A Survey of 1,700 Companies Reveals Common B2B Pricing Mistakes | Harvard Business Review

Pricing to the Average Is Always Wrong
One-size-fits-all pricing actually fits no one. Yet it is not unusual for sales executives to admit that their ability to tailor prices at the customer and transaction level is rudimentary, or that they are not even aware of how much margin they make on deals.

By contrast, more-advanced companies tailor their pricing carefully for each combination of customer and product, continually working to maximize total margin. They bring data and business intelligence to bear on three variables for setting target prices:

  • the attributes and benefits that each customer truly values, and how much value is created for them
  • the alternatives and competitive intensity in the industry
  • the true profitability of the transaction after accounting for leakage in areas such as rebates, freight, terms, and inventory holding

One North American manufacturer with margins that were highly dependent on raw material pricing suffered from an undisciplined approach to pricing. A diagnosis allocated costs at the product and customer level to determine true profitability. That diagnosis, which showed the manufacturer was undercharging in many cases, provided the support needed to raise prices where appropriate in subsequent contract negotiations, leading to an average 4% increase from that opportunity alone. The company designated an executive to be accountable for related profit margin opportunities and to track the status and effect of each price increase. As a result, the company improved earnings before interest, taxes, depreciation, and amortization by 7 percentage points.

Bad Incentives Undercut the Best Pricing Strategies
Managers often criticize sales reps for losing a deal, but rarely for pricing a deal too low, so reps learn to concede on price in order to close the deal. Moreover, companies rarely reward sales reps for exceeding price targets, which means few reps take risks to push for a higher price. Misaligned incentives push deals down to the minimum allowed price.

The antidote is to align compensation with strategic goals. Incentive plans benefit from following a few principles:

  • Clarify the objectives — be they revenue growth, share gains, margin gains, or others — and the behaviors that will help meet the objectives.
  • Make it foolproof. Help sales reps understand the payout calculation, simplify the quota structures and supplemental incentives, and make the upside for outperformance meaningful.
  • Ensure transparency. Sales reps should easily see the effect of a deal’s price on their personal compensation.
  • Track the results through regular reviews that flag areas where frontline staff might game the system.

Returning to the case of the industrial goods manufacturer described earlier, the company also overhauled its incentive program to balance revenue and profit. It created a pricing tool to make the commission on each deal visible to sales reps — for instance, “If I raise the price by $2,000, I earn an extra $700.” Sure enough, reps began to close higher-margin sales. These changes led to a 7% increase in prices, which added almost 1 percentage point as part of a 3.5-percentage-point improvement in margin overall.

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A Survey of 1,700 Companies Reveals Common B2B Pricing Mistakes.