Over the years, we’ve found that some of the most valuable pricing lessons are those that come from real life. And the most valuable of those real-life lessons are the ones that involve a little tragedy. So today, we’d like to bring you a story of good pricing intentions gone wrong.
Once upon a time, a B2B pricing team wanted to build a better relationship with sales. Our valiant pricing team decided that the best way to accomplish this goal would be to support the sales team’s desire to run a 15% off discount on one of their best-selling products.
The intrepid pricers waded into the battle with management. And eventually they emerged victorious, having convinced the top brass to sign off on the promotion.
The 15% off scheme worked better than anyone could have hoped. Volume soared 42% for the quarter, and revenues were up 21%. Sales was ecstatic over the size of their commissions.
But then came the bad news.
Word came from on high — well, from the finance department — that margins were down 19%!
How could this have happened?
In their haste to appease the sales department, the hapless pricing professionals had neglected a very important step: basic math.
Not only had they failed to do the elasticity calculations which could have predicted the likely outcome of this experiment, they hadn’t even looked at the break-even figures. Then they would have known that the product only had margins of 35% before the promotion. In order to break even, they would have needed the discount to increase sales by 75%. Based on their past experience, anyone in the company probably would have known just how unlikely a 75% increase was.
Pricing never should have green-lighted the promotion — let alone advocated for it.
To add insult to injury, pricing got the blame for profit fiasco. Their new “friends” in sales were only too happy to throw pricing under the bus, while the sales reps were off happily planning to how to spend their fat commission checks.
Now, no matter what you might think, the moral of this tale isn’t that salespeople suck.
The real moral is that you can’t shirk your core responsibilities. Doing math is a primary function of the pricing department. This group had a duty to protect the company — and they failed in that duty. Their bad choices had a direct impact on quarterly profits and an indirect impact on everyone’s opinion of the pricing department for years to come.
We don’t want your story to end this way, so we’d like to recommend a few resources to help you avoid this fate:
- Tales from the Trenches in B2B Pricing contains the story we retold above as well as nine other cautionary tales that can help you avoid common mistakes.
- Boosting the Pricing Team’s Influence can help you improve your group’s reputation within the company.
- Business-to-Business Price Elasticity explains how to do the price elasticity calculations that would have saved the pricing team in this example so much grief.
- The Pricing Practitioner’s Primer on B2B Sales clarifies the sales’ mindset so that you can work with the sales team while still accomplishing your own goals.
Our goal is to help you avoid the common pricing mistakes so that perhaps your own pricing story can end with the words “happily ever after.”
Tales from the Trenches in B2B Pricing
Pricing improvement in B2B can be a messy affair. In this on-demand webinar, glean insights from ten cautionary case studies so you don't repeat the same mistakes and miscalculations.
Boosting the Pricing Team's Influence
How can a B2B pricing team improve results when they don't control all the cooks in the kitchen? How can they be heard when others don't have to listen? In this session, learn the science of influence and persuasion.
Business-to-Business Price Elasticity
In this recorded training session, we explain the fundamentals of price elasticity in straightforward terms, explore the various principles involved, and provides valuable tips and insights to help you get started toward leveraging this most powerful measure in B2B pricing.
The Pricing Practitioner's Primer on B2B Sales
To be most effective in B2B environments, pricing professionals need to learn as much as they can about their sales function. In this on-demand webinar, learn more about aspects of sales people and processes that can affect pricing performance.