Pricing Optimization Is For Winners — So, What’s Holding You Back?

June 19, 2014 Patrick Schneidau

Want to be a best-in-class company? Use pricing optimization solutions, suggests new research from the Aberdeen Group. According to the survey, 50 percent of best-in-class companies are using pricing optimization software, compared to 35 percent for the industry average and only 24 percent of the lowest-performing companies. If this technology correlates so strongly with high performance, why aren’t more companies using pricing optimization software?

Before getting to that question, let’s look at the Aberdeen Group’s findings in more detail — and why being a best-in-class company matters. For starters, the leading companies create more effective sales quotes and more accurate sales forecasts. For best-in-class companies, 52 percent of quotes result in orders, compared to an industry average of 35 percent. Out of their forecasted sales “wins,” leading companies lose only 19 percent, compared to the industry average of 30 percent.

Much of what separates the winners from the middle of the pack is pricing optimization solutions. As mentioned earlier, 50 percent of best-in-class companies use pricing optimization solutions — far more than the industry average (35 percent). And the pricing technology’s impact continues to hold up at more granular levels. Teams that use pricing optimization attain their sales quotas 70 percent of the time, compared to 59 percent for teams that don’t use it. And on an individual level, full-time sales reps who use this technology hit their numbers 60 percent of the time — almost twice as often as those who don’t use it (35 percent).

Now, ask yourself, which type of sales organization would you want to join?

Based on this research, you might wonder why everyone doesn’t use pricing optimization software — especially when implementing the technology is fairly straightforward. Three factors present obstacles to success in this regard.

1) Lack of awareness: When sales leaders want to increase sales and the top line, the solutions they tend to think of include hiring more reps, providing more training and improving marketing. They’re not thinking first about how to use data to sell better.

2) Poor understanding of the technology: Salespeople hear about Big Data, but often don’t connect the dots to how it helps in a selling environment. They’re used to relationship selling: looking someone in the eye, figuring out what price to offer and then negotiating based on the quote. They’re not comfortable with the idea that data science could provide more insight into customers than they currently have.

3) Inability to execute: For a long time, buyers have held much of the power at the negotiation table because they have a better grasp on current pricing and the marketplace. Very few sales reps have the skillset to talk about raising prices in ways that makes sense and are acceptable to the customer. Coaching reps through that conversation and helping them develop this skillset is important, but most sales organizations don’t even consider that as part of the training they offer.

So far, pricing optimization seems to strongly correlate with successful sales organizations — but why does it work? One of the main distinguishing features of the best-in-class is how these organizations manage sales proposals, particularly their ability to manage by exception. In this group, 71 percent have clearly defined processes for approving exceptions, and have “guardrails” in place to keep pricing and discounting on track. The industry average is only 51 percent, which means nearly half of those companies essentially have to trust their gut when it comes to discounting.

For organizations to be successful, that kind of ad-hoc discounting can’t be the norm. Your pricing strategy needs to provide some structure for discounting, whether that structure is based on business rules, data science or customer segmentation. Anything would be an improvement over just going with your gut, and that’s where the advantages of pricing optimization software become clear.

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