This post originally appeared on INSIGHT2PROFIT.com
Does this sound familiar? A new customer promised they would place a $30,000 order, but only at an average price per unit of $0.16. The sales rep ran the requested price through their internal process, and because $0.16 was above the required 20 percent margin, the sales rep approved the discount. End of consideration.
But here’s where the story gets interesting. After looking at the average price points for the top 20 customers of this product, the pricing manager determined that significantly bigger customers – with purchase volumes in excess of $100,000 – were paying $0.18 to $0.22 per unit on average. In fact, the third largest customer, at $468,000 in volume, was paying a $0.22 average sale price.
What was the justification for the lower price for the smaller customer – other than the fact that the customer simply asked for it?
For many companies, pricing decisions are largely made in a vacuum, without regard to pricing data, market circumstances, product value or customer differentiation. The situation is usually exacerbated by a compensation structure that rewards revenue and volume over margins and profitability.
The solution, therefore, typically requires a completely new mindset for the sales team and organization—one focused on margins over top-line revenue.
It All Begins with Pricing Data Visibility
The beauty of the role of data in pricing decisions is that it lends an important clarity to difficult choices. A sales rep is naturally inclined to want to make the customer happy. But if you are armed with the right data, you can not only rationalize why a price discount might be a poor decision, you can also provide informed alternatives the sales rep can present to the customer – providing an opportunity for the sales rep to save face, the customer to get a great price and your organization to get the margin it needs.
In our story above, for example, you can start by showing the sales rep the list of average price points. This puts the requested price discount in an important context – that the discount amounts to asking the organization to offer better treatment to a relatively small customer than it offers to its third largest customer.
The Power of Informed Pricing Options
You can also take this reasoning a step further. Rather than saying “No” outright, you can provide alternatives. For instance, the sales rep could tell the customer that $0.16 is possible, but only with a certain volume of purchases. If the customer is willing to increase the size of its order, you’ll be happy to provide the more favorable price. Or, if the customer is unable to purchase more than the anticipated $30,000, the sales rep can offer a price in the range of $0.18 to $0.19 – still a significant discount, but more in line with the organization’s average selling prices.
Always Look at the Big Picture
When it comes to pricing, you should never make decisions without looking at the big picture. Think it through. Take the time to look at similar customer segments so you can see the prices and margins other customers are paying. And always make sure the volume justifies the price.
After all, the goal in business is not to just gain market share. It’s to gain profitable market share. Consistently offering a low-ball price eventually hurts everyone in the industry; ultimately, you’re creating pressure to make prices so low no one will be able to compete profitably – and everyone will lose. But with the right data, you can make more informed decisions and provide the options that will help your team win the sale without giving away the house.
Learn more about how top executives approach pricing decisions in our eBook: B2B Pricing without Fear.