Profit Drains – and How to Avoid Them – Part II

December 02, 2016

profit drains - Simon-Kucher

Seeing pricing software as a cure-all
While technological developments such as the internet and apps encourage us to believe it, fully automated pricing mechanisms seldom work. Buyers are people, too, and sometimes make irrational decisions. Furthermore, market situations are complex and volatile. It’s therefore crucial to take advantage of personal experience, even when working with highly automated price mechanisms.

Don’t blindly rely on fully automated pricing – and especially not exclusively. Pricing software creates transparency and makes price implementation easier, but it also requires a well-thought-out price strategy.

Treating pricing like production
Most processes within a company (e.g. production) require standardization – the aim is to remove any variations. For the pricing process, however, this is the wrong approach. The goal here is to come up with the best possible variation based on customer value and willingness to pay. And that, in contrast to most other corporate processes, cannot be achieved with a one-size-fits-all approach.

Don’t run your pricing process as you would your production process. Tailor it to your company!

Letting the boss negotiate prices
Your counterparts, and especially their procurement department, will probably be thrilled if you bring your boss to price negotiations. Why? Because your boss is usually less familiar with the specifics of the deal. Furthermore, he or she can’t use the line “I’ll need to run this discount past my boss first” or risk losing face by letting the deal fall apart. The consequence: More often than not, top managers are much too generous with discounts.

Company leaders, stay out of active negotiations! Be there for sales only as a last resort – and keep in the background!

Throwing around percentages
Sales is often too generous in negotiations: 5, 10, 15 percent  these are typical discounts steps. And these figures don’t look that big, right? They do once you finalize the business deal, as you see that very large sums are being given away.

Avoid discounts rounded to a whole number. They are suggestive of money being given away. Work with uneven (and the smallest possible) discounts; this tells the customer that you calculated precisely.