This post originally appeared on INSIGHT2PROFIT.com
While common, price overrides can be dangerous. They train your sales team and customers that price is negotiable and interferes with one of your primary goals: sticking to your pricing strategy.
If that doesn’t worry you, consider this: companies that grant high numbers of ad hoc price exceptions are more likely to experience price erosion across all customers.
An effective and mature pricing strategy includes a policy for establishing price overrides. But what would such a policy look like?
From experience, we know that managing override activity is a multi-layered process. It requires adapting your internal systems, developing new guidelines, and transforming your culture. But at the end of the day, your goal is to establish a framework to monitor and manage potentially dangerous price overrides. When we help our clients with the same goal, we use the following four-step process.
Step 1: Grow Your Awareness: Understand what pricing overrides are happening and why
Step 2: Determine Market Relevance: Set appropriate prices for specific customer and product segments
Step 3: Set Policy: Establish guidelines and controls around pricing authority
Step 4: Encourage Training: Empower the sales organizations with the tools they need to handle pricing conversations with clients
Let’s dig deeper into each of the four steps.
Step 1: Grow Your Awareness: What is Happening and Why?
Before you can manage overrides, you need to understand what overrides are taking place and what’s causing them. If you allow sales flexibility when setting final pricing, that’s okay—a certain degree of flexibility can be a good thing. It’s critical, though, that someone within company management is paying attention. Someone must be able to measure override activity so the impact can be assessed.
Ideally, no more than 20 percent of transactions should be overrides. This may vary somewhat by type of business or industry, but it’s a good rule of thumb. If your price overrides are quite a bit higher than 20 percent, this could be a sign your organization lacks appropriate controls around pricing.
Here are three common causes for price overrides:
- Cumbersome manual processes. For one our clients, adjusting customer records was burdensome. If one customer regularly received a discount, but that discount wasn’t officially part of the customer record, it was easier for the account manager to simply override the system than it was to go into the system and update the record.
- Competitive markets. Often times, if a customer makes it known they have received a better price elsewhere, the sales rep may not have the luxury of time to update the system. If the rep is on the phone with the customer, or worse – the customer happens to be sitting in the rep’s office – he needs to be able to close the sale now.
- Poor strategic pricing framework. If your overall corporate pricing framework isn’t in synch with a) the needs of customers, b) channel and product segmentation, and c) value drivers and competitive positioning, overrides are a potential indication of a strategic disconnect.
Whatever the cause, understanding why overrides are happening is the first step towards fixing them.
Step 2: Determine Market Relevance: Are Your Prices Really Appropriate?
If overrides are a problem for you, that could also be a signal your base prices are out of sync with your market. As your pricing starts to fall in a more appropriate range, your override activity should also decrease.
Start with the right data
To start, look at your historical transaction data. Supplement this data by talking with the sales representatives; they know exactly what’s happening in their markets and what they’re hearing from their customers.
An external view of current market prices is also helpful. Some of this information may be available publicly, depending on your industry. Or you may be lucky enough to have competitors that post prices on their website, which at least lets you see where their starting points are.
The key is to take an appropriately broad view of your market conditions. This may even require a custom database to help you consistently capture and manage this internal and external pricing data. Your goal is to gain clarity on where the market prices really are – and where you need to be.
Establish appropriate segments
Once you have a solid big picture view, you’re ready to begin drilling down to the details. Look to create specific target prices for groups of similar customers and similar products. For example, you should be able to understand that for a customer that’s a certain size, in a certain industry and in a certain geographical area, a competitive price is $X.
Step 3: Set Policy: What Pricing Controls Do You Need?
Pricing controls may be both hard and soft. A hard pricing control is system controlled, generating an automated warning or alert when someone tries to input a price that exceeds the acceptable override margin. However, pricing controls may also be soft, such as a price matrix the sales rep prints out and refers to during customer conversations.
Determine the right flexibility
The most effective policies achieve a balance of both hard and soft controls. You do want to give the sales team some degree of flexibility; morale will be higher if reps feel they are empowered to negotiate that final price and make concessions when they need to. At the same time, you want the sale to be a reasonably profitable transaction, or else it may be best to walk away.
Determine pricing authority
Part of your pricing guidance should establish levels of authority. For example, you may decide not to give a sales rep the authority to override a price, instead specifying they must take override requests to their supervisor, who may be able to override up to 5% of the list price. If a higher override is needed, the transaction may need to be escalated to a sales manager or even a regional manager, depending on the amount of override desired.
A key area where we often see overrides is when a company puts out a promotion. Ideally, if your prices are set appropriately, you shouldn’t need to resort to promotions on a regular basis to move product. However, because there are many legitimate reasons for promotions, it’s helpful to follow these best practices:
Establish clear requirement on short-term promotions, including approval levels, a formalized promotion review process and routine reporting on promotion performance. Some good rules to begin with include:
- Do not accept promotional pricing that has not been input into the system.
- Require an expiry date before a promotion can be loaded into the pricing system.
- Use discount levels as a promotional price whenever possible.
The concern over promotions is twofold: First, all too often we see promotional prices that are entered into a system and never changed – meaning the promotion de facto becomes the default. And second, poorly managed promotions can quickly become unprofitable and ineffective. But with the right process in place, you can avoid these problems and earn a solid return on these deals.
Step 4: Encourage Training: How Do You Empower the Sales Organization?
The final component to implementing a new price policy is to train your sales organization on these changes, so they know how to work with the new system.
Leverage value-based selling
Does your sales organization take a broad enough view of what goes into your prices? Do they understand the value your company brings to the table?
Your prices likely include a number of value-added process and services – such as timely delivery, geographic reach or outstanding support. Your sales organization needs to be aware of and able to communicate these attributes.
The challenge is to ensure your front-line people are well versed in how to effectively sell on value. They need to be able to put their customers in a comfortable place, completely outside of price. In many cases, you may find that it doesn’t take a whole lot to move a customer away from worrying about a small percentage of price and instead get them thinking about the overall relationship between their business and yours. If your sales organization is equipped to demonstrate that, often the price challenge goes away.
Practice via role-playing
When we develop sales training programs for our clients, we typically find we need to teach their reps how to communicate the value their company delivers. We do this through role-playing exercises that simulate the real-life conversations a rep might have with a client. This allows the reps to practice what to say when customers give them resistance on price.
We’ll also provide a range of comprehensive materials they can refer to again and again, including sales guides, frequently asked questions and communication strategies for various situations.
And finally, we’ll make sure the reps are thoroughly trained on how to maintain accurate records within the system, so the next time a customer orders a product, the correct price is already there.
There’s no denying that developing and implementing a comprehensive pricing policy is a challenge. It requires changing the very culture within your company, and that’s rarely an easy thing to accomplish. But with the right insights, the right tools and the right approach, you’ll be able to make the incremental changes that can lead to big results. Stay the course, and see what happens.
Read a real-life account of how a leading manufacturer managed its price overrides, realizing more than $2 million in additional revenue in just 12 months. Get our most recent success story here.