Companies of all sizes want growth. And those charged with bringing in revenue, salespeople, are on the front lines of that goal every day. When asked what makes the difference between those salespeople who hit their revenue targets and those who don’t, sales managers will often point to whether or not their sales people can articulate value.
As a sales person, matching the right value message, and the right sales activity, to the appropriate moment in the customer lifecycle can be tricky. Especially when it comes to renewals and price increases. For example, do you know if you should use the same value messaging approach to acquire new customers as you do to keep the existing ones?
Well, I found some interesting new research which may provide counter-intuitive insights into what companies need to know about communicating renewals and price increases to customers. I reached out to Tim Riesterer, chief strategy and research officer at Corporate Visions who provided this unique perspective across the entire customer lifecycle. Here are some highlights from our conversation.
Why are renewals and price increases so important in today’s complex selling environment?
As many companies evolve to more of a products-as-a-service experience, the pressures and the opportunities to drive profitability have shifted beyond new deals to two other critical areas—renewals and price increases. Often the renewal will produce way more profits than the original deal because of concessions to get the deal and over-servicing during the first contract. One stat I saw from Bain & Co. said that a five percent increase in renewals can drive a 25 percent or more increase in operating profits. Not to mention, price increases for well-established companies with large market share becomes a very strategic growth lever. And, an interesting stat from McKinsey touts that a one percent increase in price can drive up to a nine percent increase in operating profit.
The question is: Do companies realize the unique challenges these situations pose? Until now, little research has been done to understand the buyer psychology of these moments and how that affects the way you develop and deliver sales messaging in these moments. Many methodologies claim you should use the same approach across all customer interactions. We set out to create simulation-based research to test and prove messaging frameworks for the best renewal message (“why stay?”) and way to communicate a price increase (“why pay?”).
We work with two leading researchers in the field of decision science:
· Dr. Zakary Tormala, a social psychologist and expert in persuasion at Stanford Graduate School of Business
· Dr. Nick Lee, a social psychologist and behavioral scientist with Warwick Business School in the UK.
Originally, several years back, we proved through simulation-based studies that you must disrupt the prospect’s status quo bias (effectively challenge them) in order to unseat an incumbent supplier or strategy. We then built, tested and deployed a messaging framework based on that research called “Why Change?” – designed to deliberately attack and defeat the four proven causes of status quo bias. And, we’ve tracked considerable success working with companies to reignite stalled, no-decision deals and add more qualified opportunities to the pipeline.
That provocative story is essential for that new customer acquisition and defeating the status quo. But we kept getting the following question from many of our clients: “What about when you are the status quo? What about when you’re the insider and you need to renew and expand existing client relationships?” We didn’t want to guess or assume that you use the same challenging approach. So, we created an entirely new simulation with our partners that tested the “Why Change?” framework against a new, proposed “Why Stay” framework that deliberately reinforced the four causes of status quo bias instead of trying to disrupt them. And, a proposed “Why Pay?” framework that incorporated additional behavioral science concepts.
3. The results seem to have created a bit of a stir in the industry because they challenged the idea that “challenging” customers is the best approach in the majority of selling situations?
Yes, the big “aha” we discovered is that challenging existing customers at the moment of renewal or communicating a price increase has the exact opposite effect than the one you’re hoping for. In both studies, we showed that the “challenging” message approach significantly decreased the likelihood of renewal by 13-16 percent, and significantly increased the likelihood of switching to a competitor by 11-16 percent. Turns out, it’s not good to use a message designed to disrupt the status quo – when you are the status quo. The conclusion is that if the customer feels they are going to have to change something drastically as they move forward, they are more willing to open the discussion to other competitors.
If you want to secure renewals and make a compelling case for a price increase you are much better off using a framework that reinforces the four causes of status quo bias and leverages key concepts like the “anchoring effect” in your messaging. Once we determined this, we ran several follow-up simulations to determine a precise, tested and proven framework for both the “Why Stay?” and the “Why Pay?” conversations – both of which require specific techniques to maximize effectiveness.
The major implication from this research is that different moments demand different messages. A one-size-fits-all approach to the messaging development and delivery will work against you if you try to apply them throughout your customer relationships at every phase in exactly the same way. Remember, when you’re trying to convince customers to stay or pay more, craft the right message, otherwise it will backfire in a big way – potentially causing your customers to rethink the value of their current relationship with you.