A question from a reader:
Good morning Mark. The podcasts are excellent, as always. But I have noticed there may be one point you have not covered: “Why should sales not be in charge of pricing?”
Thank you for the question. I can think of two reasons why sales should not be in charge of pricing.
- Their incentives are wrong. Most salespeople get a commission as a percentage of revenue. This partially aligns a salesperson’s incentives with the company in that the salesperson wants to sell more revenue, but the incentives are not aligned in terms of profit. A salesperson has more incentive to discount than the company.
As a slightly exaggerated example, imagine a sales situation where the product sells for $100. The company’s costs are $90, so the company makes $10 in profit. The salesperson’s commission is 1% so he/she makes $1. Now a customer asks for a 5% discount. If the salesperson accepts this (because he/she is in charge of pricing), then the company profits are cut in half to $5. However, the salesperson’s commission went down only 5% to $0.95.
It is possible to create sales incentive plans that more closely align the company and the salesperson’s objectives, but they are harder to implement and most companies don’t do that.
- Salespeople often sell many different products. Their job is to build relationships and sell value, not to study competitors for each product and determine the value of your product relative to each competitor. That’s a lot of work and requires a deep understanding of your products, your markets and your competitors.
In light of these two reasons, I could see a situation where it makes sense to let sales control pricing. If they only sold one or two products, and you used an incentive scheme that more closely aligned their incentives with the company’s preferences. Both of these are possible, but they are not very common.