We have seen that in downturns, cost savings initiatives have been typically the first lifeline for many businesses. They are typically short-lived, but can potentially backfire to harmful effect.
Cuts in sales and marketing initiative can lead to lower revenue and/or worse deals, while other strategies such as investing in sales talent and strengthening sales capabilities to close deals with minimal discounts, shifting resources, increasing sales productivity, and sales pipeline rationalization can be more impactful in the long run.
In our earlier post, we examined how negotiation can help improve sales effectiveness during disruptions. Now we’ll examine the importance of pricing discipline and pricing guidance in doing the same.
Rethink and Rebuild Your Foundation
For most companies, new sales are harder than ever and if they happen, they are taking a bite into profits. Most resources are being shifted or allocated to ensuring customer retention, with better services to support customer success.
We believe this is the right time to rebuild your commercial excellence capabilities with a holistic framework for rethinking sales effectiveness and sales behavior, investing in developing pricing skills supported with enabling technology, sales guidance with business intelligence, and customer incentives for sustaining value capture.
Establishing Situational Pricing Awareness
It’s a fact that nowadays pricing is more transparent than ever. But so is your right to challenge the relevance or significance of any data point being used against you, if you are planning to elevate the value you bring in a purely transactional relationship. Competitive data is always one of the hot topics in our engagement with customers. Most organizations fail to realize the benefits of asking their customers for it directly.
Think about competitive pricing data as a value driver in your negotiations. Competitive information is typically one of the key areas of contingency when it comes to being able to negotiate openly about pricing. Being able to access the very benchmark information that your customers utilize against you can help you to bring significance and transparency into your own competitiveness by committing to deliver predefined, agreed-upon savings.
Obviously, being able to validate and establish market significance of that data source is paramount for not shooting yourself in the foot, But there’s a clear benefit in establishing that level of trust with your best customers by procuring that business intelligence, if it’s not available otherwise, and elevating the relationship with buyers by appeasing your customer’s expectations.
Maintaining Pricing Discipline
As market dynamics change, demand is softer or more volatile; companies might give in very easily to a customer asking for a price reduction.
Different local market environments create different opportunities for pricing, and you need to understand those differences to set prices optimally. We continue to see that otherwise rigorous companies are surprisingly relaxed about pricing discipline.
Price concessions are de facto not always apparent or visible to customers. So in order to protect margins, companies should invest in the right foundational capabilities to avoid unwarranted margin leakage.
Pricing discipline is key to protecting your business and sustaining profitable growth. Pricing excellence is not only about pricing your products and services right: The key aspect is having the pricing discipline to make it sustainable. Pricing it too high or too low just changes the speed at which you kill your business.
In a downturn, every dollar of margin counts. But a dollar coming from an existing customer is different than one from a new one. The right customers should get the right price; price it too high and you will be putting the transaction before the relationship. It’s hard to have a repeat customer and nowadays, with pricing being transparent, it can be dangerous to do this. It’s better to look at growth rate, relationship quality, market power, et cetera. and provide rebates tied to compliance.
As for pricing too low or having a breakeven mentality? Like the saying goes: “Revenue is vanity, profits are sanity and cash is reality.” Revenue without margin is empty calories., It keeps you busy or distracted from profitable sales or doesn’t allow you to grow. Winning sales feels good, but not at the expense of making other departments miserable (i.e. services and operations).
Having pricing guidance and pricing discipline is about trying to make selling easier. The key to sustaining pricing discipline is bringing transparency and context into the quoting process. Higher price should only be a reflection of the higher value you create, the pushback you will get from customers is not that the price is too high but more about they don’t know how it makes you worthy paying more to obtain. Helping them to see otherwise is called selling, and it’s a different thing than pricing.
Pricing Discipline is Rooted in Analysis of Facts, Policy Enforcement and Preparation
A quick pricing and profitability analysis helps pricers and commercial owners to get a clear understanding of current and potential margin leaks and develop a plan to address them. By having transactional profitability available in detail, a price waterfall can reveal all the sources of leakage.
For example, based on our experience, most companies often fail to charge when customers don’t meet contracted minimum-order sizes try to claw back volume discounts when quantity commitments aren’t met. The problem with an unnecessary price reduction is not only the direct bottom line impact in the short term, but also how difficult it becomes to change that frame of reference in the future to elevate and tie brand perception and value delivered with price paid.
