my, my customer or my buyer believes that number, then a really good rule of thumb is somewhere around that 10% number. I could probably charge them 10% of that and be able to pull that in. So if it’s an annual recurring profit they’re going to get, they would pay me that every year and if it’s a one time or three year horizon we’d say, okay, we’ll take the one lump sum but that 10% seems like a really good number and you played around with that or we’re in that space as well.
Samuel Saavedra: Exactly. And traditionally at least when it comes to enterprise banking software, the way it’s typically priced is like an annual license for the software then there is going to be based pricing. Like, say it gives you so many millions of payments or wire transfers and so on and then there’s going to be tiered pricing. So as you go over the base pricing that has been allocated in your annual license, they’re going to say every tier of 100,000 transactions is going to go from 20 cents to, you know or 0.02 to 2.0018 and you know declining as you climb the tiers or you can supplant that with the 10% or see if you’re ambitious. If you can add the 10% to that tier-based pricing approach, but you won’t know unless you try.
Mark Stiving: Right. And it’s all a matter of how are we delivering value to our customer. So Nice. Nice. Okay. So since you know that I hate cost plus pricing and I am sitting here reading your LinkedIn page while we’re talking, the very first item on your LinkedIn page says use pricing and cost modeling skills to update a build run cost model of a data center.
Samuel Saavedra: Yeah. That wasn’t the cost-plus pricing. Meaning, okay, so data centers, they have what’s called a build cost model and a run model. So there is the hardware prices and software prices involved in building out a data center, meaning they’ll load balancers, the switches to routers, the storage area networks. Millions of dollars with the gear, right? And it’s, and you have to know how much did it cost us? What depreciation are we using three to five years? What’s your estimated return value on the gray market, right? In the resale market. That’s item one. How much staff do we use to operate this thing? What’s the power costs, utility costs, capacity, usage of all this equipment. And then, of course, the software licenses, how much did they cost? Are they priced per enterprise, per seat, per user, per cloud instance? I don’t even know how to explain that.
Samuel Saavedra: There is a new pricing metric for consuming cloud resources, which is based on an amount of resource consumption. It’s probably a podcast or a series that you might want to look at. So you model all of these out and that’s your basically, you end up with those two costs models to build costs, what it costs to build it and what it costs to run it. You try to leverage that, especially the capacity aspect to say, okay, we’re gonna migrate some software platforms from on-prem, meaning on the customer’s premises, to say a hosted model or a cloud-based model, a private cloud hosted in our data center. How do we leverage the costs of that? Plus our traditional banking, you know, our traditional value to this new software. So knowing your run cost is always a good thing. You just keep it there in the back of your mind, I guess you could use it as a floor, but at the same time, then you also have to determine what approach you’re going to do when you launch a new product, especially a cloud-based product to break even. So for example, system integrators like Accenture, Cap Gemini, where I used to work, they’re famous for basically offloading development costs onto the first four or five customers. So they’ll put up 20% of it and then they will incur somebody to be the beta tester, the first application user. And based on the feedback from them and their contribution, so wrangle in three more and hopefully, they’ll break even on their massive investment after that. It’s Cheddar all the way down.
Mark Stiving: Nice. Makes Sense. And I also think that you’ve pulled the most important pricing lessons that I would say out of that. First off, it makes sense to know our cost. And if we don’t know our costs, then why would we ever go below that? Well, why would we ever sell below that? And so having those costs allow us to use that as a floor, especially the run costs if we’re going to do pricing and metric in that respect. And then the second piece is, is this even profitable business? Is this something that we should be doing? And to make both of those decisions, we have to understand our costs. It’s just not pricing yet. Right? Pricing is about how much is a customer willing to pay us and we need to know if that willingness to pay is above or below those costs,
Samuel Saavedra: Right. So first you do the analytics of how on your end you the provider, you have to figure out the capacity of your infrastructure, right? Cloud-Based pricing is all about elasticity, scalability, capacity, et cetera. So you figure out what that is based on your assumptions of the customer’s uptake, number of transactions, number of customers growth over time. So you model that. Then they, in turn, come up with their numbers of uptake and growth over time. Once you’ve got the nitty-gritty out of the way, then there’s the actual pricing, which is, as you know, what is their perception of the value your brain, right? Because the number is the market’s perception of the value that your application brings to the marketplace. And hopefully, the number covers all the analytics you did. If not, then maybe you might need to find 10 customers to break even and then become profitable or if you can’t, then you should exit the business.
