Setting the right price for a product, it has been said, is part art, part science. The science piece of the equation – in the form of price optimization software – can be quite compelling. These software applications can take into account any number of factors including real-time changes in competitors' pricing, to set what it deems to be the optimal price of a product.
But what about the "art" of setting prices? Is there room for the human factor?
The short answer: Yes, but it can get complicated. It is worth it however, and done properly the resulting input will be just as valuable as the range of data points crunched by software.
It all starts with the sales rep. He or she is on the front line of the battle for corporate revenue. They also are the first and sometimes last contact point a customer has with the company. So who better than to turn to about advice on said customers, correct, than the sales rep? For that reason, when the sales rep urge headquarters to come down a notch on pricing, their opinion should seriously be considered, right?
Maybe, according to academic research on the subject—but first have the sales reps strenuously argue the case as to why a price should be lowered.
So found a study that ran in the November issue of Marketing Science, a publication of the Institute for Operations Research and the Management Sciences (INFORMS).
The study, called "Why do sales people spend so much time lobbying for low prices?" was conducted by Duncan Simester, the Nanyang Technological University Professor of Management Science, and Juanjuan Zhang, Associate Professor of Marketing, both at the MIT Sloan School of Management.
They began with the premise that product managers suspect that the sales force is trying to make their own jobs easier when they ask for lower prices—that is, customers will be more likely to buy when the price is low.
The sales force, for its part, thinks management is out of touch with its customer base.
One answer to this stalemate is sales force lobbying, or rather price exception. The power to make pricing decisions is passed to a committee or manager who must approve any discounts. Here is where the sales force can lobby for lower prices and here is where, the research concluded, the company should make the process as bureaucratic as possible.
By that the study means require specific evidence from the rep. I asked the study authors what such evidence might look like. Not surprisingly given their conclusion, it can be summed up as extensive.
The sales process typically includes three steps: (a) from initial interactions with the customer the sales force learns about the customer’s needs, including the strength of their demand; (b) the sales force meet with the product managers--and sometimes the finance team--to agree on what price to charge; and (c) the sales force then returns to the customer and attempts to close the order.
For example, a major technology hardware and software supplier engages in an extended sales process with large customers. This process begins (step a) with the sales force diagnosing the customers' needs and negotiating a "solution" with the customer, comprising software, hardware, services and support. The sales force then negotiates the price of that solution internally with the product managers and the finance department (step b).
To support these internal negotiations the sales force will present evidence from the customer that they are actively considering purchasing from an alternative supplier, together with indications that a competitor is offering a more attractive deal. One product manager described the process as a fine balance; if they approve every request the sales force will ask for deep discounts on every deal, but if they always say no then the firm will lose sales. The goal is to make the process difficult enough so that the sales force only asks for a discount when they really need it, not just when it would make their life easier. Once the price is agreed upon internally, the sales force then presents the price to the customer and tries to convince the customer that this is the lowest price they will be able to obtain (step c).
Cumbersome yes. But if the sales rep is willing to jump these hurdles then the company will know he or she sincerely believes a price drop is necessary.
Once the price drop has passed these hurdles it can be inputted into the price optimization software -- almost all applications support such tweaks. And if such human tinkering is met with anathema from IT, the study authors note that price exceptions are very common requests in high-tech manufacturing sales. They tell of one company where sales people asked for a pricing exception on more than 90% of transactions.
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