The best sales organizations align their interests with those of their sales reps and in the manner in which customers want to buy – may sounds simple, but few organizations “run through the tape” to fully align and address. We have found leading organizations not only design thoughtful programs, but also create the supporting structures to best enable sales reps.
- Setting the variable to optimize around (profit vs. revenue vs. profit margin)
- Enabling autonomy in the sales reps decision making with appropriate guardrails to optimize outcomes
- Supporting along the way with tools and training
We have found that by breaking down sales into configurable pricing levers (value-based selling and bundling) that firms can better support their objective to maximize profit. If your firm is still in a growth stage, willing to give up profit for overall revenue growth (profitable and unprofitable), then a value-based model might be less appropriate or your focus is less around profitability than revenue.
For those that are looking to maximize profits and align their sales reps to maximize as well, we have found breaking down value-based pricing to set / enable / support takes 6 steps to initiate.
Revisit steps on an ongoing basis to ensure your clients and competitors have not made dramatic shifts:
Setting the Variable to Optimize Around
1. Understand Your Costs
When setting pricing, its important to understand what you need to achieve to make money. You can choose in the near-term to absorb margins and even lose money on a sale for the longer-term opportunity, but having that knowledge allows you to make those important decisions. Understand your fixed as well as variable costs for your offering – down to the component level where your customers make decisions.
2. Understand Customer Perceived Benefits of Each Component
At the time of the buying decision, the perceived benefits are what drive those buy vs. walk away decisions. The actual realization might be better or worse. Because the value put on an item might be different by client, its important sales reps have the ability to decide what is appropriate. By aligning their compensation to the key variable (profit) of the firm, the sales rep / employer alliance in intact and decisions can be made on the spot.
3. Understand Competitor Component Pricing
It is important to spend time understanding what your competitors charge – whether you are a premium brand, a value brand or anything in between. Customers make purchasing decisions based on value – they might pay up for something that is similar if there appears to be the value there. Value can come in the name, in the flexibility of buying what they need vs. package, value in ongoing support, etc.
Enabling Autonomy in the Sales Reps Decision Making
4. Set Your Bands (Good, Better, Best)
List out the various components customers can buy and how they “choose their own adventure” with your offering. We have developed a structure to break out the modules, so sales reps can maximize a variable like profit. In understanding the value a module brings to a client, a sales rep might be able to get “Best” pricing for say 2 components and “Good” pricing for 1. If they tried to price all at the ‘Best” level, the client might walk away due to the mis-alignment. Download our Value-Based Pricing Matrix to view an easy-to-deploy structure to enable optimal decision making.
5. Design Tiered Compensation
Not every dollar should be treated the same. Those profits that are made at 80% margin should be treated differently than those that are made at 20% margin. Its important that firms embrace this structure and design accelerated compensation structures that pay out a relatively higher percentage for higher margin business – particularly those that are ongoing.
Supporting Along the Way with Tools and Training
6. Ongoing Oversight and Training
Rolling out a strategic program like this is not a roll out and forget it. First, its important that you communicate and ensure sales reps understand the why behind the what. We are breaking down our pricing to align structures to the perceived benefit that customers have for our offering. Additionally, it is important you have the reporting and analysis to detect dispersion or where a sales rep or client need is out of alignment. After rolling out pricing by module, you might need to revise your bands, enhance your training and sales rep value proposition communication plan, etc.
For additional ideas on Pricing KPIs to consider as you roll out a value-based pricing program or other pricing initiatives, download our Pricing KPIs Tool.
Designing and rolling out new pricing structures in addition to compensation plans are important in supporting the buying behaviors of your customers. We have found organizations that do this successfully focus on designing the program, enabling the transition and providing ongoing support that incorporates feedback.
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