Archive for November 21st, 2011

Rusher’s Gap and its implications on price discounting.

Nougat Gap

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Rusher’s Gap and its implications on pricing.  (Thanks to David Moulton for pointing this out to me.)  Rusher’s Gap is named for the former magazine publisher William Rusher. Rusher’s Gap is the difference between the extra amount you figured something would cost and what it actually did cost.  Here is an example common today in software sales.

One of the unplanned outcomes of the hey days of big , costly ERP software implementations is that savvy CFOs and procurement officers who have gone through the process now believe that if the software is quoted at  say $350 000, the true cost of deploying, and implementing it will be another $350 000, a Rusher’s gap. making  the total is twice as much.   Thus sometimes when buyers receive quotes  for software now, they do not believe the number but automatically double the amount, causing them to push back.  As Bob  Artner says  on TechRepublic, this is different from sticker shock . The price oriented  salesperson  goes back to his manager and negotiates a hefty $50 000 discount (14%). The purchaser sees a $ new quote for $300 000 and in his mind makes that a $600 000 total purchase.

Artner goes on to say”

Rather than spending your time defending the cost you quoted or speculating how you can save money at the margins by cutting out features, what you need to do is convince the would-be client that the number you quoted, no matter how high, isn’t going to go significantly higher.  In other words, instead of trying to defend x, you need to explain why it’s going to cost x, and not 1.4*x, and then some.

How do you do that? Well, here are some suggestions (and there are plenty more):

    1. Make sure that your numbers are right before you walk into the room.
    2. Provide milestones on the project path that break down the expenses by project phase.
    3. Perhaps most importantly, provide references that can attest to your firm’s ability to accurately forecast project costs.

Thus if  a sales force is working from a value based pricing model, when faced with what could be a Rushers’ Gap, they need to be prepared with the above proof and activities.  Better yet, the value based pricing model includes a response to Rushers Gap. For any selling organization, on budget execution after the sale is paramount to providing proof needed in the next presale in order to get to the value based pricing.