Required Pricing Deliverable
In pricing, what is the fundamental deliverable? What must be done?
While we at Wiglaf Pricing have spent much time and effort discussing how pricing decisions can be informed, what kind of analysis can go into pricing decisions, who should be engaged in pricing decisions, how pricing decisions impact the organization and individuals, and how value-based pricing is accomplished, the main point of pricing is sometimes lost.
Pricing must deliver actionable prices.
Actionable prices mean prices that provide sales representatives with a reasonable expectation of the price they should capture from the target market and from specific market segments and customers for a specific offering.
This is no small feat.
We have observed companies in which the average price achieved is 70% below the pricing guidance previously provided. While many pricing managers may not think that is possible, some organizations operate in this manner for years until, finally, an executive demands greater clarity and certainty in price achievement. That is, they demand that their price sheets have some useful meaning to them.
We have also observed companies in which the range of prices achieved varies, without rhyme or reason, upwards and downwards by 50% between customers and transactions. The variation is inexplicable by customer size, transaction size, geographic region, or salesperson. The range is below the pricing guidance provided, and the price variation between sales is above +/- 50%. While many pricing managers may not think that is possible, some organizations operate in this manner for years until, finally, an executive demands greater clarity and certainty in price achievement. That is, they demand that the company’s price achievements have some sort of rationality behind them.
While the route to fixing these challenges varies greatly, and the approaches one might take fills textbooks (See Pricing Strategy), the responsibility of almost every pricing effort is to deliver actionable prices.
Target, Ceiling, Floor
At the transaction level, actionable prices imply a target price to achieve on individual sales. The target price may be a high-goal or it may be an expected average, but in one way or another it provides salespeople with some clarity. It answers a simple question: what should I expect to achieve on this individual sale?
Augmenting the target price are two other key numbers: the ceiling and floor. The ceiling and floor prices provide salespeople with an expected range to negotiate between.
The ceiling tells salespeople what a high price on an individual transaction would look like. Can sales sell above the ceiling? That is a strategy decision and differs between firms. In cases where company strategy allows it, the ceiling is still useful. The ceiling price states where transacting at prices above this ceiling is likely to put the account or the individual sale at risk, even though selling higher may be possible.
The floor tells salespeople what a low price on an individual transaction would look like and is often called the walk-away price. Can sales sell below the floor? Again, this is a strategy decision and differs between firms. In cases where company strategy allows it, the floor is still useful. The floor price states where transacting at prices below this floor will require exception handling as it is out of line with similar transactions in the market.
For the target, ceiling, and floor prices to be actionable, they often need to be contingent upon multiple variables that define price segmentation hedges. Pricing often fails on its fundamental required deliverable when it demands one price for all takers. Yes, it can work for certain offerings. But most businesses don’t operate in such simple markets and, even those that do, generally discover they are leaving money on the table most of the time and failing to penetrate markets they would otherwise be able to capture.
Rather, prices should generally vary. They vary at the market segment, customer, customer contract, and even transaction levels for good reasons. They may also vary not just by offering, but the rules for pricing will vary by product category and price grouping. These input variables often impact the output variables: Target, Ceiling, and Floor Price.
Actionable Price Outputs
Hence, actionable prices often result in delivering salespeople a key set of information at the time of annual territory planning, individual account planning, and individual sales negotiation. It may look like the table below.
In this table, pricing is telling the salesperson the following: “For customer ABC Ind., which is in the market segment Medium, when selling product Sprocket, your target price is 28.00, ceiling is 32.00, and floor is 26.50. The price quote of 20.00 is too low and is not approved.”
The specifics may vary for a different customer buying the same offering in a different segment. It may even vary for customer ABC Ind. on a different day or under different buying situations. But, for that transaction, pricing is delivering the target price and expected price range. Pricing is stating that to operate outside of that range is to put the salesperson and business in peril.
Configure-Price-Quote (CPQ) software can automate the delivery of this information, but pricing must first generate the information and provide the rules behind the information. That is, pricing must determine and deliver actionable target, ceiling, and floor prices.
This is what must be done. In pricing, the fundamental deliverable is actionable prices. This the work of a pricing professional. And, pricing professionals should be well aware that families, careers, colleagues, and companies are depending on the reliability of the actionable prices they deliver.
People are counting on you. Get to work.