When Setting Prices, Ignore Your Gut and Pay Attention to Big Data
Joseph Schumpeter, a giant of economics, wrote brilliantly on the subject of price (“Price equilibrium in the circular flow is displaced by an analysis of prices in motion”). But if you lead business-to-business (B2B) sales teams, or manage pricing to maximize revenue, you’d do well to listen to Franklin Roosevelt instead. At a time when procurement agents have never been tougher, remember this when pricing products:
The only thing we have to fear is fear itself.
Consider what happens toward the end of every quarter at most companies that sell through negotiated transactions, where list prices do not prevail. In an effort to make quota, they succumb to “fear itself” -- discounting liberally. This “gut-based pricing” is a reflex to avoid the pain of losing a sale.
It’s exactly the wrong way to set the right price.
The right way to set price is driven by two trends shaping the future of B2B selling: First, a round of golf or lavish dinner won’t close deals anymore. Second, thriving e-commerce platforms threaten to antiquate salespeople who fail to give buyers reasons to buy offline.
So, how to hold the line on your target price?
1. Arm your salespeople with data. Gone are the days when salespeople negotiate with a line sheet, clipboard and pen. Today, they need data-based support. Is there anything in your customers’ economics, or their perception of your value proposition, that would affect their willingness to meet your price?
As for using this data, here’s a basic but potent application: Say the data tells you to set a target price of “x.” Start negotiating at “x” plus 20 percent. Twenty percent over target price can boost the salesperson’s commission by 10 percent. But this works only when you have the wherewithal to hold the line when buyers push back -- a skill that requires effective use of Big Data.
2. Manage price to exploit variations in perceived value. Because pricing at its best is strategic, the best price is not an arbitrary number. It’s a value on the spectrum of how customers see value.
Related: Pricing a Product? Read This First
Strategic pricing exploits these natural inconsistencies. For example, it might justify quoting lower in market segments where data shows customers seeing little value. This “give” balances out on the flip side, where pricing that exploits a high level of perceived value will flex to capture every dollar of the opportunity. It might offer rebates and other incentives to maximize revenue over the long term.
By using data to understand nuanced variations in value perception, you’ll tailor pricing to exploit the strength of customer relationships, urgency of the sale and competitive intensity of the situation. In the process, you’ll show customers why buying online -- a medium of one transaction at a time -- is no match for buying from humans capable of articulating value and making calculations on the spot.
3. Marry data to speed. Unless you’re equipped to close on the spot, getting buyers to meet your target price is futile. Do your salespeople have the capacity to know, in real time, if a deal will be approved? If not, do they have the capacity to secure quick approval, before the customer leaves the room?
Speed was an issue for an electronic components manufacturer that works with Vendavo. The company launches product lines with up to 1,000 different parts and quoted parts on the high side, so as not to cede margin. It then waited for the market’s response and adjusted price accordingly. Now, with data pushed to field reps in real time, the firm prices new parts profitably from Day One.
Here’s how to approach pricing: fear not! Arm your people with data to hold the line. If the line will not hold, equip them with insights to improvise on the spot. Use speed to your advantage. The best salespeople close today, not tomorrow.
Give your sales teams the power of Big Data, and you’ll enable them -- in the words of another Roosevelt -- to speak softly but carry a big stick. There’s no stronger approach when negotiating price.
Related: Sticker Shock