Sales vs. Pricing and Large Account Management
Prices are too high for our customers. Sales is giving away our product. We have heard these claims. Many times. These arguing points between the professionals who manage customers and those who manage prices have been fought over for aeons. Yet which group is right?
Acknowledging that there is no blanket answer to this question, and in fact I would state that is an ill posed question in its current form, what can we do with this issue?
Research by Homburg and Jensen demonstrated that some differences between sales and marketing improve profits and others destroy them. Improving profits are differences in time horizons and orientations towards the alignment of products and market demand versus products and customer specific relationships. Destroying profits are differences in interpersonal skills and competencies.
Using this realization, let us refocus the question to the needed shared competencies between sales and marketing. Specifically, let us consider the use of price segmentation according to account relationships by asking: How should prices and margins be dependent upon account specific relationships?
To address the issue of margin alignment to account relationships, let us leverage the research by Miller and Heiman on large account management into the creation of thought leadership in pricing.
Level Setting: Large Account Relationships
In business markets, relationships drive success. Relationships determine the ability to identify needs, develop customer oriented solutions, and capture profitable sales. Poor customer relationships imply a firm is perceived as just one of many suppliers of a necessary input whose points of differentiation matter little. Strong relationships imply the firm is seen as a strategic partner in creating value not just in delivering a good product at a good price, but in enabling the customer to compete stronger within their own market.
It is this understanding which underpins much of the sales methodology discussed by Miller and Heiman in their text The New Successful Large Account Management. In fact, they assume this point of view in stating “Relationship alignment is a critical feature of Large Account selection, for only those relationships whose value is recognized by both supplier and customer are truly sustainable.” (p. 20)
Miller and Heiman’s approach to large account management encourages firms to consider the following points of analysis on an account by account basis.
- The Buy-Sell Hierarchy: What is the status of account specific relationships?
- The Field of Play: With what part of the customer’s organization are you seeking to grow your relationship?
- The Strategic Players: Who is involved in that specific relationship?
- Account Trends, Opportunities, Strengths, and Vulnerabilities: What is the situation of the customer?
- Charter Statements: What specifically does the customer and the firm get out of the relationship
- Goals: What person specific action steps will be pursued which lead to the fulfillment account charter and the development of the relationship?
- Account Investments: Accounting for risk and value, what customer specific investments should or should not be made to improve the relationship and its profitability?
Of these issues, the Buy-Sell Hierarchy is one which professionals involved in selling and pricing decisions can profitably develop a mutual competency.
The Buy-Sell Hierarchy
The Buy-Sell Hierarchy encourages firms to consider accounts not simply by size or name, but rather by the way the business customer perceives the supplier. It requires thinking with the customer’s mind similar to the manner in which I encourage firms to think about pricing questions.
From the customer’s perspective, Miller and Heiman encourage salespeople to evaluate the relationship. To enable measurement, they provide a five level hierarchy.
Level 1 – The customer perceives you as one of many suppliers of a necessary input.
Level 2 – The customer perceives you as providing “good” products.
Level 3 – Your firm has extended a special and differentiated effort on the customer’s behalf and the customer recognizes and values your investment.
Level 4 – The customer sees explicit connection between your product or service contribution and your added value to their financial performance.
Level 5 – The customer perceives you as an external asset to address business challenges and contribute to their strategy development.
Importantly, from a pricing perspective, the Buy-Sell Hierarchy explicitly draws a correlation between price sensitivity and relationship status. As accounts move up the buy-sell hierarchy, their price sensitivity decreases.
At the lowest level within the buy-sell hierarchy, the customer perceives the supplier as a commodity provider. Any positive differentiators between a specific supplier and its competitors are ignored leaving price as the only driver to purchase decisions. As a supplier moves up to the second and third levels of the hierarchy, they pass through the phases of being perceived as a supplier of good products where differentiators are included in purchase decisions, to being a supplier of both good products and good client-account service.
To achieve one of the higher two levels, the relationship must evolve significantly. In the lower three levels, salespeople are mostly in selling mode and focused on meeting quotas and pushing product. In the higher two levels, a business partner relationship is developed where the supplier is perceived as contributing to the customer’s business performance.
At Level 4, the financial performance improvement created through the supplier-customer relationship is both acknowledged and valued. Customers perceive the supplier as not simply an input, but rather as making a significant and important contribution to their performance. At this level, customer’s price sensitivity begins to decrease not because they don’t want a good price, but because the overall supplier-customer relationship contributes to their financial performance and the relationship is in the customer’s immediate best interest.
At Level 5, not only is the financial value of the relationship acknowledged, but the strategic value of the relationship is developed. The supplier’s value to the customer is beyond that embodied in the products and services that they sell. Rather, the supplier is perceived to be a partner in developing corporate strategy, improving the profitability of the value network, and improving their strategic position within the industry. At this level, customer’s price sensitivity is at its lowest, and again not because they don’t want a good price. Rather, price sensitivity is reduced because the overall supplier-customer relationship contributes to their strategic performance and the relationship is in the customer’s long-term best interest.
Price Segmentation and Large Account Management
Examining the Buy-Sell Hierarchy from a price segmentation perspective reveals an apparent conflict which can be resolved though deeper thought.
According to a simplistic understanding of price segmentation, customers with a higher price sensitivity should be extended a lower price while customers with a lower price sensitivity should be extended a higher price. Applying paradigm to large account management would imply that customers low in the Buy-Sell Hierarchy should get the lowest price while those high in the Buy-Sell hierarchy should receive the highest price. Such a simplistic approach is misguided however. Value is destroyed by systematically extending the lowest price to customers low on the Buy-Sell Hierarchy while extending the highest prices to customers higher on the Buy-Sell Hierarchy.
