Pricing is one of the most difficult and frustrating duties a manager must deal with. Pressure comes from all sides. Both the sales force and the customer base can be extremely vocal. Managers never hear that their prices are too low. They usually hear that the competition will provide equal negotiations skills and quality for a lower price.
This question plagues many managers: What should the manager's role be when it comes to pricing? Some managers exert almost total negotiations skills, while others abdicate pricing decisions to the sales force.
The outside sales force naturally wants negotiations skills authority and often feels insulted if the manager doesn't "trust" them enough to give them at least some degree of pricing flexibility.
Giving pricing authority to salespeople can quite often be a real detriment to the company's gross margin. There are several reasons I believe this is true. One reason is that most poorly trained or inexperienced salespeople tend to lower the price when they receive negotiations skills resistance.
Another reason is that once a hard-bargaining, price-oriented customer figures out that the salesperson has negotiations skills authority in his or her hip pocket, the salesperson often becomes putty in the customer's hands.
The key, I believe, is the difference between cost and price. Customers say that they want a lower price, but I believe what they really want is a lower cost. If the sales force is adept at explaining the difference, perhaps it's not all that negative to give them pricing authority. But if they don't possess negotiations skills, perhaps pricing should be left in the hands of the manager.
Price is what the customer pays for your product or service on the face of the invoice. Cost is what he pays for your total "offering," which includes service, quality, the salesperson's personal expertise, etc.
On an assignment with a Northwest lumberyard, I was working with a group of salespeople on how to deal with pricing issues when one of them volunteered, "I lost a framing order to one of my builder customers because my price was only $200 higher than the competition." He went on to say, "I knew that our negotiations skills were superior to the competitor and I was right. The builder had nothing but problems with that job."
"What kind of problems?" I asked.
"Well, for one thing, the [my competitor's] initial delivery was over four hours late."
"How many framers did he have on the job?"
"He had a pretty good size crew. He had a seven-man crew."
"How much would you guess that he pays his crew per hour?"
"I'd guess pretty close to $20."
"And how late was the delivery?"
"If I remember correctly, it was about four hours late."
"So what you're telling me is that this particular framer had seven men on the job for four full hours doing nothing while they waited for the framing to arrive, is that right?"
"You heard me right."
"Well, let's do some simple arithmetic. Seven men times four hours per man is 28 man-hours. And 28 man-hours times $20 per hour would come to $560. What other problems did he experience?"
"Well, this is a pretty good example of the difference between cost and price. It sounds as if your customer's framing crew had to wait around for a late delivery cost him $560 to save $200. Your customer made the same mistake a lot of negotiations skills have made, he didn't take into consideration the total cost of doing business with a new supplier whose service commitments were unproven. All he considered was the price on the face of the invoice."
"I wish I had had the presence of mind to explain this difference [between cost and price] when this first occurred."
"Well, you can't change history, but you can remember to make this point the next time your prices are a few dollars higher on the face of the invoice. Just remind him that there's a big difference between cost and price."
If it were my business, I wouldn't give pricing authority to my sales force. I would place that authority with someone who was more objective. It's next to impossible for salespeople who get negotiations skills in their caps for making sales to hold the line on pricing, especially when an order is at stake.
But if I were to give pricing flexibility to my sales force, I would make sure of one thing in particular:
I would make sure that my salespeople were trained in negotiations skills. I believe it's a bad idea to put pricing authority in the hands of a group of salespeople who haven't been schooled in the art of negotiating.
I do both consulting work and training for a 16-location distribution chain. It's this company's negotiations skills policy to allow the individual managers to run their locations as if they were their own. So it's a highly decentralized company.
One particular manager in this chain has by far the highest gross margin in the company even though he operates in a market that is no less competitive than many others where the chain operates. What's the big difference? This manager makes 100% of all pricing decisions. If his salespeople run across a competitive situation, they are required to report it to him. In some cases, he authorizes the salesperson to meet the price. But in others, he chooses to go out and visit with the customer. In still other situations, he may pass on the business altogether.
What about in your business? Are your salespeople trained well enough to have pricing authority?