Do You Let Customers Set Prices?

Many product management and marketing leaders tell us that they carefully develop pricing according to business strategy, and that their pricing is guided by three requirements: the needs of the buyer, the value the offering delivers and profitability. But they fail to set strong pricing policies to ensure the fruits of the strategy are delivered. Without this policy, every transaction runs the risk of becoming an “exception,” and customers – not the organization – end up setting prices.

A strong pricing policy clearly spells out pricing and how it is structured, what metrics are used to value the offering (e.g. number of seats, time used, data downloaded). It indicates the criteria customers must meet to fit into each price band. It also explains policy (e.g. price protection, raw-material cost increases). Finally, it provides direction to the sales team on how to manage price objections.

To maintain the value of an organization’s products or services, a best-in-class policy provides a menu of tradeoffs salespeople may offer when negotiating with buyers. Say a company has a budget of $25,000 for software. Your proposal comes in at $32,000. Do you discount? No! Offer tradeoffs of service levels or usage access. That way, customers come to understand that pricing is not open to negotiation, but that the solution can be reworked to fit the budget. Once customers are used to working with your organization in this way, they will no longer assume they can negotiate, and will better recognize the value of your offering.

Once you have built strong pricing policies, make sure you do two things: First, educate your sales force on the pricing strategy and policy, and provide them with tools (e.g. ROI models and case studies) to support the policy. Explain the tradeoffs they may offer customers, and role-play negotiating scenarios with them. Second, develop strong pricing policy enforcement at the regional level. How is this done? First, include regional marketing and sales teams when developing the policy, so they can stand behind it. Second, allow no exceptions. Reject all quotes that go against the policy. If field marketing and sales data indicate that the policy is not competitive, consider revising the policy as well as the pricing.