EP42: Kota Siva Sarma – How to Use Pricing Models to Minimize Discounting
Kota Sarma is a Certified Pricing Professional and passionate Pricing Leader with over 25 years of experience in Pricing of Products, Software and Services, Subscription Pricing, Advanced Pricing Models, Commercial Analysis & Analytics, Business Planning & Modelling in Telecommunications, Polymers, Natural Gas industries.
In today’s episode, Kota shares with us his expertise in pricing especially in terms of using pricing metrics and pricing models which best suit customers’ needs. Also, learn about how not to reduce your pricing by switching pricing models and setting up price structures that meet customers’ cost and revenue goals.
Why you have to check out today’s podcast:
- Learn when to use pricing metrics and pricing models
- Learn how and which pricing model to use to fit your customers’ needs and to align towards their cost and revenue goals
- Learn about how he closed a $200-million dollar deal without having to reduce its price despite the customer’s feedback of such price being triple as the one offered by another vendor
“In some situations, I’ve seen, the business model itself is a totally new model and customer is not sure of the success. What happens? Customers will try to get the best price from you, which means the lowest price from you. Instead of dropping your price, you can change your total price model, a price structure and see that it needs a kind of risk-sharing model. You can propose your risk-sharing model where you grow with the customer.”
– Kota Sarma
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02:02 – How did he start his career in Pricing
03:34 – How is a gas transportation sector priced as compared to an ordinary commodity
04:09 – Should you be doing a lot of cost-plus pricing in a regulated commodity
05:12 – Who sets the price in a gas transportation sector
05:45 – Is the cost of raw materials included in the pricing for polymers
07:13 – What are the pricing differentiators for polymers
07:44 – Conjoint analysis and customer value index
08:44 – The different pricing models he uses and how it works
14:01 – Of price metrics and price models
15:00 – Structuring your price based on customer need
19:26 – How to manage to offer different customers with different price models
21:02 – The immense value of a salesperson who does value conversation
24:12 – Pricing advice that will give impact to one’s business
“Anything is possible but if you cannot measure it, then there is no use in using that price metric. It has to be measurable, number one and it should align with a customer revenue model. That is important.” – Kota Sarma
“If their revenue model is per user, I cannot have per usage. I cannot charge them per usage it has to be aligned with their revenue model.” – Kota Sarma
“Price levels are obviously different depending on the value, the scope and configuration, the time. There are so many terms and conditions and in a way each transaction is unique.” – Kota Sarma
“Don’t let your salespeople approve your pricing. They should be aware of their proposals, they should propose a price and somebody else has to approve.” – Kota Sarma
Links and Resources Mentioned:
Connect with Kota Sarma
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.)
“And in some situations, I’ve seen, the business model itself is a totally new model and customer is not sure of the success. What happens? Customers will try to get the best price from you, which means the lowest price for you. Instead of dropping your price, you can change your total price model, a price structure and see that I need a kind of risk-sharing model, you can propose your risk-sharing model where you grow with the customer.” – Kota Sarma
Mark Stiving: Welcome to Impact Pricing, the podcast where we discuss pricing, value, and the parallel relationship between them. I’m Mark Stiving and today our guest is Kota. Just like Cher, he only has one name. Not really. We’ll hear more in a minute. Here are three things you want to know about Kota before we start. He has been working in pricing for 17 years. I’m going to have to do the math to see how long I’ve been in this, cause that might be longer than Kota. Nice. He’s been in many, many sectors including polymers, oil and gas, telecom, and my favorite thing about him, he just got his US citizenship. Alright. Welcome Kota.
Kota Sarma: Thanks, Mark. And great to be here.
Mark Stiving: Okay. I just have to ask. Totally personal. Is it hard to get US citizenship?
Kota Sarma: Usually, it is hard. But pardon me, I think I got it really fast and compared to any other Indians, I got it fast. I did not really go through the difficulty.
Mark Stiving: I’ll assume that means you are very smart because I hear the history questions on those tests are much harder than anything most Americans can answer.
Kota Sarma: Well, you’re talking about those questions, no, they are really easy, hundred percent. You just have to read through once or twice. It seemed really easy. No, I was thinking about something else?
Mark Stiving: Excellent. So let’s jump into pricing and let me ask you, how did you get into pricing?
