How to Price Like a Boss.
Article published on 06/28/2017
Sell like a Boss

Price like a Boss.

If you’re in the waste industry, you know how incredibly competitive it is. The pressure to compete on price is pervasive and visceral to anyone with top-line growth responsibility. At Grid Waste, we want to help you dive into the strategy and mechanics of pricing, revenue management, and growing your top line.  This article will help you:

  • define a winning pricing strategy for your business
  • set out pricing that wins are a premium to your competitors
  • grow your business smarter
  • make more money per dollar earned
  • close more deals
  • and more!

We recommend you take this one piece at a time, in order. If you choose to bounce around, you can use this table of contents to navigate you to different sections. If you’re not a math junkie, feel free to skim past the calculations we’re providing – you can still get the content without running the hard numbers. You can definitely find more robust approaches to pricing – we’re endeavoring to be ACCESSIBLE. So in some instances, we’ve simplified for ease of use. You can download a PDF version here: How to Price Like a Boss 2017.06.28

Why Invest in Pricing
What is Revenue Management
Why Waste Removal is Unique
Are Waste Services a Commodity
Where Price Meets Strategy
Bolt Bus, a Simple Example
Optimal Mix of Price and Business Volume
Lifetime Customer Value
Your Secret Sauce
Variations in Pricing
Managing Price
Brand Equity
Speed
Distribution Channels
Pricing Calculations
Logistics Redundancy
Terminal Velocity
Competitive Analysis
Lose Customers, Make Money

Why Invest in Pricing
90% of pricing investment meets or exceeds return on investment expectations. Think about that. And consider that companies can never “cut” their way to prosperity. Pricing, in contrast, is a constant means to profitable growth. At least that’s according to some very smart people over at Deloitte who wrote a book Pricing and Profitability Management: A Practical Guide for Business Leaders. It’s one of my favorites on the topic.

Pricing is a way to increase what I call the “terminal velocity” of your growth (not to mention increase margins). If you’ve never taken the time to think about your business’s growth terminal velocity, let me get into that for a moment.

Shift gears on pricing to maximize gains

Rev up to hit your maximum growth

Terminal velocity is “the highest velocity attainable by an object as it falls through a fluid (air is the most common example)” according to Wikipedia. The object, in this case, is your waste removal, recycling, or organics composting business. The velocity is your revenue growth, and the fluid is your market(s). We’ll get into a full section on what terminal velocity is, how to calculate it, and how to use it in a few sections. What you need to know now is, managing your pricing well is a way to increase your terminal velocity beyond the “gravitational pull” of your market’s growth. Dangerously, not doing so is a way to not even achieve your terminal velocity growth.

What is Revenue Management

get more bens in the bus.

yield management – managing your revenue to yield you more

Revenue management, or yield management, is the practice of maximizing revenues. Wikipedia calls yield management

“a variable pricing strategy, based on understanding, anticipating and influencing consumer behavior in order to maximize revenue or profits from a fixed, perishable resource”

and goes on to claim

“Robert Crandall, former Chairman and CEO of American Airlines, gave yield management its name and has called it “the single most important technical development in transportation management since we entered deregulation.”
https://en.wikipedia.org/wiki/Yield_management

We see yield management as a pricing strategy that maximizes the value of your service AND the inventory of that service. In the waste removal industry, we don’t often think of the capacity of a truck or route as inventory. But that’s exactly what it is. Our job is to sell that inventory for as much as we can, while staying competitive and building a loyal customer base. Comprehensive pricing strategies can shape customers behavior, respond to competitive pressures, differentiate services, drive logistics efficiencies, and, most importantly, maximize profits.

Yield management-driven pricing models are most effective when three conditions exist: you have a fixed amount of product/service to sell, your product/service can be classified as “perishable” meaning that it ceases to be sell-able, and people will pay different prices for your product or service. As a waste service provider, you may not be used to thinking of your route capacity as a fixed amount of product or service to sell. You also may not be used to thinking of that route capacity as “perishable.” Compare your route capacity – your inventory – to a hotel room or airline seat. If those go unsold, they can never be sold again. Likewise, if you have space on your route that isn’t filled, you can never sell that pickup capacity again!

