We’ve all had this awkward conversation with customers:
“Can you go any lower? I can’t afford that, but if you can drop the price just a bit, I might be able to make it work.”
It’s uncomfortable but not uncommon.
Sales reps and account executives face price negotiations every single day. How they handle these conversations is the difference between a profitable deal and an unprofitable one. What truly separates successful sales reps from the unsuccessful ones is much more than their close rates; those who can hold the line with price discipline and sell as close to the list price as possible are the most valuable members of a company’s sales team.
Price Discipline: The Extinct Revenue Strategy
Price discipline makes a big difference. Unfortunately, it’s almost nonexistent. According to a Vantage Partners study, almost 60% of companies reduce pricing for half of their deals. 25% of companies include price cuts on almost all of their deals.
And these deviations from the list price are no small potatoes. The study also revealed half of these companies consistently discount prices by 10-24%. Most companies just bleed revenue during pricing negotiations with their customers.
Why is price discipline so rare? For starters, most businesses simply don’t make it a priority. McKinsey estimates fewer than 15% of companies commit to pricing research. Within these companies, most pricing responsibility falls to the front line sales reps, who are often focused on two metrics – volume sold and close rate – that are inherently in tension with pricing discipline. With metrics encouraging discounting and no strong management commitment to manage prices, it should be no surprise that price discipline is the exception rather than the rule.
The short-term effects of constant deviations from list price are pretty obvious ─ margins never reach their full potential. Revenue takes a hit as a result.
The long-term effects are often less obvious, but they are equally harmful:
1. Rewarding bad customer behavior:
Sales reps end up rewarding customers who only care about price. These are typically low-margin customers who already receive too much attention and drain energy from your company. Sales reps should instead focus on loyal customers who appreciate the overall value your business delivers.
2. Impairing future price increases:
Every company has to increase prices eventually, whether driven to it by inflation or by an opportunity to capture an increase in the value of its products and services. If your sales reps give a discount every time your customers ask for one, they “train” customers to believe your list prices are not real and to expect you to back down every time they push for a price concessions. This makes it infinitely more difficult to push through price increases. On the other hand, if your customers believe you have principled price and will stick to it, they are far more likely to take your price increases seriously, giving you a real chance to make them stick.
3. Feeding the gossip mill:
Customers talk, purchasers change jobs, and competitors acquire one another. You have to assume everyone in the industry is going to know about your discounts sooner or later. Unless you have a good defense and can justify your pricing exceptions, you may have to give the same discount to other customers later down the road.
4. Triggering a potential price war:
If your competitors sniff out your reckless discounting behavior, they could counter with their own price exceptions in an attempt to undercut you. This can quickly spiral out of control, resulting in a price war. Only customers win those.
5. Solidifying bad sales habits:
Bad habits are difficult to break. The more price exceptions your sales reps give, the more difficult it becomes for them to sell at list price. Holding the line on pricing, however, forces your sales reps to become practiced at value-selling, and success in doing so increases their confidence that customers will pay higher prices.
Price Discipline Action Plan
Step One: Break the Cycle ASAP
Weeding out unprincipled discounting should be your number one priority. Evaluate your invoices to identify your biggest pricing discipline offenders. Explain to these sales reps how they’re negatively impacting the company, and outline future consequences for their discounts. Set a cap on price exceptions, and let them know you’ll be watching them closely.
Step Two: Eliminate the Fear of Losing Customers
Of course, some sales reps may take the communication above and panic about losing customers who will go elsewhere to get discounts. Let them know you’ve got their back. Don’t criticize them for losing volume, or they’ll end up giving away discounts the next time around. If your sales reps don’t lose a customer every once and a while because of refusing to discount, they aren’t being aggressive enough on price.
Step Three: Incentivize on Strong Price Negotiations
Instead of taking the traditional route of basing sales reps’ incentives solely on volume and close rate, reward them for how closely they stick to list price as well. Incorporating price discipline into your incentive strategy communicates to your sales team how they directly impact the company’s bottom line with their closing tactics. It also trains them to focus more on deal profitability rather than merely closing a deal.
Step Four: Make Value the Primary Focus of a Deal
When customers ask for a lower price, have an explanation ready, and leave costs out of it. Instead, shift focus to value. Start with value propositions related to the individual product or service itself. Then expand outward to show how the entire relationship – from customer service to delivery to ongoing support ─ is valuable for a customer. Sell on the total package and how the customer benefits from the entire relationship. Our team recommends having a list of unique value propositions (UVPs) handy for sales reps to reference during pricing negotiations with obstinate customers.
Step Five: Encourage Price Transparency
Build a foundation of trust with customers by preparing them for price increases in the future. Communicate how these changes will affect existing discounts, and outline expectations. Transparent pricing communication allows customers enough time to plan and adapt their budgets, with minimal impact to their bottom lines. This straightforwardness also reassures customers your company understands their needs to explore competitive prices, which further emphasizes confidence in your company’s offerings and customer relationships.
Pricing Discipline Made Easy
Of course, all of your efforts must build upon the foundation of a strategic pricing strategy. How are you making sure your prices achieve maximum profitability at the transaction level?
KiniMetrix, our cloud-based business analytics software, helps you accurately evaluate your pricing strategy and fine-tune it for greater profitability. Give your strategy an immediate boost by signing up for a free trial today.