Kota Sarma: Yeah, I started my career in finance and I continued in finance for almost 13 years in different roles and once, I think that goes into the year 2003 and when I was working for Island Gas sector, the company has started the pricing function in the corporate office and I was offered a job there in that team, so I immediately grabbed it. I jumped, I did not know what it was. I knew nothing about pricing at the time. I joined that organization. That was a small team of four people or the entire company. It’s centrally located at the corporate office. Fortunately, that company had a multi-product, which was a multi-product company, multiple products up there. I started pricing in the monopoly, completely a natural monopoly like gas transportation, which is totally regulated. We have to follow some regulation pricing mechanics there and then we also, I was also exposed to the pricing of polymers, which is totally competitive which is in the oligopoly setup. In an oligopoly, it is totally value-based pricing and then there are some things in between also that because those products which are gas extracts we were following this next best argument to end up pricing. So a lot of fun working in that company and I learned a lot.
Mark Stiving: Yeah. Let me push on both of those for just a second cause this is going to be fun. You’ve been involved in enough of my LinkedIn conversations to know I do not like the word commodity. And you just said you were pricing in a commodity. What do you do if you price a commodity? You just say, Oh there’s the market price. I don’t have to do anything.
Kota Sarma: Did I say commodity? Because of natural monopoly, that’s a natural monopoly. Gas Transportation is a natural monopoly. It’s different from the usual monopoly. Monopolies, when you don’t have competition. But then actual monopoly is when you cannot have a competition, this is a gas transportation. So, then you lay a pipeline from point A to B, you cannot add multiple pipelines there to just to increase competition. It’s going to be only one. Just like a road. It has to be regulated. Otherwise, it uses a lot of pricing power or negotiating power to the seller.
Mark Stiving: Yes. Yes. And so then since you’re regulated, you’re probably doing a lot of cost-plus, not because it’s the right thing to do, but because that’s what the regulators force you to do.
Kota Sarma: It’s interesting. I thought it used to be easily cost plus, but it is really cost plus but not cost-plus of the seller. It is. It’s like this. So you’re allowed to have the second margin like IRR, the post-tax IRR of 12%. It used to be that 12% post-tax on post-tax of 12%, but that is not on the cost of the company. It is on the benchmark normally to cost. So, it is the industry’s best cost. On that, you are allowed to have 12%. So, it incentivizes you to be more efficient than the best in the industry.
Mark Stiving: So, at least there are incentives to become more and more efficient that way, which is nice. And yet there’s still, you know, I come back to the fact that there’s still no pricing intelligence behind that because I’m following formulas that I have to use.
Kota Sarma: Yeah. As far as gas transportation is concerned, yes there is no marketing, not much. Even negotiations, there is no room for negotiations also with customers. It has to be a government-set price.
Mark Stiving: Let’s talk about the older business with the polymers then. And so one of the things that I find fascinating, and I’ve always heard this happens in the chemical industry and I’d love to know from your side since you’ve lived this, is we often see contracts where the cost of raw material is part of the contract. Is that consistent?
Kota Sarma: No. No. Not for polymers, at least. Yeah, the polymers is, when I was doing pricing for polymers, and that time there was some gap between supply and demand. The supply was less than the total demand in the country and it used to be some imports coming into the country, so our entire, we used to call it as an import parity pricing. Basically the imports are the next best alternative for all the customers and the structural, industrial there are only three or four producers in the country and then there are like six or 7,000 customers across the country. So, prices used to be an internationally published prices. We used to keep track of those prices and they set the import parity price just to prevent imports coming into the country or innovate the comparable import parity price, but we used to do a lot of adjustments and then we used to also have some premium and some discussions on the quality of the product depending on the quality or product is better than the competition needs to have premium like certain products we use. Yeah, investing every month. We used to change and post it every month and they used to be huge. It used to be a huge price list.
Mark Stiving: Nice. And so, the differentiation for the polymers, what was that? Cause you said you get a premium for quality, but is that the only differentiator that we had? You call it quality.
Kota Sarma: Yeah, it’s quality, service, relationship, the after-sale service, liability, everything. But apart from that, we used to have a detailed conjoint analysis, and then we used to get feedback from all the customers and based on that we used to price that premium, put a premium on the different rates.
