Can they sell a price rise?

GREAT... BUT CAN THEY SELL A PRICE RISE? PETER COLMAN presents the ffth article in his series on behavioural economics in sales management – reacting to biases to grow profts. Here, he focuses on how too many pricing opinions and too few facts mean that a company’s most powerful proft lever is usually poorly managed or not managed at all

The best thing a salesperson can sell In previous articles I’ve covered a range of topics is a price increase. Pricing is so including incentives, sales strategy and tooling. This important – in fact, it is the most time I’ll turn my attention to how commercial important proft lever. Pricing is leaders need to think about pricing, and how it can one of the most fundamental afect the perceptions of everyone from customers aspects of any business – every and competitors through to their own salesforce. company has to set prices for its products and Here is a list of the six most commonly occurring services. If the world was a rational place, pricing psychological biases when it comes to salespeople’s management would be a core competence of every pricing behaviours. frm, but in reality it almost never is.

The beauty of pricing, and price increases in 1. “THEY STARTED IT” particular, for sales leaders is that it all drops straight (ATTRIBUTION BIAS) through to the bottom line. As one recently “Our competitors are so aggressive on price.” remarked to me about her salesforce, “If they can’t In our study mentioned earlier, about half the sell a price increase I don’t want them on my team.” respondents said they were in a price war. When

But we know that many asked who started it, 77% salespeople hate even the thought of price-related “The best thing a of those attributed it to a competitor. In other words, customer conversations, let salesperson can sell is “We’re sensible and everyone alone price increases. So it a price increase. Pricing else is a barbarian.” Hear it should be no surprise that in is so important” enough and it becomes my frm’s global pricing and accepted wisdom. sales survey (among 1,925 Just note that those same companies in major industries in over 40 countries competitors are probably saying exactly the same – see tinyurl.com/y2o2nrbw), companies said they thing about you. In our experience, poor price typically achieve only 37% of their price increase management accidently starts a tit-for-tat target (ie. what they get versus what they set). This reaction that can often become a damaging race to means that even if frms are setting increases to the bottom. keep pace with infation, there is a high chance that In a management meeting I attended, a their prices are going backwards in real terms. recently joined executive asked me to guess why

their company’s proftability had sufered in the 2. “WHO WOULD BUY A CHEAP past. I suggested, “You’d reduced prices to win BULLETPROOF VEST?” some more volume and your biggest competitor (FRAMING EFFECT) didn’t take it too kindly, so retaliated with a price This was a great example of a sales leader framing decreases of their own?” There was a nod across a conversation around “value to the customer” the table. rather than cost-plus pricing. The frm in question

I wish I were psychic, but alas was a yarn manufacturer, I’m not. Like Groundhog Day, “Pricing can transform whose material was used in a I have this conversation about profitability and needs to variety of applications from once a month, except with a diferent frm each time. “You didn’t get any volume did you?” be part of the toolbox of every sales leader” tyres and heat protective clothing through to ballistic protection. I asked. This time, a shake of The price per kilogram was the head. The unfortunately signifcantly higher when sold predictable result was that the market shares stayed in the most critical applications, even though the the same while the profts of the warring frms took manufacturing costs were roughly similar. As the a nosedive. question posed above suggests, some things are

The task then is to claw those prices back. One worth paying more for. way to reduce the chances of a price war is to try to This framing issue is so important for a sales estimate how competitors will react if you reduce team, and the sales leader needs to lead by example your prices, as this is often overlooked in the if they want to make a success of a “value before estimates of increased volumes. volume” sales strategy.

“WHO OWNS PRICING?”

When we asked this question across various departments in one company we got some interesting answers. Responses from salespeople included: “finance”, “marketing” and “don’t know.” Answers from finance people included: “marketing” and “finance and marketing”. And the replies from marketing people included: “finance” and “marketing”. It was obviously a confusing picture, so the commercial team created a checklist (shown in the panel below) to create greater clarity over the whole pricing process.

PRICING PROCESS CHECKLIST

Pricing manager

Pricing committee

Escalation scheme

Pricing dashboard

Pricing training Full time resource to ensure focus on the topic of pricing

Monthly meeting with senior representatives across pricing, sales, marketing, product management and fnance Installation of clear discount authority limits

KPIs and charts to track/analyse prices, discounts and rebates Covering pricing basics, techniques and pricing psychology 3. “YOU’VE JUST GIVEN AWAY A HOUSE!” (LAZY HEURISTICS) It started as a discount request for a large deal from the account manager to the VP of sales. Would she approve an extra 10% discount? But where did the 10% fgure come from? The VP of sales suspected it was not from a careful consideration (let alone any real knowledge) of the customer’s budget but rather just defaulting to a convenient heuristic. She knew that discounts are invariably packaged up in nice neat 10% increments.

