by Paul Hunt – President
I have been watching the Stanley Cup Finals between Boston Bruins and Vancouver Canucks. One of the keys to Boston’s success has been the steady play of defenseman Tomas Kaberle. Kaberle was acquired from the Toronto Maple Leafs in February of this year. Kaberle is a talented player and as happens to so many professional athletes in North America, he was traded at the trade deadline from Toronto, who would not make the playoffs, to Boston, who was looking for the talent to push them to a championship.
From a pricing standpoint, the question is, how much should Boston “pay” to Toronto to acquire the services of this player. Often in pro sports, the price is conditional. As Kevin Costner said in Bull Durham “I’m the player to be named later.” In other words, “Depending on how the trade works out, we will change the price.”
In the case of Tomas Kaberle, the Bruins gave up their first draft pick at the time of the deal. What is interesting is that the deal had a “Pay for Performance” clause. If the Bruins made it to the Stanley Cup Finals, they would pay more to the Leafs in the form of a further second round draft pick.
Meanwhile, in a more mainstream business, we met with a company this week who sells through distribution. We asked about their distributor agreements, and found that they were sealed with a handshake almost a generation ago. While it is great to be able to trust a business partner enough to be able to do business on the basis of a handshake, in today’s data driven world you need a more structured agreement with your channel partners to ensure interests are aligned.
As we dug deeper we found that many of the distributors were not growing. Some were possibly grey marketing the product (taking advantage of arbitrage opportunities) to sell the products into other markets. And probably most importantly, there was nothing in place to motivate the distributors to sell the value the company could potentially deliver, or share market information the company so badly needed.
The company knew they should put in place a more structured agreement, but they had not been able to “get around to it”. Now they are seeing that distributors are under performing, putting the business at risk.
Working out what really matters to your customers and structuring a contract so that your company shares in the gains when they materialize is an important Pricing concept. If interests are aligned there are potentially big profits to be gained at a time when your customer is enjoying the fruits of the deal. Moreover, the customer will likely be willing to concede these “higher prices” to be paid under the hypothetical situation of “when everything goes right”.
In pro sports this type of pay for performance scheme is very common. With so much money at stake, managers have sharpened their games. Sometimes it is difficult to connect the results with the activity. In my view Kaberle has played reasonably well, but he seems tentative in the heavy going. He is clearly NOT the reason the Bruins have enjoyed success this spring. However, by structuring the deal to pay out when the customer achieves outstanding results, the Leafs have set a price the Bruins I am sure will be happy to pay.
Paul Hunt is the president of Pricing Solutions, an international pricing strategy consultancy dedicated to helping clients achieve World Class Pricing competency. Paul publishes a monthly pricing column in the FP Executive. He also writes for the Pricing Solutions Club.