I started working with Scientific Time Sharing Corporation in 1969, when they had only six employees. For fifteen years, STSC, as we renamed it, was my home away from home. It was the place I found the love of my life, my partner and wife Mary. It was the place I learned a myriad of business lessons that shaped my life and career. It was the first time I experienced the power of strategic planning and the danger of being wrong about pricing.
I thought STSC was in the business of developing and selling access to the most powerful and productive IBM mainframe-based computer time-sharing service in existence. This was a natural assumption, given that we billed our customers based on their access to our centralized computer. We billed customers monthly for the total number of minutes each company’s users were dialed into our computer, the number of mainframe CPU seconds those users consumed, and the bytes of data they stored.
I thought our pricing reflected the value our customers received from us. I was wrong! In fact, the true value our top customers received was our ability to assist them in the rapid development of custom applications and support that application’s use nationally through our extensive branch offices. Our business model was simple. Develop and extend customer applications for free. Make our money every time the application ran. STSC grew by supporting the application at each of the customer’s remote locations. Better application development support led to more applications. Better support of each customer’s application led to more users for each application. More application users led to more usage of our computer. More computer usage led to rapid revenue growth for STSC.
For a long time it didn’t matter how we priced. Our customers couldn’t afford to purchase and operate the specialized hardware and software required to match our service. Since the users were billed for minutes, seconds, and bytes they assumed that was what they were paying for. They were wrong too, but it didn’t matter.
At least, it didn’t matter until technology advanced to a point where our customers could afford to purchase hardware themselves. Then STSC’s customers started leaping to an obvious, albeit incorrect, conclusion that they were being ripped off. Customers were increasingly commenting on their billing. “I can buy a disk drive for less than what I pay STSC for a year’s storage.” “My IT manager tells me he can lease a dedicated computer to run my applications for less than I pay STSC monthly.” I explained to customers that we were only billing them based on minutes, seconds, and bytes. But what they were actually paying for was access to a 24/7, nationwide application development and support organization at their beck and call. Unfortunately, it was too late. Most customers remained unconvinced. They had trouble recognizing the value of the development and support services that we always gave them for free. They were comparing apple pie with oranges.
The initial impact of appearing to be too costly was a decline in the growth of new applications being built to run on our service. Times were good and managers were focused on developing new systems and capabilities, not reducing the cost of a working system. If it’s not broke why fix it, even if it’s somewhat expensive? After all, there was a non-trivial risk and cost to moving an application in-house. Along came back-to-back recessions and managers shifted their focus to cutting costs. Overnight, all outside services were targeted. Applications were rapidly moved in-house with the aid of motivated IT managers and hardware suppliers. Some end users even began to take control of their applications using newfangled PCs.
The time-sharing market collapsed, with one service company after another biting the dust. STSC, with its misdirected pricing, was an early victim of the shift.
I made a point of talking to our lost STSC customers a year after they transferred their applications. They’d say: “You were right John. It now costs us more to run and support those applications than it did when we had them on your service. But, that’s water under the bridge, it’s too bad we can’t shift them back.”
I tell this story to emphasize that you are at risk whenever you “bundle” elements of your product to simplify billing. You are vulnerable to inappropriate price comparisons when a substantial portion of your value is hidden from your customers’ view. This value might include the extra capacity you support to handle surge orders, the senior technical staff you maintain to assist a client in trouble-shooting their product. Your value might lie in your willingness to accept last-minute orders without penalty, the quality assurance built into the manufacturing, or the capital reserves required to survive late payments. All these add to the cost of your operations.
You will look over-priced if you allow your customer to do price comparisons with other suppliers without putting a dollar value on all these features. If the buyer insists on ignoring those “intangible” features, you have no choice but to sell unbundled and price for every individual service.
It’s important that your executive team understands your customer. Who actually signs the checks? What is the value they are actually paying for? A well-run strategic planning process helps keep everyone on the same page on many key issues, including pricing. Take a look at what strategic planning can do for you.