DUMB: A Framework for Analyzing Pricing Power
NOTE: This framework was first developed by me (Adam Juda) in November of 2017.
Why Smart People Should Use DUMB
The sales process is little more than the act of negotiation. The stronger a participant's bargaining position, the more power he has to command a premium price.
DUMB is an analysis framework that vendors can use to estimate their pricing power and identify potential avenues for increasing it.
The Four DUMB Metrics
(of the vendor)
|How early into the buying process will a potential customer recognize the offering as being a potential solution to his problem?|
(of the buyer)
|What is the strength of desire and immediacy of purchasing intent?|
(of the pitch)
|How effectively can the vendor's messaging entice buyers to make a purchase?|
(to the purchase)
|How problematic is the buying process?|
- Can be applied by quantitative or qualitative researchers
- Can be used for quick brainstorming or for detailed analysis
- Provides actionable analysis to improve pricing strategies
- Organizes information for rapid consumption
DUMB Evaluation Criteria
Discoverability of the Vendor
How early into the buying process will a potential customer recognize the offering as being a potential solution to his problem?
The most efficient and effective means of increasing discoverability will differ from industry to industry and, in many cases, from firm to firm. That said, here are a few questions that may prove relevant when analyzing a firm's discoverability:
- Does the product or company enjoy strong name recognition?
- Does the product or company rank well in search engines?
- Is the fact that the product or company offers a potential solution to a customer pain point obvious?
- Does the firm have access to a strong platform with a large and dedicated audience?
A given product might be best in class, but it means nothing if potential buyers are unaware that it exists.
It is important to note that discoverability requires more than simple brand awareness. Additionally, customers must recognize that an offering can solve, mitigate, or otherwise address his problem. The question is not one of whether or not an offering is a strong contender (a likely order winner), so much as if it is a potential contender at all (an order qualifier).
I've prepared a discoverability guide for further ideas.
Urgency of the Buyer
What is the strength of desire and immediacy of purchasing intent?
This metric deals specifically with the buyer's mindset and sense of urgency, rather than his actual urgency. In other words, a buyer will pay no heed to an unknown need. Note that buyers' assessments of needs, benefits and penalties can vary wildly from their true magnitudes of importance.
The primary questions asked for this metric include variations upon the following:
- What benefits does the buyer foresee if he does act quickly?
- What penalties does the buyer foresee if he does not act quickly?
In some cases, the urgency of a given buyer may be obvious. In other cases, a vendor may only be aware of urgency on an aggregate level for potential buyers.
The more high touch the sales processes, the more likely a salesman will be able to uncover a buyer's true level of urgency. Unfortunately, lengthy discovery sessions may prove too expensive (in terms of time and money) for both buyer and seller. Thus, many firms should consider tiered pricing and other techniques as a more efficient alternative to high-touch salesmanship.
Of the DUMB framework's four components, urgency is the most difficult for vendors to control. As such, most small and mid-sized firms may simply choose to analyze the level of buyer urgency, rather than attempting to manipulate or increase it.
That said, large and well-connected firms have found great success in increasing customer urgency through the use of lobbying, trade associations, educational groups, and even criminal enterprises. Examples of such means include the introduction of new legal requirements, financial penalties, trade restrictions, public shaming and even extortion.
Mesmerism of the Pitch
How effectively can the vendor's messaging entice buyers to make a purchase?
The effectiveness of the pitch depends upon salesmanship and messaging, though the product itself may play a significant role as well. Except in cases of outright fraud, the product's features, drawbacks, and benefits will likely limit the scope and substance of the pitch presented to potential buyers.
There are entire books devoted to the subject of evaluating pitches, but the following questions will likely need to be posed:
- How clearly does the pitch demonstrate the product's ability to provide real value, desirable benefits, or required features?
- To what extent can the pitch reveal unknown, or underestimated, urgency on the part of the buyer?
- How much charisma and goodwill does the sales person or firm possess?
- Does the pitch differentiate the offering from other products that have been discovered by the buyer?
- Does the pitch appear genuine and trustworthy?
It should be noted that of the four measures, urgency and mesmerism are the two that are most closely linked. Buyers with an extreme sense of urgency may require substantially lower levels of mesmerism before making a purchase at a given price. Of course, the opposite is also true.
Note: Some parties may be unfamiliar with the word mesmerism (spellbinding hypnosis). In such cases, the words magnetism or messaging may be substituted.
Barriers to the Purchase
How problematic is the buying process?
The elimination of roadblocks in the buyer's journey is often (though not exclusively) a matter of process improvement on the part of the vendor.
There are countless types of potential barriers, but many can be classified as a cost (monetary or otherwise) levied upon the buyer that provides negligible benefit to the vendor.
Although many in the business world assume that the barriers exist only toward the end of a sales process, they can appear at any point. Many vendors simply ignore barriers early in the sales process or even place them there intentionally in an attempt to minimize average costs per sale.
Here are a few sample questions that vendors should ask themselves when analyzing barriers to a purchase:
- Is the buying process too slow?
- Is the buying process too complicated?
- Is there insufficient responsiveness from the vendor?
- Is significant effort or initiative required on the part of the buyer?
- Are the payment terms too onerous?
- Are the switching costs too high?
Although some firms may find barrier reduction to be a very cost-effective means of increasing pricing power, this method should not be viewed as a panacea.
Managers at large established companies will be quick to point out the significant political capital required to organize and affect change across their many departments.
As such, elimination of barriers to purchase has the potential to provide a powerful comparative advantage for smaller and more nimble firms.
The DUMB model, while incredibly useful and powerful, has several limitations that should be noted:
- DUMB produces analyses that must be revisited on a recurring basis. As customer expectations, the competitive landscape, and other marketplace factors change, the framework will have to be reapplied to ensure relevancy of results.
- DUMB does not deal with potential trade-offs that can occur within a given metric or between metrics. For instance, a firm may be able to maintain its current level of discoverability while reducing costs by replacing outbound marketing with inbound marketing.
- DUMB ignores the relative standing of buyer and seller. In most markets, individual buyers have relatively little power or insight into the relative strength of a given vendor. However, when the buyer enjoys extensive power in the marketplace, such as in a monopsony environment, this model may prove useful, but insufficient, as a means of establishing the pricing power of the vendor.
DUMB in a Nutshell
The DUMB analysis framework is a powerful tool that has the potential to become a standard for understanding pricing power in the business world.
Its usage will increase firm profitability by providing managers with insights into their current pricing power as well as avenues for increasing it.
Request for DUMB Feedback
- Do you have any suggestions or criticisms of the DUMB model?
- Have you applied DUMB to your own business?
- Are there any parts of the DUMB framework that are unclear?
P.S. If you need help applying DUMB to your business, feel free to contact me!