5 Pricing and Negotiation Hacks
Most pricing challenges are not really about pricing but about discounting. In companies with complex products sold through a direct sales channel, product managers continually fight with the sales team over discounts and other concessions. Here’s the trick: Separate pricing from negotiation.
You’ll work with finance and executive leadership to define a standard pricing model including standard discounts. All your business planning is centered around revenue forecasts based on the pricing model. Build a discounting schedule into the pricing structure.
Alas, the real problem is that many sales people (and most product managers) need to brush up on their negotiation skills. Here are some tips for successful negotiation.
Concede something to get something else. For every concession, you want a counter-concession. Counter-concessions include getting the buyer to agree to active participation in product validation studies, customer advisory board, and success stories. “I can agree to this if you agree to that.”
Concede something you don’t care about. Offer something the customer values that has a negligible impact on you. For example, a consultant offered an extra half-day of coaching after a two-day workshop because the first available flight home was after lunch. Instead of spending an idle morning in a hotel room, she was able to add value and still make her flight. “What if I add this to our proposed solution?”
Appeal to higher authority. Never agree to a concession without escalating up the the organization. In fact, sales people should have no direct authority to offer discounts. All discounts should be approved by their management. It’s not that I don’t trust sales people (although I don’t); it’s because it’s bad negotiating practice. All concessions, especially price discounts, should go through an escalation. “Let me see if I can get my manager to approve this.”
Set a time limit on all concessions. A concession isn’t permanent; every concession needs a time-limit. For example, discounted pricing might only be honored for 30 days. “If I can get my manager to approve, will you buy today?”
Define a formal escalation process. What amount can be authorized by the sales person’s immediate supervisor? When does it escalate to a VP? The CEO or CFO should be involved whenever the sales team feels they must deviate from standard discounting schedules. Product managers should not be in the escalation process; they should work with finance to define the standard discounting models and have senior leadership override the standard.
For a recording studio, one artist couldn’t afford the regular rate and the studio had a time block that was unlikely to sell. The owners deferred their decision for one day to fully discuss the deal with one another and with their investor. They conceded something they didn’t care about: the week was unlikely to sell otherwise. They set a time limit: they offered a discount for only that week (and no other). They escalated: they discussed the deal with their investment partner.
Focus on the pain
When in doubt, return to the problem you're solving for customers. What is the value of their pain? Remind the buyer that the pain (and its associated costs) will continue until they make a decision to implement a solution.
Pricing is based on a client pain. Discounting is about negotiation skill. Build both into your business planning. And make sure your sales team understands the value of your solution and has the skill to negotiate.