Sales managers have a full plate, no doubt. Their role is vital. They manage the human resources that connect all of our businesses to our customers. This article discusses the role of those managers as they specifically relate to the pricing process.
Making the Right Pricing Decisions
Let’s start with decisions. There is a set of decisions that senior sales management makes to set the stage for pricing success. These are decisions about controls, capabilities, and incentives. Controls are the rules of pricing behavior that are deemed acceptable, and are a determining factor in how those rules are enforced. Capabilities are skills and structure that put the right salesperson in front of the right customer with the right offering and the right price. Incentives provide propulsion. Incentives may be money, recognition, or freedom.
One final counter-intuitive point: The better the control, capability, and incentives, the greater sales’ freedom in pricing. Let's look at a simple example.
In general, it makes sense for sales to have some control of pricing. It is part of their toolbox during the negotiation process. Let’s say sales has the authority to discount by 15 percent. The outcome we normally see when few controls are in place is that most deals get discounted by 15 percent or so, and prices always behave uni-directionally (i.e. prices always go down, never up).
Further, the profitability of the deal decreases with every percent of discount. Sales is always stressed to determine whether they have done the right thing. Sales management spends an inordinate time in negotiations. The customer has the incentive to extend negotiations because the longer and more painful they are, the better the price they will get.
Alternatively let’s give sales the same 15 percent, but instead of a discount, let’s position it as three different service levels. At the 15 percent level, customers get 5x8. At the seven percent level, they get 6x12. At the zero percent level, they get 24x7. (BTW, I wouldn’t price these as discounts, but different price points.) Now sales can serve customers who want the low price and also those who want the highest level of service. Sales has greater freedom to use price to tailor the offering to the needs of the customer.
During negotiations, prices can move up or down, bi-directionally, based on those needs. Sales management does not have to be engaged because all three options can be equally profitable when value and price are traded off. The customer has no incentive to extend negotiations. It buys them nothing. Their only incentive is to make the decision that is best for their company. It is a move toward outcome-based pricing.
Stick to Your Guns, Stick to Your Prices
For any cynics out there who might be reading this, I am not saying that customers won’t try to push your prices lower. Of course they will. That’s their job. My point is that when you have price policies in place that force value-price tradeoffs, and enforce them, the firm has a mechanism for countering that pressure.
Needless to say, if you are going to have value-price tradeoffs, sales management has some work to do and decisions to make before sales gets the offering to sell.
- What options do we want to give sales that are realistic options for customers?
- What price points are reasonable given the different levels of value delivered?
Usually these decisions depend on strong product management, working through policies developed with pricing operations and communicated through sales management. It is sales management’s role to execute those policies, provide their sales team with the necessary training to communicate the options and their value differences, and finally to provide enforcement and incentives that reward sales people for providing the solution that best fits their customer’s needs.