Sales volume is a prerequisite for making profit, but it is not a guarantee of it. Of course there can be no profit without sales, but there can be sales without profit. Without the right price, a company may be very successful in terms of sales volume, but may actually lose money – or at least not get the money it deserves. Price has the most direct effect on profit. Every percentage point of a price change will directly end up in the bottom line. It is therefore worthwhile taking a closer look at this aspect of sales.
Pricing involves a lot more than creating price lists and defining discounting policies. Eventually pricing decisions must be implemented, and this, in most of the B2B companies, falls under the responsibility of the sales force. The sales people have an impact on the actually realized prices in several ways:
- First of all, it is on them to discover the customer’s needs in order to be able to offer the right product or service (probe skills).
- Secondly they have to convince the customer about the value of the offered solution (prove skills).
- And last but not least, it depends on their closing skills to negotiate and defend the price.
Due to the nature of the business the pricing mechanisms in B2B markets are generally very complex. Products are often customized and consist of a bundle of different components, often including services. Sales cycles can be very long and usually involve a buying center with decision makers representing different perspectives and interests. It is not unusual that the solution evolves over the sales cycle leading the product to change several times, and so do the costs and the value to the customer. Managed well and diligently, this carries a lot of potential for improving a company’s profit. But it is also full of pitfalls which can even lead to disasters such as unintended price wars destroying the profit margin of a whole industry. The problem areas can be divided into three categories: management, tactics and systems.
The first question to the management is whether the sales team is managed for profit or for volume. Do sales people get targets for margins or just for volume? How are they compensated? Do they get the same appraisal for good prices as they get for sales volume? Are there effective rules in place especially for pricing authorities and discounting policies?
Other issues concern the support the company provides to the sales force. When asking the sales people to sell on benefits and not on price, the company has to provide them with sufficient arguments to help them do this; otherwise they would lack the necessary confidence. Finally, the sales people have to be provided with reliable price information whenever they need it.
The question to the sales people is about how well they manage the sales cycle, especially with regards to prices. When do they first state the price in front of their customer? What price do they choose when they are asked for a first price indication early in the sales cycle? Are they aware of the various discounts and extras they’ve already given throughout the long sales cycle with many interactions? The latter can involve numerous minor concessions which sum up to a significant amount. This phenomenon, called price waterfall, leads to a successive decline of the initial price down to a significantly lower pocket price. To manage all these issues, sales people need the appropriate training – and they need systems enabling them to manage the inherent complexity.
In sales, decisions must be taken fast and reliably. Through the right systems the company can make sure that sales people get the information they need on the spot, wherever they are. These systems also must track information about all concessions in the shape of discounts and extras in order to prevent the price waterfall from getting out of control. And they have to provide feedback about price quality to the sales people and the management along with the sales volume.
Pricing is a real challenge for every company and a particularly complex one in B2B industries. However, managed professionally in all its different facets, it is a powerful profit driver.