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Sales vs. Pricing and Strategic Accounts

October 2011 Pricing, Selling

Salespeople abuse discounts.  Pricing is the sales destruction department.  I’ve heard these claims.  Many times.  And on both sides of the aisle. They are the basis of contention between those who actually bring in customers (salespeople) and those who manage markets and profits (pricing managers).  Well, must these two groups be in contention?  Is this contention healthy?  And, more importantly, can it be resolved and dissolved?

Research by Homburg and Jensen demonstrated that some differences between sales and marketing are healthy and others are unhealthy.  In the healthy category, differences in time horizons and goal orientations improve profit performance.  In the unhealthy category, differences in competencies and interpersonal skills harm profit performance.

In this article, I seek to address a specific difference in competencies between sales and pricing.  Specifically, I seek to inform pricing on the challenges of capturing a good price with every account even if they have a terrific sales department.  Similarly, I seek to inform sales why some accounts don’t deserve the best price even if the pricing department allows it.  To do so, I will use a paradigm put forth by Heiman and Sanchez.  As a result, I will suggest an approach to market segmentation and price discrimination.

If you are only selling a commodity, much of this may not matter.  But if you are selling high-value differentiated offerings, it will.

Level Setting: Business Market Buying Decisions

In business markets, purchases are still made by people, not companies.  People within the company identify a need, investigate the alternatives, make a determination, purchase, and evaluate the results of their decision.  These are people doing each of these steps, not companies… people within a company, but still people.

Not all people within a client business contribute to the purchasing decision in the same way.  Some may evaluate its usefulness, others may evaluate its fit against a checklist of criteria, and still others may make cost-benefit tradeoffs.  Heiman and Sanchez define these three different types of decision makers within a buying committee as end user, technical, and economic buyers respectively.  They then go on to define a fourth member of this buying committee, the coach, which guides a salesperson through the buying committee and helps drive a completed sale.

Of these four types of customer decision makers, only one makes economic tradeoffs, the economic buyer.  All others may contribute to that key economic tradeoff, but they are not the key decision maker.  Period.

In The New Strategic Selling, Heiman and Sanchez go on to provide protocols for identifying a customer’s buying mode, managing perceptions, driving win-results, and managing the sales funnel.  All good and important stuff.  Anyone with a marketing education should recognize their approach as a re-contextualization of standard academic consumer behavior concepts within an executable framework for major account salespeople.

Of the ideas within this approach, the key concept in which pricing managers and salespeople need to share in common competency is in how to think about the buying committee within a strategic account.

Price vs. Utility Buyers

From considering the buying committee and the penetration of relationships a salesperson has made within that buying committee, we can quickly distinguish business customers as price buyers versus utility buyers.

In the buying committee, people with the word “purchasing” in their title and having incentives based on their ability to reduce input costs in comparison to a benchmark of choice, tend to be price buyers.  These purchasing agents may be able to kill a sale, but are rarely in a position to make a rational tradeoff between utility and price because they frankly don’t know enough about the offerings, how they are used, the benefits they deliver, and the results a firm should expect from their selection.  As such, these purchasing agents are identified as technical buyers within the buying committee (power to say no, no power to create a yes), and also tend to be price buyers with primary purchasing motivation of reducing direct acquisition costs.

In contrast, utility buyers are buyers whose primary motivation in making a purchase is to derive value from the outcome.  Meaning, the offering they select must deliver more benefits than its alternatives after subtracting the all costs, and fitting within the budget constraints of the firm.  If that buyer also has budgetary authority, and is consequently responsible for the profitability of their business, that person is the economic buyer.

As to end-users, they will strongly influence the perception of value, but they lack the authority to drive a purchase, and they lack the authority to reject a purchase.  Hence from a pricing perspective, we will neglect this group to drive the focus on the differences between accounts penetrated at the purchasing department level versus the economic buyer level.

If the salesperson has been able to sell to the economic buyer, that salesperson is selling to a utility sensitive customer.  If not, that salesperson is forced to transact with purchasing agents and therefore is likely to be selling to a price sensitive customer.

Who Gets What Discount?

