Let’s Address the Tension Between Sales and Pricing
Many companies may consider strategic pricing to be a relatively mature opportunity because it’s been around for a few decades now. After all, lots of companies have built pricing matrices, established controls and put pricing managers in place. While this may be the case, many still treat pricing as a check-list activity, without any intention of making it a key strategic and financial capability.
Despite a more mature pricing practice across distribution when compared with recent decades, I believe strategic pricing is entering a new era in which new possibilities will provide yet another wave of opportunities. As one of the early pioneers in strategic pricing, I’d like to present an updated vision for it that resolves old tensions and provides a modern agenda to serve as a profit engine for the 2020s.
The Tension Between Sales Strategy and Pricing Strategy
There is an uneasy stalemate, or tension, between sales teams and strategic pricing that we’d like to address first. For many companies, this remains the frustrating limiting force on the strategic pricing opportunity. Salespeople believe that strategic account management can’t be unhinged from pricing strategy or actions. They will often push back against higher margins, rejecting recommendations for a given account because they believe the resulting price points will prevent it from achieving its growth potential. These instincts are largely based on their previous experience or what they’ve witnessed of others.
To add to the tension, sales metrics and incentives largely don’t align with pricing strategy. Although sales growth is generally less impactful to the bottom line than strategic pricing, most sales forces’ primary KPI is revenue growth. Because of these revenue-based goals and incentives, sellers are willing to compromise margin to make a sale, doubting that they can do so at higher margin points.
Sales growth is important, but it doesn’t always translate directly to profitability. A two percent increase in sales volume may increase profitability by only fifteen percent, while a two margin-point increase in price point can improve profitability by fifty percent (dropping straight to the bottom line).
But, in spite of this reality, sales teams remain focused on the metrics by which they’re measured – revenue growth.
How 2% Improvements in Key Profit Drivers Impact the Bottom Line
How E-Commerce and Modern Business Development Affect Pricing
As distributors continue to evolve in the ways they serve their customers, traditional strategic pricing encounters additional challenges.
For one, E-commerce adoption can be a hindrance when the existing pricing strategy doesn’t support it. With a combination of increased pricing complexity (visitor pricing vs. logged-in pricing, for example), enhanced customer stickiness and lower cost to serve, the stand-alone pricing strategy faces further challenges.
Many distributors have realized how important it is to integrate e-commerce pricing into their overall sales, pricing and profitability strategies. When they don’t, they risk investing time, money and energy into e-commerce platforms only to realize too late that the old pricing strategy is at odds with the new omni-channel marketplace.
Similarly, companies that have implemented new-age business development functions face similar hurdles. With a growing recognition in the industry of new models of business development, inside outbound-calling sales teams, and upstream digital marketing, the old pricing paradigm is yet another barrier to transformation. Too often we set up that new, high-energy business development team, only to discover that the pricing strategy hasn’t evolved to support new customer conversion at scale with pricing appropriate to different stages of the customer lifecycle.
The Path Forward
The modern reality, of course, is that true sales and profit optimization requires an integrated, holistic approach to dynamically manage all four levers of profitability – pricing, sales growth, cost of goods, and cost to serve. This is what we refer to as The Profit Diamond. Any one of these levers, or a combination of them, can be the best path to success when optimizing a given account’s profitability.
- Is it better to raise a customer’s price by X percent, or to hold on price and push for greater wallet share?
- Should you aim for better vendor cost support?
- Should you choose to support the customer and address wasteful cost to serve?
The simple, yet profound truth is… it depends. With a street-level understanding of these dynamics, sales teams have historically pushed back on strategic pricing. While they have some intuition based on experience, they’ve lacked the rigorous, data-driven strategic account management disciplines and actionable sales and profitability insights to counterbalance their resistance to pricing.
With the data-driven insights available to distributors today, companies can guide sales teams to make these careful decisions based on what is actually hindering profit improvement on a per-account basis.
Strategic Pricing Must Evolve to Support Sales
With a growing interest in sales enablement, smart sales leaders are mastering the forces of growth and profitability in new and transformative ways. They will ultimately undermine pricing until the tension among the profit levers is comprehensively and holistically resolved.
Contrary to popular opinion, strategic pricing is not a mature discipline. It is an immature discipline that needs to evolve to break the sales stalemate in a transformed world.
The future belongs to those who evolve. And to those who evolve faster and more effectively than their competitors. If you’d like to explore the pricing and profitability path to the future, we’d love to talk. Your sales team will be glad we did.