Mark Stiving: Yup. Perfect. Perfect.
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Mark Stiving: Another one that you have on your LinkedIn page that I really liked this one, and I’m not sure how many people do this today, but you developed waterfall analysis across the service portfolio to address revenue leakage and declining margin points. I think this waterfall analysis is fascinating, but I don’t think enough companies do it. What was that project like?
Samuel Saavedra: I’ve done that at a couple of places, but basically a corporation will have like say a dozen or so competing products in a division and what happens is there’s contractual pricing, there’s pricing that, you know, there’s features, just pricing that you believe conforms to FASP standards. It’s contractual, and it’s nice and pretty and everything, but then you start lurking at your quarterly numbers, you know your net revenue after all is said and done and you realize there’s a 12% gap someplace. We’re leaking revenue. So then you put on your contract management hat and you go through your contract with a fine tooth comb and you realize, oh, there is a clause that goes notwithstanding the foregoing, the customer agrees to a 2% rebate after hitting a certain threshold and this is buried in clause 57. So you find this little hidden rebate clauses and then you find out that an addendum on the contract references.
Samuel Saavedra: All of this pricing can be thrown out if there’s a regional promotion or regional marketing campaign. And then you look at then some addendum and it mentions so also we do things in a quarterly basis and of course, a sales VP is empowered to offer you (inaudible) or rewards as needed. So you basically look for all these potential points of revenue leakage and you track them and then you try to close them because basically all those become additional discounts, right? Discounts that you really weren’t anticipating or approved, which means your margins were lower than you thought.
Mark Stiving: There were discounts that sales got into the contract without talking to the pricing people.
Samuel Saavedra: Right.
Mark Stiving: Nice. And so when you did your waterfall, did you do it as a corporate, these are the buckets that we tend to see. Where did you do it on a contract by contract basis saying, hey, we agreed to this price, but we’re really only getting 94% of that price?
Samuel Saavedra: Using systems like SAP or Zilliant, you first attack it bucket by bucket, what are the big red herrings? You know, the standard rebate packages that we have. And then say using Pareto analysis, you know what group of contracts generates 80% of our income and ignore the 20 then you go contract by contract on those big, big contracts. If you still can’t squeeze out that remaining 3% loss, which on a $20 million TCV deal is significant, then you’d go contract by contract, maybe region by region, but you gotta find it. And then once you find it, you have to just impose controls, tweak the process, et cetera. And you know, sometimes you just have to write out the contract and just live with it.
Mark Stiving: Well, we know we signed it. I think the real goal to the waterfall is to make sure we don’t do it the next time.
Samuel Saavedra: Exactly.
Mark Stiving: We’ve identified what the issues are. How do we keep from doing this, because we already signed the contract? You’ve also used a lot of data analytics in your roles and pricing. What types of things do you tend to look at when looking at the data, data analytics, BI tools?
Samuel Saavedra: Nothing terribly exciting. Like at places like I worked at Siemens where they have a lot of skews to make like…
Mark Stiving: Samuel, I’m going to interrupt for a second. You’re not making me want to be a pricing person. Let’s start that with, oh my gosh, this is so exciting!
