Gideon Gartner’s website has been toppled by PHP problems, so I’m reposting one of the articles I’ve spent the most time reviewing while writing my PhD. In it, the Gartner, Inc, founder explains the role of the firm’s guiding theory in developing its approach to sales and pricing.
Around 1986 I was still working to formalize and document how Gartner’s culture had evolved since its 1979 founding; seven years old, it continued to maintain (and fine tune) its original research methods, but now embraced sales goals as well. By the following year 1987, we published our methods internally, distributed to our employees as “Theory G”.
In hindsight, the name Theory G may sound trite but the idea was to emphasize our continuing need for excellence, that we were in business to serve clients and that clients were people first (not companies). Its simplistic list of do’s and don’ts included: be enthusiastic, self-critical, proponents of change, contribute and share across the firm, and so forth. It might have sounded corny to some but I hoped that when and if our employees dug deeper into the theory, they would recognize a process which included research directives such as: correct errors of fact immediately, advocate positions explicitly, improve abilities to sell a specific point of view, and optimize the way time was spent when working! Some claimed these directions were simply ‘motherhood’, but we nevertheless took time to formalize our views re increasing confidence in our values and beating our competitors.
But in documenting Theory G, our interests shifted several degrees, from focusing upon research, to analyzing our sales department as well. While aware that our clients were utilizing our research via our content, interactions and events, I hypothesized new pricing models which could be analyzed and validated. And as we added deliverables, our pricing levels grew in parallel and I was worrying about our clients’ reaction. I hoped that our better-defined values would be understood across the board, while knowing down deep that some (and perhaps many) would not be!
Each of our services was then priced at $20,000 per annum and one day I claimed to our sales group that our value-to-cost ratio had grown, now being 5:1! Initially, I did not check sufficiently to convince our team that this assumption was realistic. How did I justify this guess? I must have known that the dollar value of what we delivered was a huge variable, based upon how the client used our deliverables! In fact I believed that a study of value at many clients, might not even reach the break-even 1:1 ratio, let alone 5:1!
So even while twenty five years ago our average revenue per client was a fraction of what it is today, I guessed that for each $20K service, the client should benefit 5X, and that this assumption was at least ‘in the ballpark’. Of course I understood that not all (if any) clients would achieve such a 400% benefit. The clients simply had to be taught how to best employ our research, and the 5:1 ratio was perhaps just a goal.
One evening I found time to develop a simple system which might better justify our values, at least internally but hopefully externally as well. For each of our deliverables I simply estimated what I thought the value should be to clients; in other words, a hypothetical ‘per annum’ value which our clients should (if not would) obtain . Calls we initiated to clients would be considered ‘personal consulting’ support, and might be worth $12,500 annually; calls from the client to our analysts might be worth $37,500 annually (aggressively assuming that our responses to client queries throughout the year would lead to ’client satisfaction’)! What about our ‘audio teleconferences’? Documentation of our ‘scenario’s? Our substantial volume of ‘research notes’ content? Our conference admission values? At $12,500 annual charge for each of these deliverables, our total value actually added up to a $100,000 round number, exactly 5:1!
I realized that I was being somewhat cute, and knew that our entire staff might not buy into this approach, but it did not take long for me to decide to look for ways to cross check my own rather arbitrary $100K conclusion:
I divided my round-numbered $100,000 assumption into seven categories of more explicitly defined benefit categories, with which many or most of our clients would likely relate:
- ‘Vendor negotiation’ tactics (how to negotiate lower prices); this might be worth at least $12,500 ….
- Help in ‘Strategic planning’ must also be of significant value (clients tended to think short-term, and would hopefully rely upon us to think long term)! Another $12,500.
- ‘Individual performance benefits’: this suggested that those client personnel who followed our guidance should be recognized as performing better! $12.500 more!
- ‘Reliable data‘; we had just begun to include market research as a deliverables…
- ‘Extended staff’ was another benefit category, to the extent that a client was able to utilize our services instead of adding headcount….
And others; seven categories with benefits adding up to the same result: $100,000. QED.
I will never know to what extent our sales organization was pushed by the market to justify the pricing, I expect relatively rarely, when a prospect would close us out. Nevertheless I erred by delegating all sales training to sales management rather than being active at sales meetings. I had never been a practicing salesperson, and concluded that a significant percentage of sales training material would go into one ear and out the other!
That conclusion was likely incorrect and in any event we did OK in selling our services. Today there are few industry leaders but many relatively small advisories; to those ‘many’ which cannot afford sales teams, I would urge that they analyze what each of their deliverables are worth on average, and why. In client discussions, ignore my 5:1 story; even 2:1 should be sufficient to close deals. Understanding how clients utilize deliverables should influence Advisory’s service designs and hopefully influence their growth positively.