First, consider the issue of pricing and discounting.  Which customer is most likely to beat the salesperson up over getting a lower price?  The customer with which the salesperson has reached the economic buyer or the customer with which the salesperson has been kept at the purchasing agent level.  Yes, both will want a good price, but only the economic buyer is making price and utility tradeoffs while the purchasing agent is likely to focus on price alone.

If the salesperson is only dealing with the purchasing agent, the offering is effectively being treated as a commodity and price has become the only point of differentiation.  Hence, that purchasing agent level sale will be a price focused sale.

In contrast, if the salesperson is dealing with the economic buyer, that offering is being treated as a differentiated value offering and the utility after considering all cost issues, not just the price, is the focus.  That economic buyer level sale is a utility focused sale.

Second, consider who gets a discount.  The price oriented customer that kept the sale at the purchasing agent level or the utility oriented customer that allowed the sale to reach the economic buyer?  Unlike common consumer market rules that indicate that price buyers should get an discount while utility buyers should not, there are nuances to business markets that imply a different protocol should be executed.

There is little reason to give a good discount on a highly differentiated offering to a customer that is treating it as a commodity.  Let the commodity buyers buy a commodity that is priced like a commodity.  In other words, a sale that is kept at the purchasing agent level implies the customer is a price buyer.  Price buyers don’t value differentiated offerings implies companies should not sell them differentiated offerings.  Instead, companies should sell them a low-value, competitively priced offering.  And, when it comes to discounting, have a predefined “walk-away” point for the sale, but don’t waste a lot of time on that customer.  That customer doesn’t care about you or your firm.  They showed it by not letting you communicate your value to the economic buyer.

In contrast, discounting a highly differentiated offering to a utility sensitive business customer can make sense.  That customer has expressed their interest in gaining utility simply through the fact that the customer allowed the salesperson to sell at the economic buyer level.  While it is true that it would be better to convince the customer to “trade down” into a lower priced, lower value offering, it is also true that offerings don’t come at every point within the price to value equivalence line.  Hence, some price variance to acknowledge that the customer isn’t achieving the full value of the offering might be reasonable for highly differentiated offerings.  This acceptable price variance is contingent upon the salesperson being convinced that the economic buyer understands the value, has made the right tradeoff, and is being given a price commensurate with the value they are deriving from the offering.  This customer demonstrated that it cares about the firm’s offering simply by allowing a full sales cycle to occur that included the economic buyer.

Strategically Aligned Market and Price Segmentation

Putting these ideas together, we have a normative prescription for the firm, one which enables sales and pricing to work together in their goal for serving customers profitably.

If the sale is kept at the purchasing agent level

  • Refuse discounting higher-value offerings and instead force the customer to make tradeoffs within the offering lineup
  • Allow discounts on lower value offerings as long as the sale remains profitable, but don’t bother giving them the best price.  They don’t care about you or your firm.
  • Don’t spend a lot of time on the effort because resources (sales time and managerial time) can be better spent elsewhere

If the sale is conducted at the economic buyer level

  • Drive customers to make tradeoffs within the offering lineup to best match the utility demanded at the price afforded
  • Allow discounts across the offering lineup in accordance with the customer’s ability to derive value from the different offerings as long as the sale remains profitable and other relationship value (future sales, references, etc.) can be derived
  • Spend time with that customer because they are signaling their willingness to partner with their suppliers in creating value, and therefore their interest in creating mutual wins

This paradigm may not be a perfect, but it goes a long way in helping both sales and pricing professionals understand the challenges of capturing a good price and a rational reasoning behind denying a price discount.  In other words, it can help the firm tactically execute a strategically aligned market and price segmentation.

References

  • Christian Homburg & Ove Jensen (2007), “The Thought Worlds of Marketing and Sales:  Which Differences Make a Difference?” Journal of Marketing, 71(July) 124-142.
  • Stephen E. Heiman, Diane Sanchez, with Tad Tuleja, The New Strategic Selling:  The Unique Sales System Proven Successful by the World’s Best Companies Revised and Updated for the 21st Century, New York, Warner Books, 1988: 168.


About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
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