A Bain & Company survey of sales leaders, vice presidents of pricing, CEOs, CFOs and other executives at more than 1,700 companies across the world found that 85% believe their pricing decisions with regards to business-to-business sales could be improved.
“While most executives suggest pricing is a high priority, the survey shows that, on average, large capability gaps exist in price and discount structure, sales incentives, use of tools and tracking, and structuring cross-functional pricing teams and forums,” reports the management consulting firm.
What Top Performers Do
Bain also studied a subset of “top-performing companies” – defined as enterprises that the respondents self-describe as making excellent pricing decisions, exhibit increased market share, and execute regular price increases.
The analysis of the responses of executives that work in top-performing firms showed that these companies outperform their peers in three areas: pricing strategy, incentives for prudent pricing, and having the right tools and data (see chart below).
According to the study, the top performers are more likely to:
- employ truly tailored pricing at the individual customer and product level
- align incentives for frontline sales staff with the pricing strategy to encourage prudent pricing through an appropriate balance of fixed and variable compensation
- invest in ongoing development of capabilities among the sales and pricing teams through training and tools
What Not to Do
Many of the remaining companies, on the other hand, tend to practice one-size-fits-all pricing because they have only a rudimentary ability to tailor prices, are not aware of how much margin they make on deals, and have not deployed dedicated pricing software.
Bain also highlights a misalignment of sales incentives and pricing strategy. One major industrial goods manufacturer, for example, was found to be compensating sales reps based only on new revenue they generated. “Reps thus had little motivation to protect price levels on any given deal, and most were closing deals at the lowest permissible margin.”
According to Bain, companies rarely reward their sales people for exceeding price targets. Few of them therefore take risks to push clients to pay a higher price.
Crafting an Incentive Plan
One “antidote,” says Bain, is to adopt an incentive plan that aligns compensation with strategic goals. It suggests the following principles to follow in crafting such a plan:
- Clarify the objectives, be they revenue growth, share gains, margin gains or others, and the behaviors that will help meet the objectives.
- Make it foolproof. Help sales reps understand the payout calculation, simplify the quota structures and supplemental incentives, and make the upside for outperformance meaningful.
- Ensure transparency. Sales reps should easily see the effect of a deal’s price on their personal compensation.
- Track the results through regular reviews that flag areas where frontline staff might game the system.