Warren Buffet famously said that “if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business”. However most businesses are facing an ever increasing pricing pressure, possibly due to lack of prayer sessions. The text-book answer to this situation is to increase value delivered to customers through product and service differentiation. However developing better products is a long term solution. The other important lever is value capture – business is not only about value creation alone but also about capturing the value created. Price realization is about capturing value created.
For optimum price realization, many B2B firms follow a variable-discount-over-list price model. Products have a nominal “List Price” – similar to the MSRP or the sticker price on cars in a dealer lot. It is a statement of the position of the product in the portfolio line-up or compared to the competition. Just like the car MSRP, no customer ever pays the sticker price. Every deal with a customer receives a custom discount. The discounted price ideally captures customer willingness to pay. It is the responsibility of the sales person to maximize the deal size by selling the largest number of units while capturing the highest price the customer is willing to pay (or maximize profit or market share or number of units depending on firm strategy).
For larger and complex deals with important customers, companies cannot rely on the judgement and negotiating skills of the sales representative alone. So companies have instituted a deal governance /deal-management/deals-desk process. This could take different forms. At its simplest, a discount sheet lists fixed discounts offered at various unit volume ranges. More often a governance process in the form of an approval chain is in place. Depending on a fixed set of criteria such as size/complexity/discount-level, higher and higher authority is required to approve the deal. The sales person provides a justification as to why such a high discount is required and the approving authorities exercise their wisdom to approve or reject the pricing proposal.
Let us consider an example of a typical deal governance process. A sales rep who wants to submit a quote to a customer for 100 widgets with list price of $100 each at a 20% discount. This deal is approved by her manager the same day. Next time the same rep needs to fend off competition and requests for a permission to sell another 100 widgets at 40% discount. This time approval must be obtained from the district head. Later she has a lead for a major deal involving 10,000 widgets which she expects to win at 30% discount. As the deal size is much larger, the regional VP must sign off on the deal.
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