“Why won’t my sales reps fight for an extra 1% on price? They’re paid on revenue!” Heads of Sales across industries ask the same, exasperated question. It certainly seems that interests are aligned. If reps are paid on revenue, then higher deal prices mean higher commissions. So why do we so frequently see reps going to the maximum allowed discount?
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The answer is simple. I’ll explain why fighting on price is usually completely counteractive to the rep’s best interests.
Imagine a rep who is paid a percentage of the revenue she generates. If she is motivated by compensation, she will act according to her expected commission. This is a product of:
(1) her perceived likelihood of winning the deal at this price, and
(2) her commission if she does win
This rep is selling to a customer who has asked for a 10% discount. She is considering fighting for 9%. As the rep is paid on revenue, her commission will be 1% higher if she gets 9%. Therefore, her expected payout won’t drop if her perceived chance of winning drops less than 1%.
This is the problem. Reps never believe that a 1% price raise only drops the win rate by 1%. They would expect the drop to be significantly greater. And so, their expected commission is usually significantly lower at higher prices.
So, the sales leader who relies on reps to drive price, will be disappointed. However, the sales leader who wants to change this, can use price execution. There are 3 options. All will help separately, but the impact will be magnified when used together.
- Rules and guidelines – The obvious solution. A Sales Leader can prevent extreme discounts from occurring. She can also be specific about what circumstances merit a certain discount. But, this doesn’t help the rep push for a price within an acceptable range.
- Incentives – The sales leader can tie incentives to price level. This will raise a rep’s commission for a higher price deal. This in turn means the expected commission, at a higher price, is higher. Reps will now be incentivized to fight for cents on the dollar.
- Enablement – The last, and arguably most effective lever, is enablement. This targets the rep’s perceived chance of winning at higher price points. This can be achieved in three ways:
- Skills – Making a rep more skilled at price negotiating will empower them to do so. They will feel more able to win at a higher price point.
- Value Messaging – Giving a rep messages that resonate with customers will raise willingness-to-pay. This makes it more likely that reps will win at higher prices.
- Knowledge – Arming a rep with knowledge of the customer’s willingness-to-pay is powerful. A rep may believe the odds of winning at a higher price is low. But, imagine if that rep has willingness-to-pay research for that customer segment. And, imagine that data shows that the customer will pay the higher price. The rep is now going to be much more confident going into the negotiation. Creating internal materials that institutionalize these findings, will exacerbate the effect.
The benefits of fighting for an extra 1% can be significant. For a company with 20% operating margin, a 1% price increase raises EBITDA by 5%. These benefits will never be realized passively. They will be a direct result of sales leaders focusing on price execution.
To request a 30-minute call with me to discuss how this applies to your sales force, simply send me a note with your information to schedule a call. Or, if you would like to go deep with me on the subject of pricing strategy, come see me in Dallas at The Studio, SBI’s multimillion dollar, one-of-a-kind, state-of-the-art, executive briefing center.