Most companies take a one-size-fits-all approach to pricing and price management: Set a single price for everyone and plan to discount that price based on sales needs. The problem with this approach is that when you try to set a price for everyone, you end up with a price that works for no one.
The key to preserving your market share and profit margin is to move toward a data-driven, scientific pricing strategy, one that focuses on setting prices that win business for each of your customer segments, and then enforce your strategy with effective price management.
Imagine that, after researching the relevant market data, your company decides that your new product’s price should be $1,000 — and publishes that one-size-fits-all price. While the price may be $1,000, in reality, you’re selling it to one customer segment for $900, another segment for $750 and another for $620. When you’re dealing with this amount of variability, not to mention individual sale sensitivity, the end result is out-of-control, highly variable discounting.
In addition, this pricing approach means that almost every deal needs some level of approval before it goes through. The proliferation of exception requests becomes a huge burden to your pricing department, resulting in long wait times for quote approval.
That long wait further erodes profit margins. When salespeople realize that it’s going to take a week to get approval for a discount, they tend to ask for larger discounts than necessary, in order to pre-approve some room to negotiate further with the customer. Otherwise, they know they’ll have to wait another week for a second approval if the price is still too high to close the deal.
The end result of one-size-fits-all pricing is a constant cat-and-mouse game between the sales and pricing departments over the list price and the go-to-market price. With long wait times for quote approval, companies risk losing business to more agile competitors, and the undisciplined discounting erodes pricing and profit margins.
As case studies on Hewlett-Packard and other companies have shown, pricing technology helps to stabilize win rates across all deal sizes by using accurate, targeted pricing to control variability and excessive discounting.
But while pricing optimization technology is invaluable in reducing discounting, you need to build a strong foundation by following these four steps:
1) Focus pricing analysis efforts on your most important deals
2) Empower your sales team to make decisions on small and medium deals
3) Look for opportunities to speed up your sales cycle
4) Embed pricing seamlessly into the overall quoting experience
Each of these steps is covered in detail in our new e-book, 4 Steps to Stop Out-Of-Control Discounting. The key point to remember is that reducing discounting and variability in your pricing requires a combination of strong price management, pricing strategy, technology and organizational change — and throwing out the one-size-fits-all pricing approach that isn’t working well for you or your customers.