A more nuanced approach to pricing strategy encourages firms to seek customers that value them the most and eschew those that don’t. In terms of price segmentations, this would imply the exact opposite response in defining a firm’s pricing strategy. As a policy, customers that are high on the Buy-Sell Hierarchy should get the lowest price on average because they are the firm’s best customers: customers that create the most value for the firm, exhibit the highest loyalty, help the firm uncover new market demands, and give the firm the greatest price resiliency within their chosen market. In contrast, as a policy, firms low on the Buy-Sell Hierarchy should get the highest prices on average precisely because they don’t value the firm, value the firm’s deliverables, nor value the firm’s efforts to help them succeed.
This nuanced approach addresses three key strategic issues for pricing, sales, and the firm’s profits.
Number one: Price Contagion Management. Price contagion is where customers who are paying a higher price than others learn that other customers are getting a lower price and as a result demand that same lower price from the supplier. If prices variances between customers are not justified on some objective criteria, the risk of price contagion is high and the profit impact can be large and negative. One might pose this as a challenge of having a poor price segmentation hedge that fails to successfully segment customers in the price they pay.
In terms of price contagion, it can be very destructive for a firm’s profitability if their best accounts, accounts high on the Buy-Sell Hierarchy, should learn that customers lower on the Buy-Sell Hierarchy are systematically getting a better price. Not only would this harm the relationship, but it may also force the firm to lower their prices for their largest customers.
Number two: Account Management Incentive Alignment. The goal of the large account management process is to encourage customers to move up the buy-sell hierarchy, not move down it. By extending the best prices to accounts that have acknowledged and demonstrated a strategic value to the relationship, the firm is encouraging firms low on the Buy-Sell Hierarchy to invest in the relationship and move up the Buy-Sell Hierarchy.
Number three: Mutually Beneficial Value Alignment. Both from a sales and pricing perspective, the purpose of customer relationships is to create mutually beneficial value. To reiterate Miller and Heimen: “only those relationships whose value is recognized by both supplier and customer are truly sustainable.”
Attempting to sell and capture value from customers who do not value a supplier’s differentiators is like trying to squeeze blood from a turnip. It just isn’t going to happen. These customers treat the firm as a commodity. Relationships are a two-way street. The firm should likewise treat these customers as commodities. They do not add a lot of value to the firm and do not deserve having the firm expend time and resources in making sure they get the lowest price possible.
In contrast, selling and capturing value from customers who value the supplier’s differentiators is like attracting bees with honey. It is easily done. These customers perceive the firm as a strategic asset. Since relationships are a two-way street, the firm should likewise treat these customers as strategic assets. They add a lot of value to the firm and deserve having the firm expend time and resources in making sure they get the most appropriate price.
Conclusion and Use
So how should price segmentation be related to account relationships? In this article I have argued that customers who perceive a firm as a strategic asset should be granted preferential treatment which might include preferential pricing, and firms which do not perceive the supplier as important nor as having differentiated offerings should not receive preferential treatment nor preferential pricing.
I have carefully worded this missive to avoid certain claims. Specifically, I have not stated that a firm should never give a low-level account the best price. At times, it may be strategically important to do so. However, as a policy, I believe I have successfully defended why such an approach destroys value for the firm.
For pricing professionals dealing with sales professionals, this argument has been made in order to enable pricing decisions to be better aligned with selling conditions. For instance, if the salesperson states an account is strategic, by which she means that the account relationship is mutually beneficial and is a strategic asset; perhaps more leeway in pricing is justified. In contrast, for new accounts or accounts which offer little relationship value, prices should be extended which reflect the potential value of the offering and negative price variances should be minimal.
For salespeople dealing with pricing professionals, this argument has been made to enable you to communicate pricing requests more clearly. As a salesperson, your proper value is manifested in your ability to create and sustain mutually valuable relationships. These relationships are conduits for mutually beneficial value. Sales professionals aren’t just clerks which pitch prices and products and should not be viewed as such by others. Salespeople are relationship managers and should be charged with and enabled to properly managing customer relationships. In stating why an account deserves better pricing, perhaps the above arguments will enable clarification of the proper price position.
Does this address all the issues in discounting and price variances? Not at all. But in keeping with the research by Homburg and Jensen, firms will be better off if both sales and pricing professionals understood the challenges each other were trying to solve – and to do that, they must both be thinking about the strength of their account portfolio.
References & Notes
- Christian Homburg & Ove Jensen (2007), “The Thought Worlds of Marketing and Sales: Which Differences Make a Difference?” Journal of Marketing, 71(July) 124-142.
- Miller, Robert B., Stephen E. Heiman, and Tad Taluja, (2005) The New Successful Large Account Management: Maintaining and Growing Your Most Important Assets – Your Customers, New York, NY: Warner Business Books.
- Extending lower prices to customers low in the Buy-Sell Hierarchy while extending higher prices to customers high in the Buy-Sell Hierarchy may improve short term profit performance, but is argued here to be destructive from a long-term profit performance perspective for the reasons noted. As a note, Homburg and Jensen uncovered difference in time horizons is positively correlated with firm level profit, where sales tends to think short-term and marketing tends to think long-term. While differences in perspectives on time horizons may be valuable to the firm, that doesn’t imply that all selling decisions should be determined through short-term thinking nor that all pricing decisions should be determined through long-term thinking. It only implies that the two perspective help develop better decisions overall when both perspectives are brought to bear on a business question.
Note of Interest and Holdings: At the time of writing, the author is not currently a direct consultant to nor investor in any of the firms listed in this article.