Why Special Pricing Strategies Fail

Many manufacturers rely on special pricing requests, or exceptions to standard pricing, for a large part of their indirect channel revenue. Even for direct accounts, many manufacturers have given their sales managers and regional directors control over price limits to increase responsiveness. But these strategies don’t pay off for either manufacturers or software vendors. That’s because the systems that support special pricing are broken.

Spending a day in the field with a sales rep for one high tech manufacturer — I’ll call it Company X — made this point clear, and the lessons learned are worth repeating here.

Pricing Problems

To Company X’s credit, it has already automated what had been a painfully slow — and, from the channels’ perspective, incredibly unresponsive — process.

Sales managers can review an offer and — depending on whether the requested exception is beyond the margin floor — either accept or decline with the click on an intranet-based pricing application. From a purely technology perspective, therefore, the company is nearing best practices. Yet even with good technology, the process still fails.

What went wrong?

• Price List Proliferation: The biggest problem is that there are multiple price lists, depending on the bundles of products chosen. There is no single version of pricing truth, forcing sales reps to guess first and ask questions later. One customer I visited with the Company X rep had to get a completely different contract because the wrong price list had been presented.
• Margin Floors Moving Monthly: Earlier in Company X’s history, the CEO felt it would be great to have everyone indexed to monthly margin, so the entire company — including the pricing department — had a new and challenging goal to shoot for. The CEO had reasoned that the company was small enough to respond, but the practice continued even when it grew to more than US$1 billion in sales. The result: Sales would quote prices at the floor, but by the time the deal closed the next month the floor had risen. This forced renegotiation and embarrassment in front of the customer.
• Lingering Product Taxonomies from Acquisitions: Company X has a few acquisitions behind it and has accumulated multiple product taxonomies. Centralizing on the corporate ERP systems’ standard wasn’t possible because the combinations of SKUs and bills of materials couldn’t handle the variation in products. Doing a rip and replace on the ERP system was out of the question, so multiple special pricing systems, each built on legacy product taxonomy and pricing structure, were created. The company has over 18 special pricing applications today, and talk of consolidation is met with curt e-mails from IT, where the suggestion of consolidation is as popular as the idea of IT outsourcing.
• Isolated Manufacturing: Special pricing is a powerful tool for cleaning out warehouses full of finished goods, but Company X has so many special pricing systems that manufacturing has given up on the idea of integrating its systems with channel-facing pricing applications.
• Manually Managed Contracts: Towards the end of the day I spent with the Company X rep, contracts administration called him to say that a price exception given the previous week to a large aerospace customer would require a completely different contract. And, yes, the customer’s officers would have to sign it. Getting in to see a VP-level contact took weeks, and as a result competitors eventually got into the account. The sales rep’s commission slipped a quarter, and productivity was lost because the contracts dept. is completely disconnected from pricing.
• A Quoting System for Every Occasion: Company X’s acquisitions have also created a proliferation of quoting and sales configuration systems, confusing the special pricing request work flows. There are over 11 quoting systems today — one acquired company alone brought six with it. Only half of the quoting systems have been connected to the special pricing system.

Internal Battles

This high-tech manufacturer’s internal war is rarely seen by anyone outside the company, thanks mostly to sales reps who have found ways to coordinate pricing with contracts on their own. Often they sandbag pricing on contracts and in quotes to meet the margin floor requirements their managers set, and then use bundling or market development funds to aggressively pursue deals where competitors are strongly challenging their in-account share.

The company’s largest customers know how to time deals to get the best prices because they know how disconnected special pricing is from everything else. Sure, they get a fast price, but it’s rarely coordinated with contract, manufacturing or even product taxonomies.

The bottom line: A system developed to make sales more responsive delivers a price exception, yet sales must do the integration in real-time with each department.