About a month ago we posted the above question on a number of our favorite groups. This provoked some vigorous discussion, and as this was spread across different groups we wanted to pull the main threads together and share them here.
The complete question and comment was as follows:
How does pricing support the sales function? How is data from sales fed back to pricing?
- Most B2B companies having a pricing function these days, usually one that performs some flavor of value-based pricing. Are the value models and value messages, the pricing guidance and pricing policies, a help or hindrance to sales?
- In many B2B companies it is sales that is closest to the customer and that knows most about what competitors are up to. This information is critical to the pricing function. How is this information gathered from sales and channeled back to pricing?
People saw two main ways for pricing and sales to interact, and the interaction model determined how data should flow between pricing and sales. The two models were (i) Pricing as Governor Sales as Driver and (ii) Pricing and Sales as a Mutually Reinforcing System.
Pricing as Governor; Sales as Driver
In this approach, sales is seen as the primary business driver with responsibility for top-line growth. Pricing is seen as a check and balance on sales, ensuring that deals are profitable and follow pricing policy. Pricing collects data from many sources, synthesizes it into pricing rules, and provides it to sales, who must operate (or should operate) within the bounds laid down by pricing.
This structure can create tension between pricing and marketing. Some see this tension as healthy, a normal part of the competitive dynamics within a firm. Others saw a need for key performance indicators (KPIs) that are shared by pricing and sales, or at least sales management. Je Chong Yip at Brady suggested having targets for the following KPIs:
1) Effective Selling Price (total invoice sales over sales based on list price)
2) Gross Margins (based on standard cost that stay constant over an agreed period)
3) Sales Pipeline Conversion Rates (How effective is deal closing)
4) Average Selling Price
Some people commented that pricing management systems play a critical role in helping the pricing function act as a governor and feedback system to sales, both by enforcing pricing policy and by providing insight into where pricing issues are occurring.
When the pricing function is seen as a governor, one person suggested that it is important that pricing report to the CFO and not to marketing or sales.
Pricing and Sales as a Mutually Reinforcing System
A very different approach is to see pricing and sales as collaborators that work together to maximize value capture and minimize discounting (or at least to make discounting more targeted so that it can be used where justified to maximum effect). In this approach the pricing function creates and maintains value models (such as Economic Value Estimation or EVE™) as well as pricing guidelines and works with sales to ensure that value messages are communicated and tested in the sales process. Some people suggested having pricing play an active role in sales calls, though they agreed that this would require a special type of pricing person and perhaps some sales training.
A number of people commented on how important it is for sales to have a platform that provides them with the models, messages and data that they need to sell value, and that providing this is one of pricing’s most important functions. If sales people are not provided with the tools that they need to sell on differentiated value, then they will fall back to selling on price.
This is the approach that companies providing value-management software support. Under this model, it can make sense to have sales and pricing report up to the same place and it becomes even more important for them to share KPIs. The two most common KPIs suggested were the Discount Ratio (what is the average discount from the list price to the pocket price) and Value Capture (how much of the differentiated value is captured by the list price and by the pocket price).
Should Sales Get Information About Costs? Should Sales Get Information About Competitor Prices?
Two places in which there is a pronounced difference of opinion are (i) whether sales should get information about costs and (ii) whether sales should get information about competitor prices. Those who were cautious about sharing information felt that in both cases sales would use this as a justification to lower prices, and that information could leak from sales to the customer and from the customer to competitors. The counter argument is that one cannot implement value pricing without sharing information about the cost of the next best competitive alternative and that sales will not be able to construct the offers with the best margins if they do not have cost data. As Juho Harme (TeliaSonera, Finland) says “Yes, you need sales to provide you competitor pricing data as broadly as possible, but to maintain the enthusiasm and information flow you need to also return the information in an analyzed format. There was a good discussion in this thread on the advantages/disadvantages of sharing competitor data with sales, and there is no one single right way of doing it, but if you are running a premium operation and that fact is accepted widely also in sales, then I think you can share the data on regular cases if you accompany it with a recommendation.”
Is there a Blend?
Recently Joseph Marigliano, partner at Transcend Transcend Strategic Consulting, asked the following on the Professional Pricing Society Group at LinkedIn:
There are two major classes of pricing tools and processes today: transactional price management and value management.
For purposes of discussion, transactional is all about getting the determined price, with the “usual suspects”, discounting, waterfalls, price elasticity, etc. Value would be defined as including value mapping, tradeoff modeling, agent based simulation, economic value estimation, value proposition communication, etc. There are supporting software vendors for both camps.
Question: What experiences has anyone had in “unifying” both groups under one effort? For example, doing new product development can involve all of the upstream value innovation, identification, creation, and communication work, while then becoming involved in the tactical price setting, list price generation, bid quidance etc. A complete view would enable the PM to see the realized value capture versus conceived value potential and understand variation by any number of factors.