Expensive Pricing ‘Games’

I’m regularly regaled with stories of pricing games played in large organizations, many are Fortune 1000 companies, that cost them business.  Yet the games persist.  Here are a few examples to help you avoid these pitfalls.

Marketshare game

A marketing professional in a Fortune 500 company is also a member of the sales team.  She bemoans the regular churning of middle managers and says ‘Every time a new boss mentions market share I know that I’m going to have to boost the price on my proposal by 10% so that my boss can cut the price and feel that he/she has contributed to the sale.  That 10% is on top of the 10% I add to allow the prospect’s procurement people to feel that they’re doing their job.’

No one is tracking is how many deals are lost due to the fact that their proposed price is 20% higher than it should be.

The same thing goes on in retail.  Companies raise prices, then have regular ‘promotions’ or offer coupons that lower the price.  Recently we experienced a sudden drop in temperatures.  My wife asked me to stop by the grocery to pick up a few things.

As I entered the store I thought ‘I bet oatmeal is on sale.’  Sure enough, just when customers’ desire for their product rises the price drops.  To be honest I don’t know whether that was the store’s decision or the manufacturer’s.  Regardless, it’s an inane move.

The only possible explanation for this insanity is that either the grocer or the manufacturer were striving for market share.

Annual increase game

Let’s contrast the above example to a mid-sized manufacturer whose leadership is demanding annual price increases regardless of where their products are in the life cycle.  Their pricing director said that the sales force has to use the elevated price to meet leadership’s directives even though the product is in the decline phase of the product life cycle.  The sales force then discounts that price in the proposals they create.

In this instance the pricing director and sales force know that they’re losing deals because their proposals are getting kicked out due to the higher initial price shown in the proposal.  In other words, prospective customers aren’t reading far enough into the proposal to see the discount.

In a similar vein a Fortune 500 company raises prices annually, then tracks its ‘realization rate’ to ascertain how much of the increase they’ve actually received.  It’s doubtful, in my mind anyway, that they know why they aren’t able to get the targeted annual increase.  In other words I doubt that could tell us how much of the ‘lost’ increase is due to poor salesmanship, ill-conceived sales compensation plans, where their offering is in its life cycle or whether they’re simply targeting the wrong market.

The big question

The question you need to be asking yourself is ‘What pricing games am I playing?’

Regardless of the game you’re playing here are the results you can expect:

1. You’re confusing the customer about what the true value of your offering is.
2. Confused buyers either continue searching for what they want or, when feeling compelled to buy, revert to price because you and your competitors appear to be commodities.
3. Even customers who value what you offer will wait for the inevitable ‘promotion’ before making a purchase costing your company the margins it could have gotten.
4. As cited above, your proposals, as well as the time, energy and costs that went into creating them, are eliminated from consideration in the first cut.
5. Your sales and marketing costs go up while your sales and margins decline.

Are you really interested in absorbing all these costs?  Then stop playing games!  Establish pricing that reflects the value of your offerings and hold firm on those prices.  You’ll enjoy greater customer loyalty along with faster sales and margin growth.