By better providing a factual context beforehand the negotiation, sales teams can architect and design tradeoffs as part of the overall offering that go beyond price concessions and at least bring transparency and the ability to ask for things in return. Business insights, such as providing a frame of reference within the negotiation, last price paid, price bands with average volume transacted, cohort analysis of peer-based pricing, win/loss, unit purchased versus quoted, competitor information, and normalized net prices tied to volumes are easily available…but hardly delivered to the front lines. This can have a massive impact on defending pricing recommendations.
This information brings credibility to the seller when defending a price, as well as accountability in adhering to pricing guidance. A natural implication of this point is tying in establishing metrics for price adoption and compensating your sales teams based on adherence and margin lift.
Mastering Pricing Execution
Most companies spend most of their time and efforts discussing pricing strategy and internal alignment than around pricing execution and measuring price realization.
In order to have a more robust pricing execution framework, so value can be captured at scale in the long run, organizations need to couple pricing discipline and governance with advanced analytics and technology.
The most mature pricing organizations spend most of their time assessing their value against next-alternative options. There are many mechanisms of delivering pricing in exchange of value (subscriptions, bundling hardware equipment with their more lucrative consumables, freemium, and so on), but since customers value your products differently, these mechanisms only work effectively if they are supported with the proper segmentation that accounts and captures customer behavior and a granular and dynamic pricing execution framework to adjust accordingly:
- Customer and product segmentation: This helps to enable value-based pricing strategies paired with customer and product differentiation (good, better, best), customer value contribution (high, medium, low), and price-discount recommendation envelopes. This capability provides knowledge at the segment level of price sensitivity and profitability.
- Dynamic execution: You need to be able to quickly react to market dynamics by responding to cost changes, competitor moves and effectiveness of pricing decisions. This must happen within a governance framework that imposes controls and best practices. The cadence for making for changes should depend on industry dynamics and less on company maturity. Sadly, this is often the other way around.
- Lastly, sales incentives should be tied to business value and customer compliance. Discounts need to be standardized within a clear governance process, managing escalations and exceptions. They should be aligned with driving market share and success metrics on different channels. Designing the right incentive plan can have an enormous impact on sales effectiveness, and there’s nothing more impactful to an organization than winning the right customers at the right price. As you imagine, sales incentive plans are not very often tied or directly related to an optimal pricing strategy; this in turn often leads to undesired outcomes. You might want to revise your team quotas or reset incentive payouts to keep your sales teams motivated or also fine tune them to limit the decline in sales during this downturn.
Sales incentives and compensation should be tied to maintaining pricing discipline and ensuring customer profitability. Incentives are typically more effective when used to influence customer behavior in different segments. Some can be promos versus rebates versus bundling discounts. But utilize them with caution in order to not dilute brand value or deliver conflicting messages to customers.
Harnessing Value Realization
These three areas should all be managed in conjunction in order to regularly monitor how they are affecting value capture.
Most of your selling time should be about the offering and not the pricing alone. Sales and pricing organizations need to find the optimal balance between managing list prices and all other pricing and non-pricing items. The first step to shift the conversation from price to value is to include visibility of all factors included in the offering, i.e. payment terms, packaging, shipping, returns, cost to serve, warranties, et cetera.
Which brings me to another point: There are many factors affecting the value that companies pocket in the end, so pricing realization is a cross-functional team effort, where product marketing, finance, sales, pricing, operations, and others should be involved and accountable for company pricing initiatives. If pricing is only controlled by sales, undisciplined discounts are often the result.
In order to prevent that, the pricing function needs to be owned by the highest levels of the company, even the CEO, so there’s full transparency about what each customer is bringing to the table. Implementing this is a good indication of the level of pricing maturity within the organization.
When this is the case, providing analytical tools to the sales force for tracking and monitoring pricing performance becomes a must for organizations that want to capture every customer touchpoint/interaction between CRM and ERP and how they are translated into price waterfall.
But it’s not only about the functional solution. It’s also about how they use those analytical assets. Using predefined playbooks for business analysis is a proven path to value capture, improving results by structurally drawing insights from data. The KPIs employed should not only focus on margins but also on guidance adoption, discount escalations, overrides, promotional effectiveness, rebate compliance attainment, and so on.
In conclusion, increasing pricing discipline and achieving pricing maturity is a never-ending effort. You should define metrics and processes to assess the value and incremental margin derived from different pricing initiatives, like repricing new customers, gaining new business, improving long-tail product pricing, or optimizing low compliance customers. As part of this, you ought to define control groups for focused price sensitivity analysis as a step toward further evolving your pricing strategies into micro-segmentation.