Why is pricing so hard?

In Walden, Henry David Thoreau wrote: “The cost of a thing is the amount of what I will call life which is required to be exchanged for it, immediately or in the long run.” pricingThis statement is incredibly insightful for anyone who never worked in sales because it captures the essence of the sales challenge: getting people to exchange a piece of their life, whether short term or long term, however small or large, for your product or service, and trying to find the just the right price to get them to pull the trigger on this decision without them damaging your chance to sell more of the same product in the future. Any sales ops manager or sales rep knows: pricing is HARD, and it only becomes more difficult with the more parts and tiers and products and subscription levels you have to deal with. Quite often it’s very easy to feel lost in the woods with pricing, looking up to the sky for your North Star but seeing only darkness. And almost everyone gets hung on the same issues:

1. Underpricing

It’s so easy to underprice. You simply edge under the competition just enough, thereby squeezing out products that have essentially the same features and siphoning their customers to you, right? Er, not really. It hardly ever happens that way, and that’s because consumers, whether they know it or not, think more in terms of value than price when considering a purchase. Let’s be clear here: price is a sub-component of value, and it’s a huge mistake to think that price alone drives sales. It’s really your ability to sell that drives sales, because it’s your sales ability that creates the impression of value. Improving your ability to sell means implementing the right sales strategies and also implementing the right sales tools. Underpricing your product can be disastrous, even in a recession, because if down the line you realize you have underpriced, it’s extremely hard if not impossible to get away with raising the prices without turning away your customers. So, TIP: focus on increasing value instead of decreasing the price.

2. Overpricing

On the other side of the coin you have overpricing, or pricing your product above market value and above what your customers would be willing to pay for it. This can also be disastrous, and companies often act like home sellers in this respect: they get cocky right out of the gate, when their product is hitting the market, overestimated its perceived value and missing out on lots of sales because they’ve overshot half their potential audience. TIP: Don’t just look at what your competitors are pricing their products at; look at how they are marketing and selling them, and see where your own marketing and sales efforts align. Look at why the highest-price product sells at that price and how it’s sold, then put yourself in your customer’s shoes and ask: based on this messaging, would I really buy this product over that one if it’s priced more?

3. Not knowing your market

This is a surprisingly common mistake. You not only need to examine the potential price points of your product within your market, you need to examine the price points in the context of the market size at that particular price point to see if that price will support your planned volume. A mid-range price, for example, could potentially kill the product right out because the high-end customers will think it’s too cheap, and hence low-value, and the low-end customers won’t see enough additional value to warrant how much more it costs than the low-end products. It’s a tricky balancing act but an act that must be performed, nonetheless. TIP: Don’t just do Internet research or even just quarterly or annual report analyses to determine market size and price point potential. Conduct your own primary research via in-depth telephone interviews or even on-site visits to confirm your secondary research and determine the proper value and corresponding price point for your product.

4. Product complexity

The fourth issue enterprises run into with pricing is complexity: which usually has to do with parts complexity. When you have a price-book that’s thousands of pages long and nested configurations with main pieces and sub-pieces and different parts that go into making those sub-pieces, it can become a pricing quagmire. What if a piece of one of these parts becomes more expensive? What if the size of one of the parts changes? This is where not using a special software to help you price things out and keep track of everything can really haunt you. Trying to maintain a thousand-page price-book via spreadsheets and Word documents is insanity, not to mention totally un-transparent and ultimately unmanageable. TIP: If you’re drowning in complexity, get a tool like this one to help you out. You need to know which product to pitch, and at which price to which customer, without spending all your hours doing research. This means it’s time to invest in a CPQ software solution. In the age of SaaS and digital disruption, where everything is moving faster and customers are extremely fickle, pricing has become one of the hardest things to manage in the sales cycle. Whether it’s product complexity, underpricing, overpricing, or not knowing the market, there are far too many ways for pricing to get messed up. Want to see how the experts do it? Click here to see how the Swedish industrial company Atlas Copco used CPQ to increase margins and drive order efficiency.

By Jamie Garverick | January 26th, 2018 | CPQ

About the Author: Jamie Garverick

Jamie Garverick

Jamie is the Senior Vice President of Sales for North America and has over 20 years of application software sales, consulting, and sales leadership experience, including 16 years in the CRM and sales performance management market. During these 20 years, Jamie has helped organizations of all sizes and industries leverage sales technology to accelerate profitable sales revenue. At CallidusCloud, Jamie is in charge of the North American sales organization and has led the team to record revenue, customer acquisition, and retention.