Whether you believe “yield management” is a good fit for your business or not, the point here is that there is a LOT to be gained from taking a step back and reviewing pricing within your organization.

Why Waste Removal is Unique

price like a boss

be unique. look good. mean business.

How would you describe waste removal services from the customer’s perspective? First of all, you can’t live without it! Seriously!! When waste removal services stop all hell breaks loose. We can live without our internet and without our cell phones – but waste removal is up there with water in terms of importance. You know the details, so I won’t go into them. But we both know that the work we do in this industry gets appreciated really fast when it stops happening. Second, generally, like most commodities or utilities, it is on or off and customers don’t value it much more beyond that. Third, keeping it “on” is not something all of the vendors do well. Fourth, an increasing amount of customers care deeply about their waste and recycling programs. They want great service, they want data, they want to know where their material goes and how much is recycled and all of the details involved. Fifth, we have fairly long contact cycles in our business (more so on the client side than the vendor side generally speaking). Sixth, there generally aren’t a lot of options available to waste removal, recycling or food composting service providers to enhance or manipulate customer experience.

When you compare it to other industries, the differences really start to stand out. As an exercise, think about how your industry compares to:

  • airlines
  • restaurants
  • electronics retailing (think Apple Store versus Best Buy!)
  • cable TV, internet or phone services
  • publishing
  • digital marketing
  • farming
  • financial products and services

You get the idea. At the end of the day, the waste removal industry is pretty unique.

Are Waste Services a Commodity?

probably, but do you really care?

are waste services a commodity

Leadership in waste removal companies like Republic Services draw the line that waste removal services are not a commodity.  If you consider being a commodity bad, then they are unfortunately wrong.  If you consider being a commodity good, they they are fortunately wrong. But, your waste removal services are a commodity.  I’m going to tell you why, why it’s important, and help you understand what there is to be done about it.

First, let’s understand what a commodity really is. According to Investopedia:

A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type; commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers.

Read more: Commodity http://www.investopedia.com/terms/c/commodity.asp#ixzz4k5bF09Ii
Follow us: Investopedia on Facebook

So, like it or not, waste removal services, recycling services, and organics composting services are essentially commodities. According to the customer, the only differences are the color of the dumpster or toter, the price, and the quality.  What they customer is missing, and where Republic Services is right, is that the set-up of waste removal services is not a commodity.  Helping customers get into the right service levels is not a commodity, which is why so many waste consultants and brokers are successful – they enter the market to service the non-commodity portion and to trade on the margin of the commodity portion.

So why does this matter? It matters because commodities can be traded and brokered. Prices and sales volumes are highly influenced by market conditions. Commodities are usually purchased based on price. The products or services from supplies can even be pooled and provided to customers through distribution channels. Electricity is a good example of that.  Some franchise zones allude to that structure as well.

Being a commodity can restrict your terminal velocity if you don’t adapt to the situation well.  To get past this natural barrier, you need to signal value to your customer. Once you’re successful at that, the perceived value will take you out of your prospects commodity bucket and into a position to command more profitable pricing.

Where Price Meets Strategy
Lawrence Freedman, who is in my opinion the foremost expert on strategy, declines to define strategy in his epic book Strategy, A History. Instead, he observes that the word is perhaps overused and often incorrectly or loosely, and generally can be thought of as maintaining a balance between ends, ways and means; about identifying objectives; and about the resources available to meet those objectives.

So as I talk about “price strategy” I do so in acknowledgement that 1) perhaps we are overusing it in this particular application, and 2) I don’t really think we are. So what does strategy have to do with pricing?

what does your gut tell you?

strategy a price – a lot and nothing

A lot, and nothing. You may have a strategy to be the cost leader – the lowest price in the marketplace, r you may have the strategy of being a price leader and commanding higher prices than your competition, for example. Whatever your pricing strategy is, it will fail as a stand-alone component. You cannot be a price leader without establish real value. You cannot be a cost-leader and succeed without executing on impressive cost controls. And so you see, no matter what your price strategy is, it needs to be responsive to the conditions in marketplace in which you operate and the realities of your operations.

