by Bruce Patton
For companies that sell their products to other businesses at negotiated prices, a product launch calls for careful decision making about how to set initial pricing and manage or control the subsequent negotiations for discounts. Insufficient planning and process controls on sales force negotiations can lead to a too rapid erosion of target ASP (average selling price) and suboptimal captured revenue, especially in the internet age, when the results of individual pricing negotiations are often quickly disseminated, becoming precedents for other negotiations.
Pricing should be set with an eye to the value of the product’s features and benefits (and any disadvantages) to customers as compared to competitive or prior products. One should also consider customer expectations and market benchmarks to assess the perceived fairness of various pricing options and therefore their impact on customer perceptions and relationships. And one should think through what you expect to happen to pricing over time. How long will the product’s comparative advantages persist until competitive products catch up? Typically one should expect pricing to adjust as the product’s comparative advantage declines.
A fundamental question to consider is whether price negotiations make sense at all. Selling products the way most dealerships sell cars has drawbacks. It tends to create adversarial relationships. More difficult and demanding customers tend to get better deals, which can really annoy easier-to-manage and larger volume customers when they find out. And in the internet age, they often do, leading to a steady erosion of pricing over time. Making all sales negotiations also typically requires a larger and higher-paid sales force.
One alternative is simple fixed pricing, but in most cases this is unlikely to please or feel fair to many customers, since it treats everyone alike, whether small or large, longstanding and committed or just a one-time buyer. A more sophisticated alternative is a pricing matrix, or what is sometimes called “black box” pricing. You have a basic list price and a list of on the-merits discounts for things like volume, length of commitment, geography, multiple product commitments, customer industry (e.g., profit vs. nonprofit or educational), more economical logistics, and so on. Or put another way, you have a black box with multiple levers one can adjust for different variables. But in every case, a given position of the levers will always produce the same output price. The role of the sales force is to help a customer find the option that offers the best combination of pricing and benefits given the customer’s needs and constraints.
While a pricing matrix may make increasing sense in the internet age, it requires a major shift in one’s sales organization, and also in customer expectations. It may not be something you can implement in the short term or for a single product. In that case you should think about what you can do in terms of processes, guidelines, and tracking to ensure that traditional sales negotiations are more likely to produce coherent and defensible results and avoid bad precedents.
The first approach you can take is to approximate some of the advantages of black box pricing by creating guidelines for discounts that focus on legitimate market reasons for why a customer might deserve a discount (e.g., volume) and discourage rewarding difficult customers. The sales force can be authorized to make deals within the parameters of the guidelines without review of sign-off. A launch process with worked examples and role plays can familiarize people with the new matrix, the rationales for on-the-merits discounts, and ways to have positive conversations with customers about what is and isn’t available in the new model and its advantages for them.
When a salesperson wants to go beyond or do something inconsistent with these guidelines, it is helpful to establish a review and approval process, to limit the ability of any one salesperson to create a bad precedent or offer a discount for the wrong reasons. This can involve a pricing committee or review board, or just running it by the product manager. The sticking point will come when the salesperson says an important custom-er will walk if they don’t get a discount beyond the guidelines. This is a critical moment that everyone will watch. If the discount is granted, the gig is up, and pricing discipline will quickly erode.
There are two problems here. One is that while the salesperson may be right that the customer will walk, many studies show that risk to be much lower than feared. Moreover, the salesperson can reduce that risk by how they present the price. If they explain the legitimate standards behind the pricing before sharing numbers, they may begin to change the customer’s expectations. But a salesperson measured only on volume doesn’t have much incentive to do this. It’s easier and more profitable for them to just try to make the customer happy in the traditional way, and they have absolutely no reason to want to take any risk that the customer does walk away. So the salesperson’s incentives are not aligned with what may be best for the business.
By demanding approval through a review process, you create the opportunity to avoid this dynamic. But you won’t actually make a difference unless and until you refuse to approve a dis count that doesn’t meet the guidelines. Otherwise you’ll have no credibility with sales folks, and there will be no reason for them to work to change customer perceptions and expectations. The more consistently you refuse the better, especially if it becomes apparent that customers are not summarily walking away as a result. Of course some customers may be unhappy with the change in your way of doing business. Some may walk, at least for a time. This is probably unavoidable. Customers too will be looking to see if you really mean it. Nobody wants to change if they don’t have to. The strategic question for you, however, is whether the overall gain in ROI for your product through more systematic and higher pricing outweighs the lost revenue from those few customers who go missing for a time.
Obviously there is much more to the topic of pricing, product launches, and pricing and sales force management. This brief essay is meant simply to over-view some important strategic themes about negotiated product pricing too often overlooked, just to get you thinking. If these questions are relevant and timely for your organization and you would like to discuss them in greater depth, please feel free to be in touch!