Price is the third of the four Ps in short supply in most CMO’s repertoires. It also represents another missed opportunity for marketers to exert influence within sales operations. IBM’s recent CMO study revealed that less than half of polled marketers have significant influence on critical pricing activities (Figure 1).
Pricing isn’t even mentioned in IDC’s 2012 CMO Tech Marketing Barometer Study: Trends, Forecast, and Essential Guidance for Tech Marketing Executives. It’s entirely absent from the top 9 priorities identified by study participants (Figure 2).
Why is pricing neglected by so many CMOs? Further, what’s at stake in the pricing decisions a company makes, and what can marketers do to reclaim this critical pillar of the marketing occupation?
Here are 3 tips for marketers to consider as they develop a point of view on pricing strategy and execution, while charting a path to greater relevance within sales operations:
Tip # 1: Understand the role pricing plays in your business
Pricing can be a powerful lever that directly impacts revenue and profit performance. And depending on how price-elastic the offering is, small variations in price can have huge implications on both the top and bottom lines.
Try this: review your last twelve months of sales proposals for the same or similar offerings and try to draw some conclusions regarding the following:
- Does pricing per unit of offering (i.e. product or service) vary by industry segment?
- How much do contracted prices vary from list prices and initially offered prices?
- Is there any correlation between variance-from-list and contract win-loss?
- Are offerings itemized in proposals and contracts, or are they priced as a single bundle?
- Are there any patterns in how contract value and scope change during contract negotiations (i.e. constant scope with declining value vs. expanding scope with constant value)?
It’s imperative that you do your homework to establish a baseline understanding of how pricing has been managed historically at your company and what impact pricing decisions have had on deal velocity, sales cycle efficiency, total revenue, and total profit. Once you’ve done this, you can build a working case for making changes to pricing strategy and/or process and begin tracking progress towards a goal state.
Tip # 2: Modularize the Value in Your Offering
Pick one of your products or services, and if this hasn’t been done already, try to break it down into logical “modules” of value. If it’s software, think about how you might position one group of features as “basic” functionality, another as “intermediate”, and another as “advanced,” distinguished by the value they’ve typically delivered to clients. If it’s hardware, think about an off-the-shelf configuration, as distinct from customized and extended versions.
Breaking your offerings down into value modules allows you to accomplish two critical objectives:
- Creates a credible scale for negotiations. If you’re forced to discount deal value to remain competitive, simply caving on price without any adjustments to the scope of offering can give the would-be client the impression that your initial proposal was greedily padded with an unfair margin. With a modular view of value, you can scale down deal scope in response to price pressure, and perhaps carve out some scope under a call option exerciseable at a later date, all the while maintaining credibility in the eyes of the client.
- Allows for more granular management of contract profitability. The companion exercise to value modularization is cost modularization. In many cases, you can begin to understand the marginal costs your company incurs to deliver each increment of value, be it a software or hardware customization or a professional service. Armed with this information, you can create, propose, and negotiate solutions that minimize total marginal cost and maximize total revenue. You could choose to pursue such tactics as breaking even on a professional service or another near-term one-time offering in order to unlock a highly profitable stream of recurring revenue.
Tip # 3: Create, Publish, and Enforce a Company-Wide Pricing Policy
Your company needs a pricing playbook. Not just a rate card for products and services. A cross-functionally authored and commonly understood set of guard rails to ensure sales, support, finance, marketing, and executive management behave consistently with regard to pricing when presented with certain situations. A body like a Portfolio Council might function well as the pricing policy authoring and adjudicating entity.
There will always be exceptional cases not covered in a standard pricing policy, but the baseline and continuing analysis suggested in Tip # 1 should establish company-wide standard operating procedure in such areas as:
- Price discrimination by industry segment
- Discounting percentages permissible with and without approvals from a governing body like a Portfolio Council
- Standard offerings to position as break-even propositions or even loss-leaders, in order to spring profitable recurring revenue streams
In order for the CMO to leverage an informed point of view on pricing as a means to maintain relevance within sales operations, he/she must remain involved in ongoing contract analysis and reporting and in pricing policy enforcement via his/her role on the Portfolio Council or otherwise. If your company has never published a pricing policy before, then the first version you create will likely need to be revised as markets, clients, and the company evolves. The CMO needs to make sure his/her fact-based point of view is brought to bear as this evolution occurs.
The IDC study mentioned above shows that alignment between marketing and sales functions is getting WORSE, not better (Figure 3). CMOs have an opportunity to reverse this dangerous trend by partnering with their sales colleagues on the often imbalanced areas of pricing strategy and execution.