It's obvious to most sales leaders that pressure from existing competitors (both foreign and domestic) and decreasing barriers to new competitors have knocked yesterday's unique offering off its pedestal, landing as today's commodity.
From unique to ubiquitous - rapidly
Once a service or product becomes tarnished with the label of "commodity", the ability to use premium pricing becomes very difficult, at least for those sales forces who do not sufficiently understand market dynamics and, more important, buyer psychology.
What's worse - this lack of insight into buyer dynamics ends up lengthening sales cycles, as reps fruitlessly pour time into chasing incremental improvements in margin at the expense of other sales campaigns.
So when a customer demands a price reduction, what do you do? Sales benchmarking can provide the insight you need to make the right pricing decision.
Pricing a deal for maximum profitability
How should you price a deal? Sales managers are often given price ranges from headquarters, which bind their pricing options; however, these ranges often have a large swing - 50% in some cases.
So, how can a sales manager determine the best way to price a deal, within the mandated price range, so that the deal is won with the maximum amount of possible margin, and without needlessly lengthening the sales cycle?
The fact is, sales managers do not set the winning price. The marketplace does.
Perception is reality
Since the marketplace sets the winning pricing, the key to this challenge is to understand clearly how a prospect views your value proposition. This perception occurs in two dimensions: quality and price.
The value chart below maps what your pricing approach should be, when you match your pricing strategy to the buyer's perception of your solution:
Matching pricing to buyer perception
Pricing strategy: Economy
When the market's perception of your product quality is poor, you can realise only a small mark-up above cost and therefore must make money on volume. Do not waste any time trying to increase price - drop it and move on.
Pricing strategy: Premium
Where you have a dominant market share position, you can obtain the highest possible price for those deals. Take your time on these deals to document and support the high value perception - if you don't blink, you will be rewarded.
Pricing strategy: Skimming
When you have a new product offering in an immature market, skimming is the best strategy for deals. Your winning approach is to use the highest possible price relative to the competition. Pick your spots and only spend time with a customer willing to take a risk.
Pricing strategy: Penetration
Take this tact and reduce your price when you need market share. A "land grab" is only sustainable as a short-term pricing strategy with corporate approval. Do not waste any time on elongated sales cycles and be sure to educate your customer that this is a one-time deal.
But wait ... How do I measure prospect perception?
Easy to say, you might think, hard to do. Not so.
You can gather supporting information through online customer surveys or mystery shopping. However, you should be cautious in relying on a single source of data that may include biases and may not be accurate enough to support sound decision-making.
Determine product pricing
First, determine the final price your company must receive for each unit sale. Second, once the final price has been determined, calculate the retail price that should be set to account for expected discounts, allowances and taxes.
Realize the power of benchmarking for accurate price setting!
The easiest and most accurate way to calculate the values used in the computations above is to work with a research company who can provide specific values relevant for your company. For example, discount levels vary from 0 to 80% depending on the industry, market, competition level, type of product/service being sold, etc.
Post your comment or query on the CEO Forum discussion board
Click here