August 6, 2014
Recently, I was facilitating a one-day pricing workshop with a mix of employees from different functional areas and geographic regions of one company. Assembled in the group were ETL experts, Product Mangers, Finance, Sales and Executive Mgmt. When it came time to cover the Price Waterfall construct, I was doing an exercise where the group looked at the Vendavo Accelerate waterfall and compared it to their business. As we talked through some of the strategic discounts and did the revenue walk from left to right, I saw one of the South American sales guys light up.
We were focusing on the price setting adjustments, which are not areas that are traditionally considered as negotiable at the customer level. The Sales Manager explained his sudden enthusiasm saying that “from a customer perspective you just flip this thing upside-down.” He’s right, of course.
Not all discounting is a zero sum game, but generally speaking if you were on the buying side of the sales equation, you would be working to make each of those negative adjustments as large as possible so that the supplier pocket margin was as low as possible. The reason the Sales Manager was excited was partly that he was tracking with our discussion and partly because he had determined a way he could use the price waterfall in his sales process, up front rather than retrospectively reviewing transactional performance.
His plan was to go through each adjustment with his existing customers and show them the total value of the various discounts they were already receiving. You see this on your grocery bills with the “You Saved $X” calculated at the bottom, and it is especially prominently used with car insurance (safe driver, low mileage, good student, home owner, etc).
If your organization moves from a pricing structure which allows a large degree of control at the local (or customer account level) to one which builds strategic discounts into a “target” or “market” price, then you may feel like you’re given less margin room to work with. For the Sales Manager in our pricing workshop, the response was to help his customers see the right hand-side of the waterfall as “pre-negotiated” discounts, which would be automatically applied to their pricing, ensuring his customers were explicitly aware of and could quantify what a good deal they were getting.
Sometimes customer awareness of their discounts is lower than you might expect. A friend of mine, Laura, teaches yoga and does various types of natural healing services such as massage. She relayed a story of how someone had asked her to do a 1 hour message for his mother at her house for $50. He thought he was being generous with Laura and getting a great gift for his mother. She felt like he was asking for a special rate because she usually charges $75 for this service and requires the customers to come to her, where her equipment is already set up and her commute time is minimal. In this case, Laura was struggling with a response because she didn’t want to seem ungrateful or turn away future business, but she also felt it probably wasn’t worth the rate she was offered.
If Laura had an al a carte rate list, or a price waterfall, she could have showed the customer that the “list price” was $75, and additional travel was $10 plus a $5 setup charge. To do the job for $50 would be an effective $40 discount. She could have agreed to this as a “friend rate,” but didn’t want him to simply pay the discounted rate without an understanding of the exceptional deal he was getting. That way she could make this a one-time price, rather than simply setting expectations of low rates for the future.
Whether you’re pricing your own services in a small business or negotiating deals in a B2B sales role, helping customers to understand the discounts they are getting can help eliminate the need to layer on additional discounts and can improve sales margins. Try looking at your Price Waterfall from a different angle and see if it seems more customer friendly.