Variations of “price strategy” abound and sometimes seem to limited only by our imaginations. Commonly referred to options include:
Penetration pricing – uses low costs to gain awareness and build up a base of market penetration. Often leads to short-term financial loss, and is used to focus on marketshare. The trick is to know when to raise prices and be able to do so.

  • Skimming pricing – uses high prices for the introductory stage of a product or service to command higher prices for earlier adopters or until competitive forces demand the lowering of price to stay competitive.
  • Competition pricing – matches competitor’s prices. A super common approach in the waste removal industry but doesn’t put you in command of your destiny as much as alternative approaches – especially because in waste a price difference can cause a perceived value difference – something not possible when pricing the same product for retail.
  • Penetration Pricing – a pricing strategy that uses low prices as an effort to attract customers and draw attention away from competitors, and is usually a short-term campaign before prices are raised.
  • Product line pricing – this is about pricing products or services of the same category with different prices based on product differences. Think basic chocolate versus premium chocolate, or free CRMs versus paid, full edition CRMs. The point here is to establish differences in products and services that warrant different price points.
  • Bundle pricing – sells a package of products or services at a bundled price that is less than the price of each product or service when purchased individually. Think “value meal”.
  • Psychological pricing – uses well-researched strategies to influence purchasing decisions. Psychological pricing uses things like the $.99 pricing or having a high-margin item displayed next to much higher cost but perhaps lower margin item, making it easier for the shopper to justify the cost of the high-margin item.
  • Premium pricing – uses higher pricing to create greater perceived value. This approach is commonly seen with luxury goods.
  • Optional pricing – uses the addition of extras, options and features to increase the total purchase price.
  • Cost-plus pricing – uses a specific mark-up amount and the cost of service/production to calculate the price. I would say this is one of the best ways to set a price-floor, but generally a poor way to go about pricing a product or service as it is completely dis-engaged from the demand characteristics of your marketplace.

Bolt Bus, A Simple Example

penetration pricing and yield management done well and simply

Bolt for a Buck – a great

If you haven’t read our full piece on Bolt Bus’ pricing strategy, it’s a great quick read. For years, Greyhound bus lines and the like were losing business to big-city connecting bus lines that, at least in DC and NY, were affectionately known as the “chinatown bus.” Greyhound bus lines responded with the Bolt Bus, a massively successful come-back. One key to their success was their pricing model. Bolt for a Buck – they sold the first seats to sell for only a dollar. As the bus filled up, seat prices increased. It’s not a complicated model – and it got them a great marketing campaign, good pricing and great sales!! Many of us in waste, when thinking about pricing for front or rear-load services, may be tempted to reverse the logic and charge more for the earliest customers to make sure costs are covered, and then discount and the route becomes more full. Usually, however, there’s no difference due to factors like that – instead differences in pricing are usually only caused by differences in when customers signed up for services.

Can you tell what kind of pricing strategy this is?

Optimal Mix of Price and Business Volume
It’s an easy answer, almost a reflex, to say that more customers are better. What about fewer customers? As you raise price, you may win less work – but you may also make more money. Do you know what your price and volume relationship and what is optimal for your business?

Here’s a simple example of how price can effect profit margin and market share. The key takeaway here is, while a lower price may command higher marketshare, you may do so at a loss in real and relative terms compared to a higher price that achieves lower market share.The highest prices or the lowest prices may not be sure ways to better income.

An important observation about the chart above: you get to chose where on these curves you want to target – the greatest profit margin may not be where the lines cross (it isn’t in this example) and the greatest profit margin may not be the greatest profit overall – an important distinction. Here’s a chart using the same sample data, showing just the net profit based on the price point.
sample effect of price point on net profit

You can see in the chart above, profits are maximized at the 60 price point (60 being a theoretical benchmark in our sample data).  Looking at the preceding chart, that translates to a fairly high profit margin – but not the highest we see available – and certainly not the highest possibility for market share.  So what you want to shoot for is up to you – just be sure you have a firm grasp on how you think that will play out.

