Getting Pricing WrongArticle by Colleen Francis, April 23, 2018
Recently I was at a large gathering of CEOs: all sharp thinkers who want to see their companies grow. While I’d been invited to address their forum to talk about the sales process, what many of them reallywanted to ask me about afterwards was where they fit in that process. Specifically: do CEOs need to get involved in selling, and if so, when?
Here’s my blunt answer to their question: CEOs must own their company’s pricing strategy. Here’s why…
It’s a mistake to look at pricing as an output or a tactic. It’s not just the sum of an equation involving unit cost, overhead and profit margin (among other factors). Nor is it just a tool to achieve what’s necessary in the short-term to meet a quarterly sales target. Its function and power runs much deeper in the machinery of your business and in your brand’s relationship with your customer.
Pricing is a strategic tool to get and keep the customers you want—and to filter out the ones you don’t.
Too many executives ignore this, which is why I see so many CEOs dealing with profit margins that are erratic over the short term and trending downward over the long term. Quarter after quarter, sellers discount their price as an easy tactic to try to meet their sales targets, because the company lacks a cohesive and enforced pricing strategy. When this happens you eventually face a discounting epidemic that’s out of control. You get the dreaded margin-erosion effect. And it’s all self inflicted.
Pricing sets tone: beware of commodification
Is your company offering a premium service/product? Or, are you a low-cost option? Your price sets the tone for your customer’s buying journey and in how you are perceived. Pricing steadiness also shapes how you are seen and trusted. If your pricing strategy signals that you are a commodity—or that you view yourself as a commodity—your customer will, too. You will have trained buyers to remove the value and differentiation of what you are selling and only focus on the cost.
Discounting: the tactic that keeps on taking
The only thing that discounting accelerates is your problems, not your sales. It’s a slippery slope: once you regularly embark on that tactic, your customer will naturally expect it just as regularly. It’s why for years, some of the largest technology consultants and analysts purposefully taught their audiences to wait until the last month of the quarter to make a purchase. That’s precisely what’s playing out today in the B2C retail landscape: everything’s on sale all the time and the only thing that changes is what percentage discount will they offer you today. Meanwhile, Amazon keeps eating their lunch!
Pricing strategy makes or breaks loyalty
If your customer doesn’t believe you on price, how can they possibly be expected to believe you on anything else? The less cohesive your pricing strategy is, the more likely you are to be putting at risk the bond that your customer has with your brand.
This is a quickly changing marketplace. Customer experience (and meeting those expectations) is already poised to be the key value differentiator by 2020. If your customer feels they are being treated consistently fairly on price, they will remain loyal. Beware of inconsistency on price, special offers to new customers that are unavailable to existing customers, and hidden deals that are only presented when a customer is cancelling their account. All those do is create dissatisfaction and disloyalty. That’s when they start to shop elsewhere.
Pricing strategy isn’t a delegated task: it’s a decision
It’s also a mistake to treat pricing as though it’s someone else’s job. If you leave it to a sales team to look after this entirely, they’ll make decisions that put revenue and short-term closing rates ahead of profit and long-term growth. Why? Because that’s what they are paid to do!
Sellers that are paid on short term metrics and top line revenue only care about the selling price over a short period of time. Often this results in unprofitable and brand damaging behaviour in the marketplace related to price.
Pricing is an expression of your brand. Only CEOs bring a focused role in that capacity. While they should consider the tactical pricing advice of their staff as part of their decision-making process, CEOs must lead a pricing committee to review and modify pricing strategy on a quarterly basis. Do this to ensure your team is capturing the best customers and keeping them.
On a related note: a trend I’m increasingly seeing among CEOs of high-performing companies is that they are rethinking employee compensation plans. Rather than sticking with those short-term metrics that I mentioned, they’re building in incentives to reward staff where pricing remains steady and profit targets are met (as opposed to revenue targets).
In conclusion: for leaders, pricing strategy isn’t a matter of whether or how you should get involved in it. You must. Consistently. Everything you do and every outcome you achieve as a leader is determined by what your price says about your brand, how you are positioned in the market, what your relationship with your customer will be, how long that will last and how profitable your company will be. Pricing starts with you.