Does your sales team use price reduction to meet volume targets?
Price reduction is a great way to shift stock and achieve volume targets. Yet, excessive discounting at the line item level eats away at margins and destroys profitability. Taylor Wells discuss some simple tricks to changing entrenched discounting habits in under a month (with a new pricing system) and beyond.
Over the past few years some very successful pricing executives have been quietly putting together a pricing toolkit to reduce sales’ dependency on discounting (price reduction) to drive volume.
price management interventions.
At the heart of these interventions is the idea of “mental unblocking” – removing psychological barriers that keep people stuck in damaging patterns of thinking and behaviour.
Pretty simple though this may seem, it is very hard to get pricing and sales teams to work together. It’s more difficult still to alter how sales view pricing using logic arguments and data.
Sales teams often think that they are in the best position for price setting and manage pricing because they are the closest to the customer. But it’s not that easy …
Even though sales teams quote prices to customers and hear customers response to prices every day, does not mean they are the best people to optimise prices.
Better pricing is a science. Not an art.
Preventing price reduction with “nudges”
A combination of pricing and psychological principles can help businesses stop margin leakage created by excessive discounting.
On a superficial level, any pricing and pricing intervention is like a “nudge” – an external device developed to guide stakeholders towards better choices – Google and IBM use them a lot.
For example, some of the leading technology businesses have been re-publishing optimised price lists and tightening price reduction levels for heavily discounted consumables on their enterprise systems (superficial level).
Others have been encouraging their sales force to avoid excessive price reduction by calibrating individual discounting behaviour with their take home commission (deeper level).
In the former example, price reduction practices decrease because of a visual reminder in the quoting system.
In the latter example, discount practices decrease because the businesses are employing the human and pricing principle of loss aversion.
The hypothesis here is that sales representatives will avoid excessive discounting because it directly impacts their take home reward or commission.
The deeper the discount offered to customers the less performance bonus the individual sales rep gets.
As we know from psychology and pricing principles, people feel the pain of loss twice as much as the pleasure of a gain.
By anchoring sales to a higher commission number, the decision to quote lower prices triggers a physically uncomfortable response to discounting.
In effect, the new pricing system is encourages sales representative to avoid bigger discounts by associating discounting with loss.
Our brains and whole physiology hate loss and even the prospect of a loss (risk aversion).
When sales representatives see a visual reminder of the loss they could incur as a result of quoting a substantially discounted price to a customer, their brains are hacked by the feeling of loss.
When our minds associate discounting with the feeling of loss, we tend to avoid discounting because people do not like experiencing loss.
The key assumption to this psychological and pricing intervention is that sales will think twice about using price as bate to win more deals at lower margins because they fear losing their commission. When this happens, a new habit is forming…
However, knowing what interventions work or not are different every time:
Nudges are usually specific to a given choice at a given time, whereas pricing and psychological.
Interventions alter behaviour in a lasting way and are rooted in basic human psychology and pricing theory.
In summary, our capacity for change bad discount habits is often unrealised because teams are not in a position to take advantage.
Nudges and interventions are not magic, and cannot help people all the time.
They address specific psychological and pricing sticking points. When the condition for change is set up properly, then the psychological and pricing interventions are more likely to work.
Nudges and interventions can be used for nearly every significant pricing or change related problem you can think of.
As long as there is human involvement there is room to apply fundamental human and pricing principles to improve market strategy to capture margin.
See our blog on how pricing and sales can work together.