Pricing and Profitability Management: A Practical Guide for Business Leaders

Understanding—and Leveraging—the Human Side of Pricing

Price lies at the heart of the buyer–seller interaction, and an inherent conflict exists between a company's desire for long-term customer relationships and its effort to get fair value for its products and services. Most organizations encourage their sales teams to build strong relationships and to know their customers on a personal as well as a professional basis. Unfortunately, these bonds often become ends unto themselves, obscuring their original purpose, which was to establish profitable, long-term customers. Companies must continually analyze customer interactions at the transaction level and determine the value to both them and their customers. By understanding the worth of a product to buyers, a manufacturer can better differentiate its offerings from the competition. Similarly, by quantifying the buyer's value to the company, the company can decide which relationships warrant investment and which should be treated as opportunistic transactions. Both analyses contribute to a balanced, healthy customer portfolio.

A key driver of the buyer–seller relationship is sales force compensation, because poorly aligned incentives result in weak margin performance.

Consider the experience of a medical device manufacturer that compensated its sales team by unit volume. The products were new and evolving rapidly, so the company pushed for high rates of market penetration. Competition was fierce, and, for the sales team, getting ...