Resolving the Tension Between Sales and Pricing – Intelligent Sales and Profit Acceleration #6
Many distributors may consider strategic pricing to be a relatively mature opportunity because it’s been around for a few decades now. After all, lots of distributors have built pricing matrices, established controls and put pricing managers in place. While this may be the case, many still treat pricing as a checklist activity, without any intention of making it a key strategic and financial capability.
Despite a more mature pricing practice across distribution when compared with recent decades, I believe strategic pricing is entering a new era in which new possibilities will provide yet another wave of opportunities. As one of the early pioneers in strategic pricing, I’d like to present an updated vision for it that resolves old tensions and provides a modern agenda to serve as a profit engine for the 2020s.
The Tension Between Sales Strategy and Pricing Strategy
Many distributors continue to balance an uneasy stalemate between sales teams and strategic pricing. For many companies, this remains the frustrating limiting force on the strategic pricing opportunity. Salespeople believe that strategic account management can’t be unhinged from pricing strategy or actions. They will often push back against higher margins, rejecting recommendations for a given account because they believe the resulting price points will prevent them from achieving the account’s growth potential. These instincts are based largely on their instincts, not experience.
To add to the tension, sales metrics and incentives largely don’t align with pricing strategy. Although sales growth is generally less impactful to the bottom line than strategic pricing, most sales forces’ primary KPI is revenue growth. Because of these revenue-based goals and incentives, sellers are willing to compromise margin to make a sale, doubting that they can do so at higher price points.
Sales growth is important, but it doesn’t always translate directly to profitability. A 2% increase in sales volume may increase profitability by only 15%, while a two margin-point increase in price point can improve profitability by 50% (dropping straight to the bottom line). But, in spite of this reality, sales teams remain focused on the metrics by which they are measured — revenue growth.
Modern Complications to Pricing
As distributors continue to evolve in the ways in which they serve their customers, traditional strategic pricing encounters additional challenges.
For one, e-commerce adoption can be a hindrance when the legacy pricing strategy doesn’t support it. With a combination of increased pricing complexity (visitor pricing versus logged-in pricing, for example), enhanced customer stickiness and lower cost-to-serve, the standalone pricing strategy faces further challenges.
Many distributors have realized how important it is to integrate e-commerce pricing into their overall sales, pricing and profitability strategies. When they don’t, they risk investing time, money and energy into e-commerce platforms only to realize too late that the old pricing strategy is at odds with the new omnichannel marketplace.
In another instance, companies that have implemented modern business development functions face similar hurdles. With a growing recognition in the industry of new models of business development, inside outbound-calling sales teams and upstream digital marketing, the old pricing paradigm is yet another barrier to transformation. Too often we set up that new, high-energy business development team, only to discover that the pricing strategy hasn’t evolved to support new customer conversion at scale with pricing appropriate to different stages of the customer lifecycle.
The Path Forward
The modern reality, of course, is that true sales and profit optimization requires an integrated, holistic approach to dynamically manage all four levers of profitability — pricing, sales growth, cost of goods and cost-to-serve. Any one of these levers, or a combination of them, can be the best path to success when optimizing a given account’s profitability.
- Is it better to raise a customer’s price by X%, or to hold on price and push for greater wallet share?
- Should you aim for better vendor cost support?
- Are there any wasteful activities or processes driving up the customer’s cost-to-serve?
The simple yet deeper truth is . . . it depends. With an informal understanding of these dynamics, sales teams have historically pushed back on strategic pricing. While they have some intuition based on experience, they have lacked the rigorous, data-driven strategic account management disciplines and actionable sales and profitability insights to counterbalance their resistance to pricing.
With the data-driven insights available to distributors today, companies can guide sales teams to make these careful decisions based on what is actually hindering profit improvement on a per-account basis.
Strategic Pricing Must Evolve to Support Sales Strategy
With a growing interest in sales enablement, smart sales leaders are mastering the forces of growth and profitability in new and transformative ways. They will ultimately undermine pricing until the tension among the profit levers is comprehensively and holistically resolved.
Contrary to popular opinion, strategic pricing is not a mature discipline. It is an immature discipline that needs to evolve to break the sales stalemate in a transformed world.
The future belongs to those who evolve. And to those who evolve faster and more effectively than their competitors. If you would like to explore the pricing and profitability path to the future, we would love to talk. Your sales team will be glad we did.