Lifetime Customer Value

start-ups get lots of things right!

lifetime customer value – a start-up metric for you hauling business

Lifetime customer value (LCV) is a calculation of the worth of a customer and is used as a reference in a number of important decisions, like how much you are willing to spend to acquire a customer or how much you are willing to discount a customer. At it’s core, LCV is equal to the price you charge, minus the cost of the service (e.g your profit per customer) times the time period you expect to retain that customer. Most models use an attrition rate to discount the value due to customer loss, and an additional discount to get at the net present value of those future cash flows.

A good formula to use for calculating LCV for your waste or recycling service is:
(Operating Profit / Total Customers) * Avg Customer Tenure / Attrition Rate

Wikipedia has a great resource for more thorough LCV calculations:
https://en.wikipedia.org/wiki/Customer_lifetime_value

Why is LCV important for waste haulers, recyclers, composters and the like, and how is it relevant to pricing and yield management? Here’s a partial list of what I think are the most compelling whys:

  • If we calculate LCV individually for customer type or service type, you can get a really sound understanding of the the efficacy of our marketing efforts and what channels are best for what purpose.
  • Understanding LCV is important in having a nuanced appreciation of your terminal velocity,
  • When tracked well, LCV is part of the picture of how your price positioning is either stepping on the gas or the brakes for your top line.
  • When done on a customer-by-customer basis, you can discover who your most profitable and least profitable customers or customer segments are.

Your Secret Sauce
Price is not your secret sauce and it cannot be a trade secret! If you rely on keeping your pricing secret and winning on price alone, you’re bound to win the race to the bottom of the price tier. And, frankly, we all know that any competitor worth their salt knows our prices. Why pretend?

It’s not just retailers, airlines and hotels that publishes prices publicly. Even Space-X publishes their prices!Screen Shot 2017-06-15 at 3.28.03 PM
Source: http://www.spacex.com/about/capabilities

The point is, some competitive advantage will come from HOW you generate your prices rather than the prices themselves (so, your yield management strategy), and how your pricing strategy and operating strategy reinforce each other to help you execute powerfully. And, of course, you must differentiate! If all you give customers is price, price is all they will use to evaluate you.

Variations in Pricing

depends on what you charge?

what does waste management cost, really?

As a marketplace and clearinghouse for waste removal, recycling, food composting, and other services, we’ve had the privilege to analyze hundreds of thousands of prices. It’s not uncommon for quotes from competing companies for the same piece of work to vary by 50% or more. More shockingly, it’s not uncommon for quotes from different representatives of the same company, for the same service, to come in at widely different price points.

This kind of deviation indicates a few important conditions exist:
1. service provides have more room to move pricing up or down than they may realize,
2. companies of all sizes can be lacking in adequate internal pricing controls,
3. lack of adequate internal pricing controls often means poor tracking of quote performance,
4. poor tracking of quote performance means little or no feedback loops on proposal dimensions (including price),
5. No feedback loops on proposal dimensions means inadequate learning, and
6. Inadequate learning results in failure to take advantage of room for moving pricing or other proposal dimensions for more profitable bids.

So when you see big variations in pricing from the market players or even a single company, the cause is probably the price management practices of those contenders. So, without further ado, let’s get into price management practices – they’re a critical lead in to great price strategy and competitive posturing.

Managing Price

and your leadership

managing price takes organizational planning

The management of prices in waste removal companies is a topic as interesting and nuanced as the setting of those prices themselves, and plays a key role in how prices are set. The needs of different waste removal companies, and the resulting price management practices, vary greatly from company to company. We’re going to touch on it briefly here – I’m planning on putting out something more in-depth soon, so stay tuned for that.

Some of the issues your price management policy should deal with include:

  • Who has price calculation authority?
  • What are the agreed upon profitability metrics and benchmarks, and methods for calculating them?
  • How are calculated prices communicated to your various sales nodes?
  • How long are quotes good for?
  • How often are price calculations reviewed?
  • What discounts are available?
  • Who is responsible for ensuring conformity with pricing guidelines set?
  • Does pricing receive the respect as a critical business discipline within your organization?
  • Who gets to review, provide feedback, or approve pricing?