Mark Stiving: Nice. And I think not enough companies use conjoint analysis. It’s such a powerful technique. Did you guys do that yourself or did you hire outside people to do it for you?
Kota Sarma: There’s a consultant. Gallup used to do that.
Mark Stiving: Gallup used to do it. Nowadays there are a bunch of companies that have online software to do that pretty inexpensively and they’ll hold your hand through it. I’m not sure the big companies do it that way, but I think a lot of small companies can get into it where they couldn’t have before, which is really nice.
Kota Sarma: Yeah. In the Telecom industry, I’m not used to this conjoined analysis. I’ve been into the telecom industry like this. We don’t follow that much. There is a way to track the customer, I think what do we call it, I think customer value index, some customer perceived value index or it’s not exactly the conjoint analysis.
Mark Stiving: Okay. Well, one of the things we said we were going to talk about was pricing models and I’d love to hear, did you put together a framework in your mind for different types of pricing models or did you want to chat about a few different pricing models you’ve used? What’s the high level of where we want to go?
Kota Sarma: Yeah. This concept of price models is how I’m very fond of this price model because in the Telecom industry, when I joined the Telecom industry, I got introduced to the price models and we talked about earlier. But this pricing, the Telecom, it gives a lot of opportunities. Many times what happens, first of all, the nature of the deals in Telecom are huge, large value deals and very complex, customized solutions and when we put the price usually goes through several iterations, a lot of negotiations including score, cost, everything, terms and conditions, all that. But usually at some point in time customer pushes for the price reduction, right? What are the options for you? Wondering as you go anywhere you go present your value, right? You present your price. And then the other option is you just try it, but still you have to one price and sometimes you have to offer discount and if you just, you feel, but just to meet the customer requests for the price reduction, the only option for is to just reduce the price, which is not good.
So, the best part is, there must be a reason why a customer is pushing for a price reduction. As you mentioned, I heard many times in your discussions about the value conversations. When you engage in the value conversation and exactly address the pain points that customer is going through, I categorize those pain points into two categories. The first one is, taking the pain points with, for example, a customer may how huge a problem that they want to save on the power and they want to reduce their patronage or they want to use some additional customer experience on issues that would generate additional revenue for the customer. That is a different part of the pain point so you can address that through in your solution.
What is the product you have could be an annuity product? You can address that. The other part of these problems is pain points that the customer has. Usually, it’s commercially related. You may have issues with this OPEX budget, you may have issues with this cap X project or even have issues with this cashflow or he doesn’t believe this is what I learned or yes, in my experience and sometimes the customer doesn’t believe in your solution. He sees everything but he wants to try? He’s really not convinced, he’s not sure so you have to put a different model in that case and in some situations I’ve seen the business model itself is a totally new model and customer is not sure of the success. What happens customer B tries to get the best price from you which means the lowest price from you. Instead of dropping your price you can change your total price model, a price structure. A kind of risk-sharing model. We have done that many times so you can propose your risk-sharing model where you grow with the customer? If the business is successful, you get money if this is not successful you get the minimum price so you are taking the risk that you’re putting your skin in the game through partnerships. Now that could change. So, just to put names to the pricing models, there are sharing models, gain-sharing models, pay-as-you-sell or pay-as-you-go and we can convert everything to the OPEX model or a CAPEX model. Yeah, different models are possible and that is where I taught. I hope I did a lot about the price model, right? I did not define what price model. I’m assuming that.
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Mark Stiving: So let’s take a step back for just a second. When I say the word price model, I tend to think of things like, oh, we’re gonna use a subscription-based price model, or, oh, we’re going to use a freemium price model or, and there’s a whole army to sell by the unit or by the hour or by the….
Kota Sarma: The price metric is one of the components of the price model. There’s a difference between, it’s different from a price model. The price metric is one of the components. I would say.
Mark Stiving: I’m completely with you and what I find fascinating about the answer that you just gave is you’re really saying, I’m going to create a price model per customer, so I’m going to create a flexible price model structure so that when I go into a customer, I have the value conversation, I know what their push backs are, their challenges are. Then I can structure my pricing model for that deal for what that customer needs.
