Pricing discipline is critical to sustainable, profitable growth and needs to be managed in a consistent manner.

Business service firms can make significant gains if they have pricing discipline, unfortunately most do not.  In fact, 30% of companies reduce pricing by 10-24%.  This variance in pricing leads to poor sales behaviors, customers who expect discounts and most importantly lower profits.

 

Pricing discipline is critical to sustainable, profitable growth and needs to be managed in a consistent manner.  Discipline should not lax as the month ends, quarters close and fiscal year comes to an end.

 

For more on Pricing discipline and Price Governance, read this article titled, “The Importance of Price Governance in Capturing Enterprise Value.”

 

Download the Guide to Implementing Pricing Discipline to determine if you have a Pricing Discipline, or if you need to implement one.

 

Why Is a Lack of Pricing Discipline the Norm?

 

In essence, sales, leaders and executives typically have strong incentives for bookings.  While there are limits, the practice of lowering prices causes 60% of companies to reduce their pricing on at least half their deals.  The problem only gets as worse as the artificial deadlines of fiscal closes come closer.

 

This endless cycle has significant consequences.

 

What Are the Long-Term Negative Impacts Caused by Short Term Gains?

 

  1. Bad Sales Habits

     

    Sales reps will expect to be able to get price discounts through. As pressure mounts to close a deal, sales will know they have a lever to pull.  This can become a part of the culture and become hard to break without a lot of training, coaxing and moaning from reps.

     

  2. Price Wars

     

    If competitors expect you to cut prices, they will likely do the same potentially creating a vicious cycle of downward pressure. This only exacerbates the problem.

     

  3. Customer Talk

     

    A typical industry is tight knit with most job changes happening within the industry. This means the behaviors become known, expected and entrenched.

     

  4. Customer Lifetime Value

     

    When starting from a lower base, let’s say 15%, that 15% will live when it comes time to upsell, renew and sell other products as that price point is now established. The long-term effect over a common 3-6 life time will continually show up in the bottom line.

     

  5. Teach Customers How to Buy; The Wrong Way!

     

    Lack of pricing discipline only rewards customers who choose based on price. These typically low margin customers may already receive too much attention and consume valuable resources, sales selling time and customer service.  Instead much better to find, win and focus on ideal customers who value the service being delivered.

     

Read this article for more on pricing programs: Don’t Stop Your Pricing Program After the Initial Improvement in EBIDTA.

 

You Can Implement Pricing Discipline and Improve Profits.  Here’s How.

 

  1. Start at the beginning. Break the practice of end of month, quarter and year end discounting.  Talk alone will not do it.  You can explain all the long-term reasons to reps, but they are most likely paid primarily in bookings per period.  To help them help you, you will need to adjust compensation plans and put firm guidelines in place.  Requiring escalating approvals for more discounts helps but be sure not to implement processes that slow down deals and make finance the deal prevention team.  No doubt this is a balance and we see this regularly at SBI.

     

  2. Get over the fear of losing a deal. Face it, you or no one for that matter have a 100%-win rate.  You still lose deals even when you discount.  Why?  If you do not know exactly why and only have the reasons, or excuses, from the sale team, you need to push for an in-depth win-loss analysis.  This goes beyond just hearing from sales for a perceptive from the customers you win and lose.  This knowledge can help you win more deals without resorting to price discounting, you will be able to make up any % points in lost deals through the win loss analysis.

     

    Learn more on Why Your Value-Based Pricing Strategy Isn’t Working

     

  • Make it a corporate strategy that will hold people accountable. At SBI we usually see a lack of alignment between a corporate strategy and seeing how it manifests itself in compensation design.  Adding pricing discipline to how people are compensated shows the organization this is not a fad that will lose steam in 6 months.  You will have to stick to your guns.  This is where you will need to show your discipline and lead by example.

     

  • Enable sales to convey your value and differentiation. A player sales people do not just close more deals, they also close bigger deals.  To do this, they understand what your client gets out of the service and can get them thinking of the value vs just a price point, or just the % discount they win.

     

    Pricing-Enhanced Personas, a Sales Leader’s Secret Weapon

     

  • Believe it or not, consistent pricing can help customers. To continue with your service, customers need to add it into a budget.  Having consistent numbers will help them plan.

     

Download the Guide to Implementing Pricing Discipline to determine if you have a Pricing Discipline, or if you need to implement one.

 

 

Additional Resources

 

Schedule a working session at SBI’s Studio. 

 

Located in Dallas, TX, our facility offers state-of-the-art meeting rooms, lounge, full-service bar, and a studio used to tape our TV shows. SBI provides the location and facilitators, all at a compelling price point.

 

New call-to-action

ABOUT THE AUTHOR

Barry Witonsky

Delivers a decisive course of action to sales and marketing leaders by analyzing their market, industry, company and products.

Barry leads SBI Solutions, a global practice area that provides ongoing analysis and strategic insights long after an SBI engagement has been delivered. This team of analytical, sales and marketing consultants applies advanced data science tools to ongoing client problems. This enables our clients to maintain the original value of the SBI work by staying ahead of an ever-changing market and competitive environment.

Read full bio >