How to Stop Losing Money on 25% of Your Products
When executives look at their portfolios, many may be surprised to find that ~25% of their customers and products are actually losing money.
It’s a scary, sobering thought. And, unfortunately, entirely true.
Obviously, the smart and capable leaders at these companies don’t set out to lose money, so you’re probably wondering how something like this can happen…and actually happen so much that it’s the norm rather than the exception.
It’s because of pricing.
If your sales team determines your pricing, then it’s a safe bet that you are losing money on a high percentage of products and customers.
How does it happen?
Human Intuition is Flawed
Imagine for a moment that one of your sales executives is attempting to close a new, large deal.
How should they price it?
It’s not a simple decision. To do it right, your sales executive must come up with precise answers to a long list of sophisticated questions like:
- Is the pricing consistent with the company’s overall strategy and value proposition?
- What is the “win probability” at a given price?
- What impacts will there be across other products (i.e., Good-Better-Best relationships)?
- If we can’t get the price we want, are there product substitutes with higher margins that the customer would be willing to trade to?
- How full is the plant and what is the impact on our costs and profits given an expected tradeoff between price and volume?
Even the smartest, most amazing sales executive can’t answer these kinds of questions consistently and correctly across every deal…nor as quickly as needed to close deals.
It’s not their fault. No human can do it.
But because they can’t, their company’s pricing is all over the map, with some of their highest-value customers getting the worst pricing (churn and revenue loss becomes a real risk here), some of their low-value customers getting the most favorable pricing (this is where they’re leaving money on the table), and another cross-section of customers priced below costs (this is where they are losing money today).
That kind of upside-down or backwards pricing might sound a bit alarming to you—why on earth do the best customers get the worst pricing?—which is why it’s often referred to as “irrational pricing.”
But remember that companies don’t set out to do it. And most don’t even know this is what their pricing looks like because they aren’t routinely looking at all customers and pricing across the business.
It’s just what happens almost every time a company relies on the sales team to decide pricing on a case-by-case basis.
Using Static Thresholds
When companies decide they can’t have these kinds of pricing mistakes and therefore can’t rely on human intuition alone, they often feel the need to put rigid parameters in place for pricing.
For example, they tell their sales teams that all deals above a certain value require multiple signoffs, or they set a static price floor below which every deal needs approval.
On the one hand, companies gain some control and visibility using such measures. On the other hand, these measures slow deals down...way down. Plus, they prevent the sales team from being efficient, and they leave money on the table because the price guidance is not calibrated to a customer’s willingness to pay.
So while applying more rules and rigidity to a process that’s too open and governed by human intuition is good common sense, there are often very real and unintended consequences.
An Alternative: Predictive Analytics
If you find that human intuition and static thresholds don’t work for you, there is a third option: use predictive analytics to set pricing guidelines.
How does it work?
Predictive analytics software will systematically analyze your data.
It then tells you how to segment customers based on their willingness to pay, and recommends a price range for every customer, product, and deal…a price range that does meet the needs of the business and customer while still giving your sales teams some freedom to adjust pricing to close the deal.
In our work, we have seen predictive analytics help companies intelligently price their products in a more dynamic way across the portfolio, ensuring profitable deals without giving up control and strategic alignment.
Book a meeting if you want to take a closer look at your pricing and could use some guidance.