The 4 Keys to Profitable Pricing

Customer Experience
Customer Experience
How does a company create an environment that will allow sellers to work through conflict so that they price for profitability? It is critical to improve capabilities in the following four areas.

Even today, pricing decision-making continues to be one of the least-understood levers for achieving high performance in B2B transactions. Most companies recognize the importance of price as a driver of profitability and have carefully crafted pricing strategies to maximize the bottom line. But the hard truth is that most pricing strategies fail to generate the levels of revenue and profitability that they ought to deliver. This often happens because sellers are too accommodating in response to pushback from buyers. Many times, their primary motivations are to "make the sale" and maintain a good relationship-even at the expense of profitability.

How does a company create an environment that will allow sellers to work through conflict so that they price for profitability? Based on our experience, it is critical to improve capabilities in the following four areas:

1. Understanding and embracing the 1 percent principle

For many businesses, a 1 percent increase in average prices lifts operating profits by anywhere from 7 percent to 15 percent. This concept works both ways, so a 1 percent decrease in price can be detrimental. Negotiation concessions such as splitting the difference, rounding down, and providing free add-on services may not be noticed at the level of the individual deal, but the cumulative negative financial impact can be substantial. Educating a sales force about the collective impact of its actions is just one of many approaches that can help alleviate price-diminishing behaviors.

Sales teams that understand the 1 percent principle are far more likely to seek out the easy wins for their company rather than easy ways out of a challenging discussion with procurement. To enable this, the linkage between price and volume should be made clear. Based on the history and understanding of customers, sellers should be able to identify the points at which they can increase price without it affecting their ability to close the sale.

2. Maximizing pricing levers

In responding to a price-discount request, the ultimate goal in the negotiation process should be to change the momentum of the discussion away from a pure pricing exercise. Sellers should follow a simple process to achieve this goal.

First, it is important to not simply give in, but instead to find out what is driving the request. For example, is it driven by the budget or mandated by corporate management? The seller can then use this understanding to explore potential pricing levers to pull when responding. Consider factors such as the project's resource intensity, modified payment structures or schedules and the terms and conditions required to meet mutual objectives. Finally, sellers should work on structuring their responses to the buyers so they can get the customer to understand-and agree-to an outcome that is much closer to the seller's stance while maintaining mutual benefit.

3. Controlling the behaviors that impede profitability

Experienced salespeople are familiar with buyers' standard ploys-such as demands for volume discounts "since we're a big customer." However, some salespeople will be spooked into early concessions by the psychological and theatrical aspects of negotiating price.

To ensure that sales people don't limit their focus to the purely rational aspects of negotiations, the supplier's sales leadership should first examine their company's behavioral landscape. For example, how willing are salespeople to say "no"? To promote profitable pricing, a seller's recognition and rewards plans need to align to the pricing strategy and not send conflicting messages to the field. If, for example, there is acceptance of "win at any cost" deals, then sellers will be too accommodating at the negotiation table.

Sales leaders should also equip their sales teams with the means to assess the behavioral landscapes of their customers and prospects. Behavioral elements, such as anticipating a response to good cop/bad cop tactics, should be as much a part of the preparation as discovery of the customer's financial status and supplier options.

4. Improving the balance of resources and skills

Promoting profitability also involves ensuring a more even match between buyer and seller. Procurement teams have made great progress in recent decades, acquiring skills and leverage that eclipse those of many suppliers' teams. To redress this imbalance, it is necessary not only to augment suppliers' skills in negotiation and solution selling, but also to ensure that the right teams are fielded for the negotiation situations encountered. Further, the sales organization should have all of the appropriate pricing capabilities, including the metrics and incentives that support the right skills.

What are the right skills? At a minimum, sales leaders should ensure that their teams understand the pricing strategy of the company or business unit, that they are deeply knowledgeable about the product and its market environment, and that they have mastered the fundamentals of negotiation. Beyond that, sales executives should acknowledge the variations in negotiating circumstances and in the skill levels required for each.

By adhering to these principles and focusing squarely on behavioral change, sales teams can produce substantial improvements in profits and help their organizations in the quest for high performance.

This article is adapted from The Oxford Handbook of Pricing, published by Oxford University Press, June 2012.