Selling: How can I maintain profitable pricing? (part 1 of 2)
All too often sales teams and their management spend long hours agonizing over the winning prices to accompany a proposal or tender response. Why is this so hard to do? At its most basic level, the winning price is simply the premium (positive or negative) you can enjoy relative to the Market Rate (M.R). Argh! The dreaded market rate!. Just to say this out loud can have the same effect as Lord Voldemort on Harry Potter!. Some people avoid it’s use and call it benchmarking, others pretend that it doesn’t exist and guess a number based upon the Cost + a desired profitability. So why is estimating a realistic M.R so difficult even for a single item let alone a whole package?
Firstly there is frequently confusion between the Market Rate..i.e the starting point, and the “Winning Price”..the price that will enable to win profitably, which could be regarded as the M.R plus or minus your competitive advantage. They are rarely the same number!
If we can establish a consistent and justifiable way to estimate a realistic market Rate for a specific proposal in a particular country, the sales team would be able to focus on maximizing the “Competitive advantage”, which let’s face it, is what you hope they are doing. The Mbrace Profitable Pricing (MPP) service helps you achieve this, and more!
The second challenge in a global world is that through Contract Management systems buyers increasingly have immediate access to pricing around the world to compare and challenge pricing variations. When there is no consistency to the way prices are constructed, justifying pricing becomes very difficult at best and often leads to the lower price being negotiated even if the market conditions are unrealistic. Establishing a reference price list is a critical step in delivering realistic M.Rs.
The third pricing challenge is to avoid Value-leakage. When a sales team builds its pricing from the bottom up (i.e Cost+), they inevitably sacrifice the differentiating value as they approach what they consider a winning price. This not only erases your differentiation but also prevents you from recouping any of your investment made in developing the product or service. Stripping these two factors out of your prices means you may win the work but not at a sustainable level of profitability for your company.
A simple way to retain this “value” is to lock it in to your reference pricing in the form of a competitive differentiation factor for each line item. This has the added benefit of allowing you to allocate different factors to each line item. For example, your offering may consist of differentiating technology mounted on a steel pipe that you buy from a supplier. This steel pipe has no differentiating value and so you want to ensure that you cover your costs for the steep pipe but retain as much value from your own technology as possible in your proposed pricing.
The MPP package enables you to build a differentiated reference price list that can be reviewed and revised over time as any single product or service loses its competitive advantage in the face of competitors, or you introduce newer versions that you want to favour commercially.
The discount factor applied to the reference prices reflect different markets and serves as a useful benchmarking technique to anticipate market trends and make expansion decisions.
Finally the MPP package provides a convenient and simple way to build a realistic opportunity value based upon the M.Rs to be used in your opportunity forecasting in CRM. Once the anticipated workscope is entered into the MPP workbook, it will generate an expected contract value.
Reliable benchmarking is difficult as we rarely have enough information to make an informed decision. Under such circumstances it is tempting to revert to building your pricing from the only constant you have..cost. As we have discussed above, this is a sure way to erase profitability from your prices. The use of the Discounted Market Rate provides consistency, and accuracy, leaving the sales team to focus on maximizing their competitive benefit.
In part two of this blog we will look at how this competitive advantage can be derived.
