Pricing Courage

 

roulette-finlandsfarjaBeing a pricing theorist/consultant/coach is much easier than being a pricing practitioner.  As a guide, we pontificate about Value-Based Pricing.  We point out pricing leaks.  We offer suggestions on fixing them all.  Then we leave.  If it worked, we were brilliant.  If it didn’t work, well, obviously the company didn’t implement it properly.  We’ll take the credit and shirk any blame.

As a practitioner, you have to stick around and live with the consequences.

Nowhere is this more obvious than when you’re pricing a single deal.  A salesperson comes to you with a HUGE deal and says, “the customer needs a 30% discount to make this deal happen.”  What do you do?

There are a lot of steps you already know to take: make sure the salesperson is selling on value rather than price; help the salesperson realize the value of your solution to your customer; create new tools to help the sales department sell value; start by offering a smaller discount; and many other things.  But in the end, the purchasing agent is playing hardball and insists on that 30% discount.  They say “take it or leave it.”

Do you take the deal or not?  Taking it ensures you get that revenue.  Big win for the company.   This is the easy decision.  Most companies will take it.  However, by taking the deal two bad things happened:  1.  The company gave away profit unnecessarily.  2.  The company set a precedent for the sales team that it’s OK to sell on price.

What if you don’t take it?  First, you will probably win the deal at a higher price.  Remember how you got here.  Somebody besides purchasing probably made the decision to buy your product.  Although purchasing may be saying you have competition, you probably don’t.  Purchasing departments, in order to buy at lower prices, take training on how to manipulate and mislead salespeople.  Odds are very good that if you refuse to take the deal, purchasing will come back and offer you much better terms.  Once they do that, you know they were playing you and you should be able to stand firm to get your price.

Second, if you don’t take it, you are setting a precedent for your entire sales team that you don’t sell on price.  Other salespeople will start to focus more on selling value and less on selling price.

What happens if you lose the deal?  OUCH.  This is where the courage comes in.  Making a decision and sticking with it is scary.  You will lose some, but you have to decide if it’s worth it.

Imagine over the course of a year you are presented with 10 deals of equal size, say $1M each.  Each buyer asks for a 30% discount.  If you say yes to every one you made $7M in revenue.  If you say no to every one of them, how many do you lose?  You could lose 3 of those deals and make the same revenue, $7M.

Now think about profit.  If you have marginal costs of 50% of list price or $500K, then when you say yes to all 10 of the deals you made (700-500)*10 or $2M in profit.  If you say no, you make the same profit if only 4 of them say yes.  Six buyers can say no deal and you still make the same profit.

Mathematically and statistically it probably works in your favor to not give in to those discounts.  The problem lies in when you lose a deal.  You feel bad.  You look bad.  You have to have the numbers and documentation to support your decision.

One other important consideration though, how often do you see really big deals?  If it’s 5 or 10 times a year, then statistics are on your side.  If it’s only once a year, or once a lifetime, then this may not be your best decision.  Sure, the expected value (if you’re a stats geek) is higher by saying no to the discount, but what if statistics don’t work out in this case?  This is why casinos have maximum limits on bets.  Casinos know in the long run, after thousands of wagers, they will win.  But they are at risk of losing any single bet.  If that bet is too large, they may lose too much.

You are probably now wondering what to do when faced with a deep discount situation.  Here’s my advice:  Hold your price if you see similar deals often enough that you can afford to lose a small percentage as long as you win most at a higher price.  Also, be sure to document every deal where you said “no.”  You want to track and report on the revenue and the profit gained or lost by those decisions.  Also, it will help you make better decisions in the future.

Oh, and if you take my advice and it doesn’t work out for you … you probably implemented it wrong.  😃

Good luck.

 

Photo by Uutela