A major driver behind undertaking a pricing transformation effort is the acknowledgement that price negotiations both take too long and also lead to discounts and rebates that are too big. Executives are looking for a way to bring these negotiation decisions under control in the hopes of reducing price erosion and improving profit capture.
Pricing executives are good at meeting that goal. A typical pricing transformation delivers a 2% improvement in prices without loss of sales volume with or without a software implementation. The improvement is a direct result of reigning in price negotiations, replacing them with a calibrated strategic pricing policy, and targeting specific areas where prices could be raised for some customers. The process utilizes statistics and machine learning to drive intelligence augmented decision making. The result is more accurate pricing.
Stated simply: Pricing transformations improve profits by improving accuracy and control. In practice, however, it isn’t so simple.
Pricing Accuracy Requires Less Price Negotiation
For example, consider a set of transactions for the same offering that range in price within some band between a high and a low price.
Statistically, one can find where the average price on this offering rests. This average price is an accurate representation of the price the company has been able to capture. Strategically, the company may choose to raise or lower that price in a controlled manner (preferably raise). But, as a first goal, executives need to determine where the average price rests.
If the company was to seek to do no more than reduce uncontrolled discounts and rebates resulting from price negotiations by enforcing a single accurate price, it may be tempted to use the average price as the new price.
Yet now, all price negotiations must stop just to retain the current profitability. If the policy surrounding price negotiations is not changed, then the result would be to do no more than lower prices overall, as the new range of prices shifts towards a lower price floor.
To prevent that, executives must raise the target price and reduce the acceptable range of price negotiations. The result may look as follows:
Less Price Negotiations Threaten Sales Power
Deploying a more accurate target price higher price floor means salespeople can’t negotiate prices to the same degree as they did before. Instead, the pricing policy delivers them a realistic and accurate target price, and sales must be held accountable for hitting that target or near to it.
Reducing the negotiating range of salespeople in their interaction with customers is reducing some of the power salespeople have over how customers are managed. Instead, that power is shifted to pricing with the support of marketing, finance, and the CEO, and enforced through pricing policy.
Many times, sales executives won’t want to let go of that power. They will express fears that the loss of that power will result in the loss of sales, and that the whole pricing transformation itself is doomed to harm profits, not help them. As such, they will argue for a wider allowable range of price negotiations.
You can’t have your cake and eat it too.
While the accuracy of then new target price can be defended through pictures, graphs, statistics, and simulations, one must address a simple tradeoff: for every little bit of price negotiation you want to allow, one must raise the target price a little more.
A simple table can be used to make the tradeoff explicit. From this table, one can see that if the expected average price erosion resulting from price negotiations is 5.0%, then price must be raised by 5.3% above that which accurately represents the overall expected average price to capture. If sales wants even more freedom to negotiate prices, then prices have to be raised even higher.
It’s a tradeoff: pricing accuracy for negotiation range. And therein lies the challenge.
Recall, the pricing transformation delivers its price improvement by reigning in price negotiations, replacing them with a calibrated strategic pricing policy, and targeting specific areas where prices could be raised for some customers. The result is more accurate pricing within a narrow range of unpredictability.
If the range of allowable price negotiation is not reduced, the pricing transformation will have failed.
Culture Change Required.
Reigning in price negotiations is not as simple as delivering more accurate target prices, aligning incentives, and making rules. It requires cultural change as well.
Sales executives and their teams must become comfortable with the new pricing policy prior to them accepting the loss of price negotiation latitude. This means:
- Pricing executives have a responsibility to help sales understand the impact of the new pricing policy, both on them as individuals and as a sales team.
- Pricing executives must communicate clearly not only the reasoning behind the new pricing policy, the challenges it will address, and the expected outcome, but also how the new policy will impact the ability for sales to meet their objectives and manage customer relationships.
- Pricing executives must also share specific changes sales should implement to help them meet their objectives and perform.
- Pricing executives should even work with sales to co-create an implementation plan.
- Once implemented, pricing executives must support sales in executing the plan to drive the implementation.
- Afterwards, pricing executives should report how well the new policy performed and identify potential areas for improvement.
It is change management 101 on steroids.
Political Skills Required
For a pricing transformation to succeed, one must accept that some decision-making authority may shift across executives. Those that once enjoyed freedom may find their new constraints uncomfortable. Others who may have held little or no responsibility and accountability may suddenly find they have a new set of job requirements. In fact, shifting decision-making authority is the purpose of the pricing transformation in the first place.
Moving and shifting decision-making authority within an organization requires political skills. These political skills include the adept use of emotional intelligence and change management – skills most often found in senior executives. While some may think of pricing as a purely analytical field, it is far more than that. Pricing requires a senior executive who must reach across departments to drive improvements through empathic communication based on rational business logic.