Exactly. Yeah, absolutely. You’re spot on. There are some issues here that price metric, you cannot use any type of price metric. Sometimes your measure will be problems or some price metrics. You cannot measure the actual usage. Then what it, then there is no use in deploying that price metric. Right, and you’re more than using their price metric. For example, you can say my price, let’s say HD movies. Yeah. I’m just taking one example. She has a new cable provider. They can charge it based on like unlimited model or number of hours viewed or just hypothetical or they could be a hit your knee on the speed, total data downloaded. Anything is possible but if you cannot measure it, then there is no use in using that price metric. It has to be measurable, number one and it should align with the customer revenue model. That is important. The most important thing, it has to be aligned with customers. For example, if the customer is sending data in unlimited buckets, and we want to charge a price per GB, it doesn’t work. This customer is not getting his revenue on per GB business. Then it has to be some other metric like price per subscriber or price for Speed or expedience or latency. Something else, you know I’m a mobile operator. Mobile phone customer. Yeah.
This is pretty fascinating. I usually say now we kind of shifted our conversation from the pricing model, which I’m going to get back to in a second to the pricing metric and what I usually sound a pricing metric is it has to be aligned with the way our customers receive value and essentially it’s, I guess I would say parallel consistent with aligned with our customer revenue model. I liked your example that said, if they’ve got an all you can eat model, I can’t charge them for the units or at least it’s hard there. It makes them take more of a risk than they really want to take.
Kota Sarma: If their revenue model is per user, I cannot have per usage. I cannot charge them per usage it has to be aligned with their revenue model.
Mark Stiving: Yeah, so I’ll push back just a tiny bit on that. I wouldn’t say that you can’t charge that way. What I would say is that it’s harder to charge that way because what we’re doing is we’re asking the customer to take more of a risk, but as another pricing expert that I love Ron Brown, he goes, we get paid for taking risks. He says, if you’re not taking a risk, you’re not going to get paid. So you know, maybe but, but yeah, the closer we get it aligned so that we’re not forcing our customers to take unnecessary risks, the more likely we’re going to get the deal and we’ll get them to sign up, hopefully grow with them.
Kota Sarma: The problem that it might create in some cases is the customer might have a totally different cost goal totally misaligned with the revenue goal, which is not, yeah. And what happens is they are happy to take that model from you, but they’ll push on price levels. Which is not good for us. They really last for a huge discount and price reductions. The price model is not an innovation. It is like 60 years old model coming from Ryan Rose rise. Like you know that the power by the hour they started last long back. Yeah, it is. The price metric is what this is, it’s the same thing we have been using the only thing in Telecom is it gives us an opportunity to use multiple price metrics in the same situation. So you have to use the best one. Yeah.
Mark Stiving: I want to jump back to, so I’m not sure if we’re intermixing the words price metric and price model. In my mind, the word price metric is what am I going to charge for and in my mind, the word price model is how do I structure the overall deal, which does include a price metric but it probably includes other pieces as well. So one of the things you were talking about was CAPEX versus OPEX or an upfront payment or an overtime payment and so I want to jump back to thinking about a price model for a second. How do you manage to offer different customers, different price models? Do you as the pricing expert have to be involved in each deal? Do you teach your salespeople how to do that? How do you manage this process?
Kota Sarma: It has a pricing person fully trained pricing expert, but we will be doing, creating this, customizing the price model to the situation, right? Lots of value terms. As I said, it is highly, I mean context tool pricing. We price to the transaction, we price to the context rather, but each transaction, the price model could be different. Price levels are obviously different depending on the value and the scope and the configuration, the time. There’s so many terms and conditions and in a way each transaction is unique. So many things are different.
Mark Stiving: So, how good are your salespeople at telling you here’s what the situation is and being accurate or is this a challenge that you have to go out and talk to the customer’s yourselves?
Kota Sarma: Sometimes we definitely be a company of salespeople and talk with customers also. But for all practical purposes for pricing people, the salespeople are our eyes and ears. I mean not only in Telecom, in any industry anyway. There are some information we can gather, its sometimes placed in a database on competitive intelligence, which comes from the public domain, from consultants and lots of product management centrally maintained. That is not enough when you’re working on it.
