Timely Feedback is Essential for Pricing

nathanlphipps

Nathan L. Phipps
Consultant, Wiglaf Pricing

Published June 17, 2021

The importance of timely, specific feedback is a well-known principle in both management and education. Employees or students can course correct faster if errant behavior is tactfully and professionally brought to their attention sooner rather than later. Likewise, successful behavior can be more quickly reinforced by celebrating it as soon after the behavior as possible.

The importance of timely feedback applies to many other areas as well. It also applies to how we interact with our environments through our nervous system and our bodies.

Timely Feedback is Essential for Pricing

Balancing is nigh impossible without timely feedback

Balancing on a beam or tightrope requires our sense of proprioception, which allows us to detect the position of our bodies and maintain an upright posture. If we lean too far to the left, our body will detect it. We intuit that we must adjust our body to the right to bring our center of mass back to the centerline of the object we are balancing on. And if we overcompensate too far to the left (past the centerline goal), we will recognize the change and know that we must now lean to the right to find that perfect balance.

This entire process takes a fraction of a second. But suppose that becoming aware of our body position took much longer. Can you understand the difficulty of trying to balance on a beam if your body took 4 or 5 seconds to register that it was no longer aligned with the beam’s centerline?

I bet that you would quickly abandon your balance beam dreams as a practical impossibility. You would not be receiving the necessary feedback to adjust your body’s position in a prompt manner. By the time that your brain registered that something is off with your balance, you would already have lost your balance and be on the ground. Your brain would still receive the feedback, but far too late for you to do anything useful with that information.

Balancing is a skill that we all have some innate ability for, and our body has innate mechanisms to maintain balance. But, to extend this concept more broadly, learning any new skill requires feedback and adjustment. And the timelier the feedback, the quicker the adjustment can occur.

An absurd basketball example

Imagine that you decide to pick up a new skill: you will pursue your desire to be the best 3-point shooter in your neighborhood. You know that repetition is key, so you purchase 10 basketballs and prepare to head over to your local basketball court to perfect your 3-point shot. (Ten basketballs may seem excessive, but you reason that you will be able to spend less time retrieving the basketballs and more time shooting.)

Unfortunately, while researching how to improve your 3-pointer skills, you find a charlatan online who is hawking his “soon-to-be patented” Sports-O-Matic 3000 training helmet. Through a gross misunderstanding of the technique of spaced repetition, the charlatan explains that the longer you delay feedback for a given action, the stronger your learning and improvement will become.

His amazing invention actually detects when a basketball shot reaches its apex, and then the training helmet temporarily blocks the user’s eyesight by deploying a blindfold and blocks the user’s hearing by deploying earmuffs. This prevents the user from seeing or hearing whether the shot was successful or not. Instead, the training helmet has a camera that records the outcome of the shot, so that the user can view the results after at least 24 hours have passed.

The charlatan is quite charismatic in his declarations of the power of this sports training “scientific breakthrough.” Plus, the product has a plethora of 5-star reviews on a popular ecommerce website, and most of the reviewers don’t even seem to have made-up names. So, you agree (for some reason) that this approach is worthwhile and decide to purchase your very own Sports-O-Matic 3000 helmet.

For the sake of argument, let’s assume that your new training helmet is lightweight and does not interfere with your perception and senses while making a shot. The only effect of the helmet is that you do not learn whether you have success or failure until after 24 hours have passed.

(Note that feedback on an unencumbered, helmetless 3-point shot is not as rapid as the previous balancing example, which could be measured in fractions of a second. There will always be 2 or 3 seconds between when you shoot and when you learn about the outcome of your shot. Timely feedback is feedback that is available as soon as possible.)

Needless to say, your Sports-O-Matic 3000 helmet is a complete failure, and it does nothing to help you improve your 3-point shots. The time between when you engage in your shooting action and when you learn about your success (or failure) is too long to be able to make effective adjustments to your shooting technique.

Are you using the right posture? Are you releasing the basketball correctly? Are you using too little force and coming up short, or too much force and shooting over the backboard?

You don’t know! And you won’t know for another 24 hours!! How can you possibly develop the muscle memory necessary to become a superb 3-point shooter with such a horrible delay built into your training program?

What if your feedback was delayed by a week? By a month? Until the end of the fiscal quarter? Until the end of the fiscal year?

Now we are getting to the struggle that salespeople face if they do not have timely feedback about the prices they offer to customers.

Salespeople need timely pricing feedback

It is impossible to expect optimal prices if the sales team does not have timely feedback on whether their proposed prices meet margin requirements (or whatever criteria the management team has determined).

Some businesses have an incredibly simple pricing structure with well-defined targets and price floors that apply to all their customers. But for businesses with complex pricing structures and a multitude of discounts and rebates that apply to some customers but not others, calculating the accurate price target and price floor generally requires a tech solution.

For instance, Customer A is a very large customer, so they get a very large strategic annual volume discount. Customer B is a medium customer, so they get an annual volume discount, but at a lower percentage than Customer A. Customer C is a small customer, so their annual volume discount is negligible. But they always pay their invoices early (thus qualifying for an early payment rebate) and over half of their annual purchases are for strategically important products (which qualifies them for a strategic growth rebate). Customer D is eligible for a co-marketing rebate and a shipping rebate because they always order a full truckload.

This is all easy enough to keep straight with only 4 customers. But what about salespeople who must manage dozens of customers and keep track of eligibility for over 50 different strategic discounts and rebates? How much of a tactical discount can the salespeople offer before they drop below their price floor or need management approval? Keeping track of it all quickly becomes overwhelming.

And expecting salespeople to just calculate their margin can be an impossibility if they are in an industry with rapidly changing variable costs or if the company does not actually disclose what those variable costs are until the end of the year. That would be like not receiving the shot results from the Sports-O-Matic 3000 helmet until the end of the year. And some companies would prefer their sales team to not have full knowledge of their entire cost structure. (This is a concern that can be addressed through profit-based incentives, such as Deal Points.)

Salespeople need a simple measurement that tells them THIS is my price target and THAT is my price floor. Timely feedback allows salespeople to answer all types of pertinent questions.

Is this price too low? Will this price move them closer to meeting their annual profit goal? Will they have to seek higher prices later this quarter to make up lost ground? How much leeway do they have to negotiate?

Feedback on pricing behavior needs to be timely. In most cases, that means that salespeople need to have feedback on their prices at the time of the sale. How else can they discern meaningful information about the transaction and adjust accordingly?

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About The Author

nathanlphipps
Nathan L. Phipps is a Consultant at Wiglaf Pricing. His areas of focus include pricing transformations, marketing analysis, conjoint analysis, and commercial policy. Before joining Wiglaf Pricing, Nathan worked as a pricing analyst at Intermatic Inc. (a manufacturer of energy control products) where he dealt with market pricing and the creation of price variance and minimum advertised price policies. His prior experience includes time in aerosol valve manufacturing and online education. Nathan holds an MBA with distinction in Marketing Strategy and Planning & Entrepreneurship from the Kellstadt Graduate School of Business at DePaul University and a BA in Biology & Philosophy from Greenville College. He is based in Chicago, Illinois.