Often clients come to us determined to enforce some sort of central pricing discipline on their overseas subsidiaries, convinced that they are leaving money on the table. Anyone who has ever run an international group (that’s what I was doing ten years ago before I set up Burgin Associates), knows that controlling policy on anything is like keeping a gang of frogs in a wheelbarrow.

A client with just such ambitions approached us the other day and I put together a short paper for them offering advice on the potential pitfalls. I thought you might like to see it.

Autonomy and Profit Centres: You expect General Managers to deliver profit. Price is one of their key levers although often badly used. Simply taking responsibility for pricing away from them back to the centre would stir howls of dissent if they are worth their salt as managers. Bringing them alongside the process and helping them understand how it works and what it can deliver for them is the key. Initiatives in the first instance should be advisory rather than mandatory. Any subsequent shortfall in their profit performance can then be used to drive the policy in place …”If you had done what we suggested on price in the first place….”.

“It is different here”: At least one overseas operation will tell you that their market is fundamentally different in some way. All markets are slightly different and the central marketing function ignores this at its peril. We have seen product launch initiatives fail because the sub-pack size did not work with the peculiar conditions in retail in a territory. However, more often than not this is a political signal to ‘stay out of my business’. A subtle, more advisory approach, often lower down the subsidiary’s organisation will overcome this so long as the General Manager is kept in the loop.

KPIs and Incentives: We have seen the way that salespeople and management are measured completely undermine pricing initiatives. The obvious toxic combination is; discretion to set price but measured on sales volume or value. Aligning KPIs with profit objectives combined with modelling the effect price has on profit performance is a key driver of appropriate behaviour…. “Look how much money you can make if you get it right…”

Cognitive Bias: There is an inherent cognitive bias relating to pricing that hampers almost all organisations. There is a belief that the market is more price-sensitive than it actually is. The primary reason for this is nobody tells you when you are too cheap, so the groundswell of anecdotal feedback from the market is that you are price positioned higher than you should be. This leads to a belief that the market is more price elastic and that a cut in price will drive volume. For a variety of reasons this is nearly always wrong. For instance it assumes that competitors will not cut price in response (see Sweezy’s kinked duopoly model 1939). Price is the leading excuse for poor sales performance and the desperation manifests itself in calls for cost to be stripped out of the upstream operations. This is exacerbated by a panic at senior level about sales volumes.

Rule of Thumb and No Science: Price setting in smaller organisations like local profit-centres is seen as a black art only based on experience. We seldom see subsidiaries deploying market tests or careful measurement to determine accurate price positions. Some will avidly collect competitor price information but forget that the consumer does not see this level of detail. If you have 15 competitors in a territory but stockists only stock one manufacturer’s range, then the share decision is not made by the consumer (unless they choose a store based on the product in question). In this instance a higher RRP makes the retailer or distributor more money.

The Retailer or Distributor as the Customer: Smaller operations particularly with a limited share of retail presence, will regard the retailer as the customer rather than the channel to the customer. As you know, the mindset of a brand is that they own the consumer and this strength should make retailers hungry to stock their wares. Limited marketing budgets in smaller territories mean that building brand awareness is a luxury they cannot afford. Support from the centre, a strong brand-driven culture will help change this perspective.

Footnote: Strong brands, no matter how nice their people are, will always be considered as arrogant by retailers and distributors. This is simply an expression of their limited power to negotiate with you. Calling the shots on RRPs (in a legal way) is sometimes seen as arrogance. This has to be assuaged by demonstrating the superior profit opportunity it offers.

The moral of the story is: Tread carefully lest you give your subsidiaries the very best of excuses for not selling enough.

We often get stuck in the middle of a heated discussion across the boardroom table about whether salespeople should be allowed to either set prices or offer discounts. I find myself sitting there, sage-like, until the fury has died down and both sides turn to me for the ‘expert’s view’. I thought I would save you the angst and give it to you up front.

There have been quite a few studies (mainly in the USA) that indicate that companies in the same sector that do not allow salespeople discretion to discount make more money. However it is not quite as black and white as that…it sort of depends on the nature of the business, the mindset of the sales team and how you manage them.

A good starting point is to distinguish between two rejections on price which are sometimes difficult to tell apart:

1. “I have a price from your competitor that is lower than yours and I cannot see a reason to pay a premium to you.”
2. “I like your product and am intending to buy from you, but I am going to have a crack at getting a discount because you look scared and I want some of your profit.”

It takes takes a deep understanding of the context of the purchase and the needs of the company behind the somewhat aggressive buyer, to call his or her bluff and stand your ground. There are many reasons why front-line salespeople won’t do this:

Deals are binary for them... In their world, sitting in front of a customer, they are faced with a choice: Give the customer the 5% discount that they are asking for or lose the deal (and the associated bonus).

At the centre of the organisation we aggregate the swings and roundabouts to get our market view. The salesperson’s market view is the customer across the table from them right now.

Nobody ever tells you that you are too cheap… This is an inherent cognitive bias that afflicts almost all companies. Unless properly measured, your view of your price position is almost always inflated.

Field Salespeople are unfamiliar with the maths… There is seldom anywhere in career path of the average salesperson where someone sits them down with a P&L and shows them the disastrous effect dropping price has on the bottom line.

There is an assumption that the competition will not react… They may not get a chance on this deal, but the next time they come up against you they will have learned their lesson and launch a pre-emptive strike…. (don’t get me started on the whole price war metaphor thing).

5% doesn’t sound like much… Who hasn’t heard salespeople round to the nearest 5%… after all it is only a 20th…. not if it is another 5% discount from list and the discount is already 65%… then it is a 14% drop in price. A 5% drop in price will put a 4.9% EBIT business into the red.

Negotiating is different from Selling…. a salesperson will go out of their way to delight a customer, after all that their job! Delighting the customer when negotiating price is not usually a good idea.

The ability to discount is a badge of rank… It is like the company car grade or the title on the business card (do you have anyone who is still a Sales Representative? …or are they all Area Managers now). The more senior you are the more of the company’s money you are allowed to give away. The discretion to set or discount prices will have to be wrestled from their cold, dead hands.

Having said all that…

If you cannot generalise at the centre about the price sensitivity of the market and you do not have the time feed the decision up the management chain, then perhaps the salesperson does need to make the judgement whilst sat in front of the customer. If this is the case this is what you have to do:

Train the hell out of them… teach them the maths until they can do it in their head without thinking (some won’t make it). Teach them to understand benchmarks, context and value so they can judge price sensitivity. Teach them to negotiate (needless to say we can help with this).

Measure them and reward them to drive good pricing behaviour… We still see some companies where salespeople are measured on volume or value yet allowed to discount. We tend to put the CEO straight fairly quickly (we find a baseball bat helps). Even bonus paid on profit or contribution doesn’t always crack it.

Give them permission to lose customers on price… this is an anathema to most companies, but if you always win you are not pushing the envelope on price.

HERE’S A WACKY IDEA… to start down this path, give them the discretion to increase prices but not discount. Measure and celebrate those that get the best price for the value your company offers.