Small, local companies will often have an owner making all pricing quotes. Often these decisions are well informed but made without structure. They’re often instinctive and habit-driven. Being so close to the business, they’re often very effective at winning. But there is usually no keeping track of when they win, when they lose, or why. Without that discipline, the ability to adjust prices upward without sacrificing your win rate is inhibited.

As companies get a bit larger, usually a sales person or small sales team is set out with price commandments from the owners or management. In many cases, these sales reps have been hired from competitors and bring a wealth of knowledge and price insights to help them stay competitive, in addition to a rolodex of prospects and corresponding contract expiration dates. At this stage, generally they are provided price guidance that is informed by their experience and input.

Regardless of what size of company you are with or what your role is, it’s a real challenge to set aside the time to look at price management as a practice and set up the right policies, feedback loops, resources and to delegate properly and communicate properly to manage price truly masterfully.  We’ve only touched on it here – hopefully your wheels are starting to turn!

Brand Equity

does it help or hurt your sales?

what does your company’s reputation do for you?

Can you command a higher price because of your brand? Do buyers in your marketplace recognize you, respect you, and perceive a value difference because of your brand? Can you quantify this and track it?

One of our favorite ways to *attempt* to quantify brand equity is looking at the “net promoter score” for a brand. The net promoter score measures the willingness of customers to refer your services to others. Getting the score is as simple as can be – survey customers and ask them “On a scale of 1 to 10, how likely are you to recommend this company’s products or services to others?” Here’s where interpreting the results gets interesting:

1 – 6: Detractors. They won’t refer you, and probably won’t buy from you again. They may even dissuade people from working with you.
7 – 8: Passives. They are somewhat satisfied, and would be willing to switch for the right opportunity. They won’t refer you, but probably won’t dissuade others from working with you.
9 – 10: Promoters. They love your service, will keep buying from you, and will tell others about you!

If you think you know how your customers will respond, we recommend you don’t guess but go out and ask them! There are lots of great survey tools available online to manage this easily. You can easily bundle in a few other quick questions to try to color the responses with some information about what, specifically, your customers appreciate or are disgruntled about.

Speed

speed thrills!

speed wins when it comes to closing deals

Responding to leads within one hour is over 60 times more effective than waiting longer, according to a recent Harvard Business Review study. Sales is one of those areas where speed doesn’t kill, it wins. Here’s a sample of their data, presented a bit differently than they do. In this chart, we showing the aggregate number of companies, in a percentage, that responded within the time range on the X-axis.
Screen Shot 2017-06-21 at 2.37.25 PM

You can see in this chart, a solid 20-30% of companies respond WITHIN 5 MINUTES to sales inquiries. Growth from there is pretty unimpressive. So how can we make sure we respond with speed and urgency?

Well, why don’t we? A waste removal company has sales reps on the road, doing site visits, shaking hands, checking out the competition, moving in and out of meetings. It’s hard for that rep to respond quickly. Some prospects can and will wait, especially if they have some loyalty to your brand, but some prospects are in a rush and will strike the first deal that comes their way.

So how can trash haulers improve sales response time? It seems to be a catch-22 question: you want your sales reps to “always be closing”, but you also want them to always be available, and they can’t be available if they’re busy closing!

always be closing

always be closing

So what’s to be done? Build a process that optimizes response time. Think about what you can automate, what you can simplify, and what steps you can cut out. Think about how you can leverage distribution channels to do some of the sales and closing for you. In many cases you can favor speed over accuracy. We coach haulers setting their Grid Waste accounts up to charge a bit more for difficult-to-service locations as an incidental charge to help speed their sales process but insulate them from the risks of skipping site visits. There are lots of similar approaches that can solve time-bound problems just by having the right rate categories in place.

With the right system, you to can ALWAYS BE CLOSING!

Distribution Channels

are you missing key opportunities?

what distribution channels do you leverage?

Typically we talk about distribution channels in the context of product distribution – how to get a product on a shelf, so it can get off the shelf into a consumer’s hands. I like looking in overlooked places for opportunity, and we think distribution channels is an overlooked opportunity for waste removal companies.

Critics of this section may say what we’re really talking about are affiliates, or even partnerships. We can debate the semantics – the point is, waste companies can achieve growth through channels beyond their own internal sales force. This might be strong relationships with brokers, marketplace sales through sites like Grid Waste or HomeAdvisor, or other crafted partnerships that facilitate co-selling.

