Salespeople must be trained and incentivized to support a company’s overall strategy. Pricing that reflects value by customer or segment, while paying the sales force on volume, rarely works. Notice the message when the commission or bonus is linked to sales volume, independent of price, margin, or the cost to serve: Go forth and multiply because any customer willing to pay a certain price (often discounted to make the volume quota target) is a good customer. This approach soon generates an unwieldy array of sales tasks, undermines selling effectiveness, and makes profitable growth increasingly difficult. This is, in fact, the situation at many SaaS companies, and it’s a big impediment to investor expectations.
Consider Fortis (disguised name), which sells a bundled solution of equipment and consumables with presale application support and post-sale technical service. Fortis lost market share and profits after customers started to unbundle that package after the initial purchase. Meanwhile, the sales force continued to be evaluated and compensated on sales volume. Fortis charted the net price paid by each major account (after volume discounts and price exceptions) versus the cost to serve that account. The result was a revealing 2x2 matrix, with customers randomly distributed across all four quadrants.
Chart these variables by account — price paid and cost-to-serve — in your company, and see what you find. If the result is like Fortis, notice the implications. Customers who are low price and high cost will be negative economic-profit customers — a drain on capital — and selling to them is not sustainable even if they generate commissions for salespeople. Conversely, customers who are high price and low cost are profitable — but also vulnerable to competitors who do understand and manage these core selling and pricing variables.
What can sales managers do in this situation? Change incentives to align with pricing realities and follow-up in performance reviews. Effective reviews look at options ranging from pricing to reflect cost-to-serve, shifting support to lower-cost online channels, different ordering or delivery options, or perhaps offloading some activities to resellers who perform certain tasks more efficiently. Too often, however, busy sales managers treat reviews as cursory, drive-by discussions of past performance versus quota, rather than focusing on the development of customer-facing behaviors, including pricing.
The same forces that empower customers also enable sales leaders to get smarter about pricing. Data to track the selling, service, and other costs by account are increasingly available. CRM systems can often supply the relevant data, but are they used? Activity-based costing reports typically uncover dramatic differences in costs and profitability by product, customer, and order, but does sales act on this information in setting goals and managing price exceptions? As usual in business, the important levers are leadership and management, not the technical means.
A price is not the same as pricing. By voting with their feet, customers ultimately determine a market price. But you and your organization have control over pricing where, as Buffet notes, the business impact (up and down) is tremendous.