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The Pricing Advisor: How Much Air Can You Blow Into Your Pricing Balloon?

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July 1, 2013- 

By Alex Smith

recently met a pricing manager who had a brilliant analogy for how sales people price customers and deals that’s definitely worth sharing. It’s a great way for non-pricers to quickly understand one of the most important pricing issues in many companies.

Pricing by a sales person is like blowing up a party balloon. Let me explain.

The average parent who blows up balloons for their kid’s party is much like your typical sales person who’s pricing a customer deal. The parent tries to blow up the party balloons quickly so they can move on to the next balloon and get everything done before the mass of kids arrive. They know of course that bigger balloons – the ones with more air in them – are more fun for the kids, so they exert just enough air so it’s nice and full, but not too much that it bursts. They don’t exactly know where the bursting point is, but it doesn’t matter. The parent will use gut feel and personal experience, and that’s good enough so they move on to the next balloon.

So how exactly is that like a salesperson you ask? Well your typical sales person is trying to quickly price a winning deal, move on to the next deal and complete the transactions by the end of the quarter, when their boss arrives, much like getting ready before the kids arrive at the party. The salesperson knows of course that a better deal – one with a higher price – is better for their company. They want to price it well so that there is a good margin – but not so high that they lose the deal and potentially the customer. He doesn’t know exactly where the bursting point for the deal may be, but

it doesn’t matter because he’ll use his gut feel and personal experience to set a price that will be good enough to win the deal and then move on to the next.

Of course there is a certain degree of generalization in this example, as there is with every analogy.

Sure, there are professional clowns and party organizers who regularly blow up balloons for parties, just as there are very experienced, skilled sales people who possess a lot of knowledge about their markets and their products. And yes, some people are better at it than others.

Perhaps most importantly, in neither example are these people employed specifically to ‘blow up balloons’ – it just happens to be part of their job. In the case of the sales person, even if they were dedicated to pricing, there are different products, different customers and differ- ent deal situations, so no two deals have the same bursting point.

To further complicate the matter, sales- people are too often incentivized on overall revenue – not on margin. So, then, why should they bother trying to get the maximum amount of air into that deal when ‘good enough’ will do? In a revenue incentive situation, the risk of losing the deal is always greater than the gain of pushing the price a little bit further to make a small bit of additional commission.

So the result is that party balloons are constantly under inflated, and compa- nies that depend on salespeople negotiating deals are constantly leaving money on the table.

Now, someone just looking at the small picture might ask “Does it matter?” One slightly bigger balloon doesn’t make that much difference, and nor does one slightly better priced deal.

In my experience, I would argue that if you can squeeze one extra breath into each balloon you will fill up the room faster. And if the sales team can squeeze just a 1% better price into every deal it can make an enormous difference to a company’s financial results.

I am sure everyone is already very familiar with the studies on how price is the most effective lever for increasing operating profit, and that for a typical company a 1% improvement in price results in an 8-12% improvement in operating profit. Even more interesting is that many businesses with large field-based sales forces, where this balloon-blowing analogy is especially true, have smaller-than-average net margins. Distributors, for example, have smaller-than-average net margins, and a 1% improvement in price can result in an improvement in operating margin >25%.

So, as you can see, this is a great analogy and a good way to keep your sales people thinking about a key problem in pricing. 

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