A key consideration with distribution channels is thinking about the pricing. When someone sells a product through a distributor, they sell at a wholesale price to the distributor, who then sells at a retail price. In some cases, a buyer can purchase a product or service at the same price from the original seller OR from a distributor – like buying a computer at an Apple store OR at Best Buy. How you manage the price differential between your “wholesale” and “retail” pricing is going to be a decision you need to grapple with. Commission structures where your distribution channels are paid on a commission of total sales tends to be a model that’s a bit different than true distribution channels, but is worth lumping into this category of client acquisition avenues.

Pricing Calculations
price like a boss
It goes without saying that there are a LOT of different ways to go about calculating price. I’m going to get into some of them and look at the pro’s and con’s of some of the most common approaches. They key point to keep in mind here is your price calculations should ONLY relate to cost calculations when you are looking at your price floor, and only as a price double-check. In other words, you should calculate your optimal price WITHOUT consideration to cost, then make sure that price is above cost enough to meet your profit needs.

Price Per Yard
This is one of the most common pricing approaches we see. It’s great because it’s super easy to calculate. However, this pricing approach misses out on some great opportunities to steer your prospects towards more profitable service structures.

For example, let’s say you charge $7 per yard for waste disposal for a particular customer segment. First, you should ask yourself how you got to that $7 per yard figure, and why do you think it reflects your prospect’s willingness to pay for your services? Digging further…

A customer who has 8 yards of waste per week is going to pay you $56 per week, or $242.48 per month based on a 4.33-week month. This customer can get a 2-yard dumpster emptied 4 times a week for this price. Or, they can get an 8-yard dumpster emptied once per week for that price. Since visiting them once a week requires fewer trips, and less time on site total, that’s a more profitable service structure for you. But this price structure doesn’t give the prospect a compelling reason to go with that service. They may opt for a more frequent service because they perceive having their waste gone and not sitting around stinking as a higher-value option. In some cases, they may be willing to pay more for that convenience. Other times, your prospects may not care about that but may value having a trash truck on site less frequently, and therefore be willing to pay more for the larger dumpster with fewer service events.

So you can see how, while pricing per yard is an easy, quick way to come up with a quote – you could really be missing out on some opportunities to charge more or convenience or increase profits with operational efficiencies.

Cost-Plus Pricing
To use cost-plus pricing, a waste hauler is going to calculate the cost to service for each account individually, and then tack on what they believe is a reasonable profit mark-up. This method can be great at accurately providing the leanest price you are able and willing to offer, and so is a valuable go-to when you are bidding fiercely for a prospect.

The downsides to this approach, however, are many. First, even with good tools generating a quote for each opportunity can be laborious and take time – valuable time that could cost you the deal in some circumstances. Second, you may not be adequately accounting for your prospects willingness to pay as your price is cost-focused instead of demand focused. Third, you may not be adequately taking into consideration what your optimal price / volume mix is, as we discussed previously. Fourth, you may not be pricing in accordance with a thought through price strategy, also discussed previously.

You may actually be doing all of these things if the mark-up you are adding to your cost bridges that gap. As a rule of thumb, this is going to be a long, hard way of calculating the leanest price you can. If your goal is to be the lowest bidder, period, this is one of the best ways to go.

A quick sample of cost plus calculations might look like this:
service cost + disposal cost = total cost
total cost * (1 + markup %) = price

Return on Investment Pricing
Calculating price to target a specific return on investment is a slightly more sophisticated variety of cost-plus pricing, but generally has the same shortcomings. The difference between ROI pricing and cost-plus is, for ROI pricing you take the cost plus, and the margin that you add must be high enough to meet your investment hurdle rate (aka targeted return on investment). To do this calculation, you have to be able to accurately calculate the cost-to-serve as well as apportion the investment total to each account or opportunity appropriately.

Return On Owner’s Equity
Here we focus instead of return on total money invested, on the return invested by ownership – separated from the money invested by lenders. The key difference in the calculation here is what the total investment amount is. Otherwise, the logic is the same.

