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Setting Pricing

Start with business development.   The first step in setting the price with the customer is to know how low we can go.  The price must be for a solution that meets the need - this, we've discussed.  But in getting approval, I've always found this step often requires more time than the actual negotiation with the prospect/customer.  This is because of how most companies determine their pricing.

All businesses want to retain profit.  So, in each deal, they will examine the size of deal and then build in the percentage of cost to determine how they want to price.  "They," in my experience, is usually some form of a bid desk or financial analysis center, frequently labeled "Business Development."  Within the Business Development center, someone usually logs the opportunities, someone else responds as a primary point of contact, and other people review the deal to make sure the price isn't TOO LOW!  That's right, there is someone who is going to help you get a low price (and someone who isn't) in just about every Business Development center I've dealt with.  

Approval.  So, how do we handle working with this internal support group?  I always position the opportunity for higher volume (scale) than the prospect commits to me, this way,  the deal looks larger than it is.  Second, I request the lowest possible price we can offer, building up a case of strong competition.  I do this because I know that the Business Development group likes to withhold best pricing for their largest accounts and opportunities.  I try to explain the opportunity in as clear and simple language as possible, with as complete definition of scope of work, so that the pricing is easy for Business Development to deliver (thus, reducing the time required to turnaround pricing).

Submitting the price to prospect.  Once we have the pricing approval, it is time to present to the prospect.

How can we know our price is set to win?

1.  Range.  We can ask the prospect for the range of pricing responses they have received - or the range they expect to receive.  Some prospects will not tell you (specifically) where you need to be, but they will give you a range of other bidders.

2.  Profit.  Taking into account the range and scope of deal, how much money do we want to retain?  Keep in mind that every dollar left on the table (not won) is a dollar lost in pure profit to our company.

3.  Growth.  Do we want to use lower pricing (even at a loss) to win early business at the hope of getting follow-on business?  I've seen other companies use this tactic.  I used it in one account who demanded best pricing, where I gave them best pricing on their computers, but on peripherals (where they didn't measure carefully due to the time involved) I would sell at a higher profit margin to recoup the low margin on primary desktop PC's.

4.  Scope of Work.  How much work is going to be required?  Are we going to have to invest in a significant amount of new resources, parts, people, or systems to deliver?  This will impact our profit margin significantly.

5.  Account Management.  How much effort is this customer going to require to keep extremely happy?  In my career, I've found some customers are relatively quiet (requiring an occasional visit/call) where others want to talk to me just about every day.  How much effort will the customer require of the salesperson, account managers, customer support people?  These questions can help determine how high of margins we REALLY need to keep, too.  

6.  What do I want to earn.  The most important question I always asked in setting a price is "what do I want to earn?"  Comparing this against my compensation plan, I could always tell where I WANTED the price to be, from my perspective.  Now that I know this, I can take the APPROVAL price Business Development gave me, factor in the other 5 issues (such as competition, growth, management) and determine, in my own mind, what our lowest price SHOULD be.  

Once I know what our lowest price SHOULD be, it is much easier to just add a percentage ON TOP of that price (unless in an RFP/Bidding situation) to enable me to NEGOTIATE.  There have only been a handful of deals in my history where the prospect didn't negotiate my pricing.  Therefore, I must be prepared to lower my price to give in a negotiation.  When negotiating, a rule I have is to never give anything without getting something back in return.  So, when we lower our price, we can ask for a longer term, or additional business they are keeping in the wings for future deals.  There are many concessions both parties can make, and price isn't the only one.  

I've seen too many salespeople immediately cave on price when they could have easily asked why the prospect wanted the lower price and probed deeper to determine what the real issue is.  Often, prospects just bluff the business in order to see if you have anything left to give.  So, I make it a rule to ask several detailed questions to determine the prospect's real motive prior to lowering any price.  And, ask for something back from them.   

When we set pricing to win, we must know what OUR COMPANY'S winning price is, and have an idea what a winning price is for OUR PROSPECT.   Once we know these two elements, we're well on our way to creating win-win relationships.

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