So the VP of sales denied the request, with a demand that the account manager return with a more thought-through proposal. To make sure the lesson stuck, she translated that 10% into something tangible based on actual euros. She knew that it pays to think in absolutes rather than percentages.

From a practical point of view, if you have a discount escalation policy, it would be worth moving the escalation points away from any nice round percentages to counteract these damaging heuristics. 4. “WHEN DOES MARGIN GUILT KICK IN?” (SUBSTITUTION BIAS) Substitution bias is when we swap a hard-to-answer question for one that’s similar but much easier to answer. When it comes to pricing, a hard question is “How much is a customer willing to pay for this?” Consequently, salespeople will often substitute it for the much easier question, “At what gross margin will we start to feel guilty for making too much?”

This magical guilt margin percentage varies from frm to frm but there usually is one. One answer is to hide cost information from the salesforce – they can’t afect costs. Instead, you can just steer their behaviour on price levels, which they can infuence.

5. “THERE’S A MARKET PRICE” (AVAILABILITY BIAS) Salespeople rarely get to see all their colleagues’ proposals, let alone their competitors’ prices. This lack of available information means that they tend to believe their experiences are the true market reality (and some will be right).

So where does reality end and perceptions and bias become the dominant factors behind their price setting? It’s difcult to tell. If you ask them to talk through some of their high or low price submissions there will be an entertaining story behind every single one.

One nice way to get insights on this is to do a controlled request for proposal. We often include this exercise in our price training sessions. First, we create an imaginary yet realistic and familiar deal. Then we ask the salespeople to write down what discount they believe they would have to ofer to land the deal. (By asking the salesperson to write down their answers, we avoid them being infuenced by the opinions of their colleagues, ie. to counteract “groupthink”.)

Considering the fact that all the salespeople are presented with exactly the same information, the wide range of answers is usually pretty worrying for their sales leaders. For example, in a recent training course with 14 participants, we received 10 diferent discount answers, ranging from a 45% discount all the way up to a maximum of 75%. All for exactly the same deal. We then showed the results to the sales team members and had them discuss how they would try to avoid their biases in the future.

6. “TELL THEM £400” (LOSS AVERSION) The fear of losing a deal is a strong infuencer of sales behaviour. A few years ago, we had a meeting with a managing director of an asset rental business who had commissioned us to do a pricing excellence project. Our analyses and mystery shopping had shown a huge range of prices being charged under fairly similar deal situations and this had prompted the MD to test this himself.

On one of his visits to a depot, he sat with an inside sales rep and listened in to a few of their inbound calls. The rep had a list price and limit rate card on the desk in front of them. While listening into one of the calls, the MD pressed mute and told the rep to quote the list price.

The rep looked at him in disbelief as he rarely ever quoted that number, but rather a much lower “street price” he thought he needed to use to win deals. The MD told him not to worry about whether it was won or lost as it was “underwritten by him” but to just quote the £400 per day number. To the amazement of the rep, the customer accepted without trying to negotiate. After trialling CASE STUDY: THE POWER OF PRICING

This international company had lagged behind its peers in terms of profitability for many years. Cost cutting and new product introductions had helped close the gap a little, but the gap was still there. Our thinking was, “If you’ve tried everything else, perhaps it’s time to grasp the nettle and focus on pricing?” That said, a (mistaken) belief on the part of the executive team that they were already pretty good at pricing meant they were sceptical at first.

Where to start? As the firm was too big and diversified to cover all markets, four pilots were selected as tests, each with different geographies, sectors, products and customers. List prices, discounts, rebates, terms and value added service charges were all reviewed and optimised where needed. Pricing managers were installed to lead the implementation of the changes and to sustain them in the long run.

The result was that operating profit margins increased in all markets, averaging around 3.5 percentage points overall. The most commoditised market saw margins increase by two percentage points, and the highest increase measured was eight percentage points. The initiative was then rolled out across other markets, further transforming the firm’s bottom line.

a few more examples, and combined with the analyses insights, the pricing steering committee recommended changes to the rate cards. A MATTER OF GUTS In general, when compared with the other proft levers (costs and volume), pricing is far less professionally managed. I presented a keynote at a recent conference with the provocative title “If you managed costs like this you’d be bankrupt”. I got some smiles at the start that slowly changed to worrying nods as the audience spotted a few too many home truths in the project cases I presented.

When done well, however, pricing can transform the proftability of the frm and so needs to be part of the toolbox of every sales leader. While its foundations lie in traditional economics, to do it well you have to also focus on behavioural economics and human psychology. As Jack Welch, former CEO of GE, observed, “Costs are a matter of facts, pricing is a matter of guts.”

PETER COLMAN is a partner at global strategy and marketing consultancy Simon-Kucher & Partners, where he leads the sales efectiveness practice for the UK and Ireland. He specialises in commercial excellence programmes to address strategy, sales, marketing and pricing topics. You can email him at peter.colman@simon-kucher.com or visit www.simon-kucher.com