And, like any of the preceding methods, this is still truly a cost-driven price methodology that doesn’t get at what the demand characteristics like price elasticity (aka what your prospect is willing to pay).

Density-Based Pricing
This one is a personal favorite of mine DESPITE the fact that it is also cost-oriented. The reason I like it is it makes it possible to offer lower prices AND make more money in real and relative terms. The concept is simple – what price can you give a prospect who is physically very close to a customer, provided that the prospect agree to a overlapping service schedule. You can discount this prospect because the cost-to-service is lower, and if you do it right you can still end up making more money. The trick to using this technique well is to have a firm grasp on your route density, and only discounting relative to your existing route density. In other words, if most of your customers are already neighbors, there isn’t much of a change in density by adding another so you may not deviate much. But if most of your customers are not neighbors, you probably have room to move.

Capacity-Based Pricing and Perishable Inventory
First, let me clarify what “perishable inventory is”. You probably have fruit and vegetables coming to mind – when really that’s not as perishable as some other forms of inventory. A seat on an airplane on one particular trip can be sold once and only once. If that plane flies and the seat is empty, the opportunity to sell that seat to someone is gone forever.

Now let’s apply that to waste removal. Let’s say you’re in the roll-off business. You’ve got some dumpsters in your yard, and the trucks to deliver them and pick them up. Every day those boxes sit in the yard is a lost opportunity to sell that service. The same logic applies to contract dumpster service like rear-load collection or front-load collection. That’s what we’re referring to when we talk about “perishable”.

Perishability in this sense is related to capacity, but they are not the same. And how you price related to them is a judgement call you must make.

There are essentially three approaches to pricing that is responsive to capacity and perishability: 1) maintain consistent pricing as though all units of production are of equal value to both you and the prospect, 2) discount items or capacity that is soon to “perish” or expire, to ensure peak revenue is acheived, or 3) increase price on items or capacity soon to expire because those items are more scarce and, therefore, more valuable.

The concept of scarcity will be a leading consideration in defining value and price-setting.

Willingness to Pay
The hardest, the most sophisticated, and probably the most worthwhile price calculation approach. Using a willingness-to-pay model is the only way to truly detach from cost considerations that anchor your prices to the floor and give you the upward mobility you need.

Most of you reading this are going to scoff. “Their willingness to pay is zero” some will sneer as they struggle to collect. Not so, not so! Remember, we established that waste removal services are something we CAN’T LIVE WITHOUT! (Yes, I know, so is water and air and we pay little or nothing for that, but let’s not get into the “given rights” debate here).

Economists dedicate tonnes of data and entire books and whole software systems to calculating price elasticity and willingness to pay for various products and services. You’re not operating in a bubble, so let’s look at some shorthand ways to think about this and use the concept.

First, we need some data. It’s important to look back over your QUOTES data to review performance. If you haven’t been tracking quote performance data, you may want to start right away. It’s not uncommon for a bit of data to help us see something fresh in a subject we were sure we had mastered. Think about structuring the data so you can filter results and find answers to a lot of questions. Think about what service levels were quoted, what the customer segment was, the customer geography, the price that was quoted, the duration of the conversation, if the quote was accepted or not and, if not, if the prospect retained their service provider or went with another. Keep track of who the incumbent was and who won the work. If you can find out what price and service level they won the work at, track that. You may even keep notes on qualitative data – did the prospect have a relationship with another company or with your company that helped with the deal? Where did the lead come from? When was the quote issued? When was it accepted or rejected?

As you dig through that information, patterns may begin to emerge. I’ll be writing up another focus piece on quote performance tracking, so stay tuned for that.

Logistics Redundancy

#costmatters

service redundancy can be a leading driver of cost.

#costmatters

service redundancy can be a leading driver of cost.

While not related directly to price, service/logistics redundancy can be a BIG cost driver and can be managed a bit by good pricing – so I couldn’t resist getting into it for a moment.

When I ask haulers when they offer service, most of them say “every day” or “six days a week”. Got it.

