Strategic Pricing and Negotiation: A Powerful Pairing

strategic pricing and negotiation skills

Strategic pricing is about more than just the numbers. After working with over a thousand companies across a wide range of verticals, we’ve continually seen that successful pricing initiatives depend heavily on the sales team’s ability to sell at target price points.

For years now, SPARXiQ has complemented our pricing services with negotiation training, either in-person or online. In fact, it was one of the first additional products that SPARXiQ (SPA, at the time) added to its product line after over 20 years as a leading pricing service provider.

Negotiation training to go with a pricing project? You may be asking what that’s all about. Many of our clients have asked exactly that. In this article, I’ll discuss the role that key negotiation skills play in supporting a successful pricing strategy.

The Behavioral Side of Pricing

Let’s start with an example. Suppose a sales team often discounts prices and routinely deals with price pressure from their customers. When buyers mention competitors or react to a price, sellers often drop prices by 10 percent or more. Now, to add pressure on these sellers, the company is rolling out a strategic pricing initiative to add margin where possible while also keeping up with increases in the costs of doing business.

The company enters the new target prices into the system and moves on to the next project. What happens then? When the customers hear of these price changes, will they go right along with it? Are the sellers going to be able to successfully capture these higher target prices, or is the team going to buckle under pressure and discount at similar levels as before, or maybe even honor the last prices paid by the customer?

If this example company is like many others, the sellers will likely not be able to capture the target margins resulting from the hard work that the company did. And, in most cases, the prices weren’t the problem. In fact, the customers have been trained to ask for better prices and apply pressure on the sellers because…it works.

Ultimately, pricing and profitability results are only partially a function of a sound strategy and accurate price targets. These targets only turn into results when the sales team can successfully reach them and preserve margin even when customers are negotiating.

The Role of Negotiation Skills

Many professional buyers have been trained in basic negotiation strategies and tactics because, after all, it’s what they do for a living. However, salespeople haven’t received the equivalent level of training. The result is an uneven playing field where buyers have the upper hand because they use basic tactics that sellers perceive as pressure on them.

What happens when you level the playing field and train sellers in negotiation? Price overrides are reduced in frequency and size, and margins are preserved or expanded.

A few years back, we studied two groups of sellers at a regional electrical distributor – one group that took our Negotiation Quotient 1.0 program, and one that didn’t. Since we were already doing strategic pricing work with this company, fortunately, we had a very thorough data set to study.

The results of the side-by-side study? The group that did not take the training maintained a steady rate of overrides during the measurement period, actually increasing the amount of override revenue by 1.1 percent. However, the group that took the training reduced its revenue on overrides by a whopping 16.8 percent during the same time frame.

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Negotiation Strategies that Support Strategic Pricing

While negotiation skills aren’t a mysterious dark art, they also aren’t something that typical salespeople are naturally good at without formal training. A lot of salespeople may think they’re good negotiators, but wind up giving in to buyer pressure to get the sale.

Understand Pressure

The first principle of negotiation that helps sellers maintain ideal price targets is to understand that there is pressure on both parties in a negotiation. Too often, sellers only focus on their own pressures: earning commission, hitting quota, etc. The reality is that buyers have their own pressures as well, which sellers don’t always recognize. Maybe you’re the vendor who most intimately understands the buyer’s use case. Your solution may be more complete than your competitors’, or your company is easier to do business with. Perhaps you’re the only vendor who can get a product delivered in time for a critical project.

When salespeople focus only on their own pressures, they give up significant discounts and their company’s profitability in the process.

Set Good Targets

Strategic pricing recommendations, when determined and rolled out correctly, should be able to provide ideal targets for sellers. However, we all have experienced situations where sellers proactively discount when providing an initial quote, as though they’re expecting a price concern from the buyer. This predictably erodes margin when buyers haggle anyway, further reducing the price from the already-reduced starting point.

It’s critical that salespeople aim high when quoting, within reason of course, so that they leave some room for buyers to negotiate. Even if your product is exactly what the buyer wants, they still will want to get it at the best price they can and feel satisfied that they got a good deal. That’s why they negotiate, and that doesn’t change much regardless of whether the initial quote is slightly discounted or not.

Recognize and Respond to Buyer Tactics

Even the simplest negotiation tactics have helped buyers receive significant discounts and additional value when making a purchase. Your ability to recognize these tactics, and respond accordingly, can help preserve price points and your company’s profitability. Below are some of the most common negotiation tactics and ways that buyers express them.

The Squeeze

Example: “You’ll have to do better that.”

Throwing Junk

Example: “That feature doesn’t matter to us anyway, so we don’t want to be paying for it”

The Flinch

Example: “What?! That’s much more than we’ve ever paid.”

Competitive Leverage

Example: “Your competitor was a lot less than that.”

When sellers can identify these tactics and know how to preserve price points when they are used, it makes a significant difference in a company’s bottom line.

Concede Carefully

One of the ways that untrained sellers respond to common tactics is by dropping price, and sometimes significantly. Immediately dropping 10, 20 or even 30 percent off is not unusual, and it is why buyers use tactics like these.

It’s important to concede carefully in negotiation situations. First, think what would increase the buyer’s satisfaction. It’s not always just price discounts. Maybe there are additional features, complimentary add-on products, or even higher levels of service that can be offered to increase buyer satisfaction and perception of the value your solution offers.

If you must discount, doing so carefully and slowly broadcasts a limited range of flexibility to the customer. A first price drop of 2.5 percent communicates that there’s not much further you can go. Inversely, a 20 percent drop indicates that the initial price may have been way too high to begin with and you may have flexibility to go down even further.

Ensure Your Sales Team Can Sell at New Target Prices

Prices can go up for a variety of different reasons. Whether it’s a response to increases in the costs of doing business, inflation, or your business’s goal of improving profitability, price changes are something the sales team needs to be prepared to execute successfully.

Salespeople who aren’t equipped with the skills necessary to preserve price points (and margin) are bound to drop prices when under pressure from buyers who are simply trying to get the best deal they can. That’s why SPARXiQ has been complementing our pricing engagements with negotiation skills training.

To be successful, it’s important to not only set the right prices for your products and services, but know that your sales team can get the right prices when they are in the trenches quoting and negotiating.

Explore Negotiation Quotient today to equip your sales team with the skills needed to secure deals while protecting profitability.

Negotiation Quotient

Counter tough tactics and craft superior win-win agreements.

Ensure better negotiation outcomes that create value while increasing profitability in the process.

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