How A Price Override Kills Your Profit ❌
For some businesses, price drops have become overused and price overrides are prolific. Your pricing structure should not be something that’s negotiable to the point of underselling your value. Manually entering prices or overriding prices in the system is time consuming and increases price complexity. Yet, there are many who make this mistake by training their marketing and sales teams to establish this type of pricing practice. Today, let’s talk about what a price override is and then how a price override can kill your profit in an instant.
At Taylor Wells, we believe that pricing is a continuous process that adapts to evolving market trends and buying patterns. We argue that pricing transformation involves not just setting numbers. Rather, there’s often a need for change within your organisation’s culture and internal functions to create a framework that oversees and implements necessary adjustments to minimise price overrides.
In fact, our consulting work shows that with the right set-up and pricing team in place, incremental earnings gains can begin to occur in less than 12 weeks. After 6 months, a business can capture at least 1.0-2.25% more margin using better price management processes. After 9-12 months, they’re very often generating between 3-7% additional margin each year as they identify more complex and previously unrealised opportunities, efficiencies, and risks.
What is a Price Override?
A price override happens when you allow negotiations and flexibility to dominate your pricing structure. Basically when a sales representative overrides the official price in the system and enters a new price that is usually lower to win a deal. This is often a learned price behaviour within your sales teams as they deal with customers or manage accounts.
Rule of thumb: A price structure that has an override record that exceeds 20% is not a good indicator of your ability to control your price system. What’s more, it shows you have little understanding of the value of your product portfolio and what it means to your customers.
A single override often leads to a vicious circle for customers too. For example, research shows that price-sensitive customers can easily switch if they don’t feel they’ve got discounted deals. We have seen some managers overriding hundreds of SKU prices at a time with individual customer price records to prevent channel conflict and angry customers. Overall, then, a price override devalues your products, and brands and undersells your offer. They can lead to many hours of additional, manual price administration and even put your business reputation at risk.
How Price Controls Stop A Price Override Situation
Price control is a process that many businesses still struggle with. The main reason price overrides occur is because there’s no formalised and documented price discount policy, rule or any price discipline in the business. Businesses mostly think that setting their prices is as simple as running through costs and expenses. But it’s more than that. Pricing is a continuous process of assessing and evaluating price models. Any inconsistencies will only confuse your customers and allow them to devalue the quality of your products/services.
Your pricing capability becomes a problem when:
- you’re not meeting the needs of your customers
- you haven’t researched and identified their key value drivers
- there is a lack of proper segmentation and strategies in using your data analysis
Listed below are some good ways to put in place price controls that can help sales to stop overriding prices in the system:
1. Observation and awareness – Most people at the executive level don’t pay much attention to organisational culture. They’d rather rely on their subordinates to report when something is wrong.
So, the first step is to ask if there are any outdated processes in your operations when it comes to pricing, research and development, sales, and marketing misalignment of strategies. Is your customer relationship management a means to undervalue your brand or boost your value proposition?
2. Secondly, you need to know what’s going on with your team. Are they working together or in silos? What can you do further to enhance the performance and creativity of cross-functioning teams in pricing, marketing, sales, and R&D? Siloed departments aren’t the best environment for employees to thrive in where the values, vision, and mission of your business aren’t openly communicated.
3. Fostering a culture of learning – Coaching, training, and evaluating your staff helps them to be more conscious and aware of their performance. What are their strengths and weaknesses? How can you help them improve their performance?
Executives want to encourage their staff to practice value-based pricing and discuss strategies that will leverage customer value drivers during account management and business acquisition. It’s just as important to ask what your sales teams hear from customers. You can use this feedback to make any adjustments necessary that improve teamwork and organisational function.
Tips On How To Prevent A Price Override Culture
4. Pricing Policy – You need to have the right price information and data that help you track past market and behaviour trends. How have you coped and adjusted to past challenges in your industry? What are your competitors’ pricing points? Then you can use this to make better decisions for current and future market trends.
Likewise, establishing pricing guardrails (link) communicates your authority and value as a brand. A poor pricing framework along with misaligned strategies in team culture often causes businesses to experience a major loss that eventually discontinues their operations.
5. Segmentation is another important factor of your demographics research before you set your prices. In certain geographic locations, for instance, a specific product or service is more in demand than in another city or country.
Similarly, a specific age range would have a different preference compared to youngsters, students, or employed individuals regarding your product portfolio. This is why it’s just as crucial to invest in researching who your customer base is. What problems do they want to solve?
6. Marketing strategy – How competitive is your market? What are the market trends you observed and how can you use this to your advantage? Unfortunately, many businesses simply end up copying their competitors instead of innovating and researching what competitors haven’t offered yet.
Many business executives forget that according to research, 30% of consumers buy to gain something, while 70% buy to solve a problem. Therefore, it’s important to set new guidelines, price metrics, culture transformation, and foster a teamwork culture within marketing, sales, and pricing teams.
There’s a fine line between being flexible and price control. Establishing price governance and price discounting rules for your pricing, sales and teams protects hard earned margins.
Excessive or frequent discounts, on the other hand, encourage customers to only engage, depend and rely on price drops. In the same context, consistently low prices send out the message of poor quality in your product or service portfolio.
Short-term promotions with the right metrics in your pricing system allow you to track how often you implement discounts. Price negotiations shouldn’t always be at the discretion of the sales staff where they can apply discounts whenever and however they please. Otherwise, it shows that you lack uniformity in your pricing capability and organisational functions.
But training your staff how to negotiate, research your demographics, replace misaligned strategies, and communication, and hire the right teams to help minimise negotiations over prices. The changes you implement will go a long way.
For a comprehensive view on building a great pricing team to prevent loss in revenue,
Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?
If so, please call (+61) 2 9000 1115.
You can also email us at firstname.lastname@example.org if you have any further questions.
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