Samuel Saavedra: Okay, well analytics software can yield some very fascinating insights. So you start off by looking at performance over the region, region by region, what price points are successful? You know, uh, does the organization, are they willing to do price elasticity? Right? Does, do the tests, do their products or skews lend themselves to tweaking the price to see what changes that have in terms of moving volume through a distributor? In terms of impacting the end-user sometimes or not, but basically some good analytics software combined with manufacturing data, like if you’re a Cisco or Siemens can yield us insights and it can identify the sweet spot that in spite of our big push on the subset load switches or these cable TV boxes, it appears that we actually make our money off the remote control or the power cable going into the switch box, you know, and anticipated insights. So that’s the exciting part of analytics.
Mark Stiving: I think back when I was doing analytics, there’s always the first level, which is kind of, oh, revenue dropped this quarter or profit didn’t grow the way we thought it was. And then there was the second level to figure out, okay, why, what happened? What caused it? Where does it come from? And I think that’s always the fun part cause you’re, it’s almost like you’re an explorer trying to find the answer to the question in the data.
Samuel Saavedra: I agree. Because you’ll see a sudden drop and say revenue uptake movement, you know, inventory velocity and some reason for some quarter on a specific two week period and you go through and you realize, oh, the bridge was out. None of the trucks could deliver raw materials to the warehouse, you know, something like that. It’s, it was, it was tied to that or some new piece of legislation went into effect to that quarter or some, not to be topical, but some tariff got imposed on their price of steel raising the price of our nails and just, you know, things went down the toilet that particular month.
Mark Stiving: hate when nail prices go up. Ugh!
Samuel Saavedra: Yes!
Mark Stiving: We’re going to have to start to wrap this up, but I always end with this question I’m going to ask you, what’s one piece of pricing advice that you would give our listeners that you think could have a big impact on their business?
Samuel Saavedra: Don’t be afraid to raise your price.
Mark Stiving: Oh, I love that. Tell me why you say that.
Samuel Saavedra: Because so many studies show that I think, what is it like a 1%, 2% raising of your price across the board can really uplift revenue by what net? 5%, 6% something like that. And it’s just, it shows confidence to the marketplace and your customer base, it says, Hey, I’m bringing value here. And contrary to what you might expect, no, my price doesn’t have to go down year over year. In fact, it should go up based on the additional value innovations that I bring you. So I think you just, you know, it works for some companies, but other companies are terrified to even contemplate it. They’ve been beaten up by so many large enterprise engagements where it says contractually, your price will go down 5% year over year. If you can fight that, fight it.
Mark Stiving: Yeah, I think you’re spot on. And I love the fact that you mentioned that it’s fear because I believe that it is fear. People are just not confident they’d deliver the value and they don’t think they’re going to keep the business if they raise prices or don’t lower prices. So I think, I think that’s spot on.
Samuel Saavedra: Thank you.
Mark Stiving: So Samuel, thank you so much for your time today. If anyone wants to contact you, how can they do that?
Samuel Saavedra: Just probably through my email address, Samuel@565business.com. It’s a website I have where I do a bunch of things. That’s probably the best way, or just find me on LinkedIn. I’d love to connect.
Mark Stiving: Alright. And episode 35 is all done. Let’s see. My favorite part of today’s podcast, hmm. I would say the final answer where we talked about the fear of raising prices. That one was pretty impressive. And what was your favorite part? Please let us know in the comments or wherever you downloaded and listened. While you’re at it, would you please give us a five-star review, those are very helpful to us. If you have any questions or comments about the podcast or about pricing, feel free to email me, firstname.lastname@example.org. Now go make an impact.
**Note: Mark Stiving has an active LinkedIn community, where he participates in conversations and answers questions. Each week, he creates a blog post for the top question. If you have a question, head over to LinkedIn to communicate directly with Mark.
Mark is a pricing expert who helps companies understand value, how to create it, communicate it and capture it. He has a PhD from U.C. Berkeley and an MBA from Santa Clara University, plus 25+ years pricing experience. As an educator, speaker and coach, Mark applies innovative, value-based pricing strategies to guide growth and increase profits for large and small companies.