Some, however, are more precise. They service one geography on one set of days, and another geography on another set of days. This system ensures greater operational efficiency, obviously. It costs a lot more to go to “Address A” on Monday, Wednesday and Friday and “Address B”, across the street on Tuesday, Thursday and Saturday then it does to visit “Address A” and “Address B” on the same days. Where I think this gets interesting is using pricing as a mechanism to manage service redundancy. This looks and sounds a lot like the “Density Pricing” we talked about earlier. The point is, service redundancy is expensive, and can drive your costs up and, therefore, your price floor up. But savvy pricing and incentives can reduce service redundancy or ensure that you are compensated well for it.

Terminal Velocity

fast.

how fast can your waste company grow?

As I explained before, terminal velocity is how fast your organization can grow. Simple! Tracking terminal velocity is a one way to keep pulse of how your growth rate is performing against expectations. You may recall:

Terminal velocity is “the highest velocity attainable by an object as it falls through a fluid (air is the most common example)” according to Wikipedia. The object, in this case, is your waste removal, recycling, or organics composting business. The velocity is your revenue growth, and the fluid is your market(s). We’ll get into a full section on what terminal velocity is, how to calculate it, and how to use it in a few sections. What you need to know now is, managing your pricing well is a way to increase your terminal velocity beyond the “gravitational pull” of your market’s growth. Dangerously, not doing so is a way to not even achieve your terminal velocity growth.

There are a few ways to calculate your terminal velocity. In its simplest form, it is:
Market Size (in Dollars) X Market Growth Rate / Market Share

The above formula is simple. It assumes that a rising tide raises all ships – therefore market share is static. As a result, it inherently ignores important considerations like your customer attrition rate, annual rate increases on existing customers, entrance or exit of new waste, recycling or organics competitors. While not obvious, it does take into consideration the different service you offer. For example, if you offer roll-off services that are driven by construction cycles, that service has it’s own terminal velocity. If you’re offering multiple services, your companies terminal velocity is the sum of each of it’s parts. For the purposes of our discussion, the most important element left out of our simple TV calculation is the change in customer value – e.g. you being able to charge more or less per new customer for customers of a similar profile.

The shortcoming of the above model is it doesn’t take into consideration the impact of your waste removal company moving into a price leadership or price lagger position, or impact on market share due to such a change. We could build out a more sophisticated terminal velocity model.

Competitive Analysis

#winning

Get the data you need to know your competitors.

Now that you have a really nuanced understanding of price, we can talk about looking around the playing field and doing some competitive analysis. As an outsider, your role is to evaluate your competitors sales process – not just price – to gain a greater understand of what they win and lose and why. You’ll start with a high-level analysis looking at the topics we’ve covered and considerations like:

  • Speed – how long does it take them to get a quote to a prospect? How responsive are they to follow-up inquiries for a prospect? And how good are they at answering all of that prospects questions before the prospect can even ask them?
  • Context – is the company you are observing growing or contracting? Are the pumping up the top line ramping to an exit? Are they losing customers? Understanding their context can help you understand motivation behind their price and sales decisions.
  • Market Share – how much market share do your competitors have? Are they strong with certain segments or services? How do they stack up?
  • Compensation – how are their sales reps compensated? Is that incentivizing a certain type of behavior?
  • Price Point – What is their price point, in comparison to the market as a whole and in comparison to just you.  Look at each service they offer and how the price it. Perhaps they have a mixed (or even accidental strategy) where some services are priced very low and others are priced at a premium.
  • Services: What is the range of services they offer? What is their service quality?
  • Promoter Scores: Do their customers like them? Do they have a high or low promoter score?

 

You can plan a pretty thorough competitor analysis formula and put all of your competitors through the same analysis to get a holistic picture of your competitive landscape.

Lose Customers, Make Money

#greatpricing

Often, less IS more.

It’s provocative to say, but it’s true. There have even been books written on the subject, like The Pumpkin Plan by Mike Michalowicz. If you refer back to the Optimal Mix of Price and Volume section, you’ll recall that more isn’t always better and that you can have the greatest earnings if you focus on the most profitable price point and customer segments, rather than on market share.  Whenever your cost calculations come into play, take the time to compare cost-to-serve, cost-to-acquire, and lifetime customer value data for your different customers and customer segments.  That data can show you what segments are not helping your business as much as others.

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