Mark Stiving: Yeah. And since you brought up the concept of value conversations, this seems like it would be this type of salesperson knowing how to do a value conversation for us would be immensely valued.
Kota Sarma: Yeah, absolutely. Yeah. There are different people of ECR types of people, right? There are some people who are just eager to just respond to the customer request on price reduction. They come back and they say just like work like messengers and then they’re good people. They’re very, very efficient in pushing back and they are actually having a good conversation with the customer and understanding the exact issue and addressing it. Many times it happened to us. I can tell you an example. It was in 2010 I was working on a deal which is largely for IT operator and that was a Greenfield operator, which is a new customer. We submitted our price. The fast feedback we got, is our price was three times higher than our Chinese vendors. Yeah. The Chinese competitors, so we don’t have any option. There is no way you can go on to present your value, a value preparation, not show anything.
You’re not going to get that much and we don’t want to reduce our price. Right. The only thing is that you have to walk out of it or propose something new and that is when we actually created the network sharing model, we changed the price metric to a price per capacity and we said you don’t bother about the score, we will maintain it for you. You focus on your marketing, you’re a new operator, don’t spend your time on the operation of the network. We maintain it for you fully, complete NPN and you paid for the capacity that you actually use. At the same time you allow us to provide this network the additional capacity to another tenant. So we created a network which is a multiple done network. So the other benefit when we bring in the other tenant, we got additional money from the other customers.
So, it’s a sharing model that customers actually pay instead of the request for 33, he agreed to pay us 40% with a condition that we also gave him an insane do when we bring in the second tenant, third tenant, we accumulate the value. We’ll also give him an additional discount. So it’s a way to increase him to bring him more than words. So he agreed to join a new market for the additional tenant, and that’s a beautiful model. Then finally, we were successful. It’s more than $200 million deal, and we were successful in convincing the customer without dropping the price. I mean, of course, it’s not to that extent. Initially, we took some risks, but overall it does a good deal in the long term.
Mark Stiving: Yeah, that sounds like a brilliant solution. And as we talked about earlier, we get paid for taking risks, right? Yeah. So, if we’re willing to take the risk and it pays off, we should make a lot of money.
Kota Sarma: Yeah, yeah, absolutely. Every product there is a standard price model and lots of alternative options. Right. The alternative options always come with additional risks. That is why internally we used to say that parity models have additional risk, so, you need to have an additional price or a premium.
Mark Stiving: Alright, nice, nice. Since you listen to these all the time, you know this next question is coming. What’s the one piece of pricing advice you could give our listeners that you think would have a big impact on their business?
Kota Sarma: Yeah, I was thinking of what advice. One advice is, don’t let your salespeople approve the price offers, the pricing. Number one, I want to give you one more so the first one is in your sales process there is always a greater process, right? At some point in time, the offer is approved before it is submitted to the customer. Don’t let your salespeople approve your pricing. Number one, they should be aware of their proposals, they should propose a price somebody else has to approve not pricing people. I see in some cases they themselves are approving which is not going to be, which is not a good practice. Number one. Number two is you ask me what I’m going to give you. Sales Company Plan should always be linked to one way or another, the value linkage is price performance. If it is linked to just the sales, our profit is not going to work, especially in the software business because in the software business, what is profitability? It is not very clear, the incremental cost of software is close to zero, right, so it has to be linked to the value linkage or price performance. You can have some target price and price deviation, or value deviation. There are multiple options, but it should not be sales or profitability. It should be something else.
Mark Stiving: Nice, so we got a bonus answer on that one. I appreciate it, Kota. Thank you so much for your time today. If anyone wants to contact you, how can they do that?
Kota Sarma: Yeah, I’m active on LinkedIn and you can search me on LinkedIn as Kota Sarma. And I’m going to post the link.
Mark Stiving: Yeah. His name and the link probably to his LinkedIn page will be in the show notes, so you’ll be able to find it there. All right. Episode 42 in the can. I gotta say my favorite part of today was talking about the pricing models and the fact that they customize the pricing model per customer. I thought that was brilliant. What was your favorite part? Please let us know in the comments or wherever you downloaded and listened, and while you’re at it, would you give us a five-star review? We would hugely appreciate it. If you have any questions or comments about the podcast or about pricing, feel free to email me at 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.