Pricing policies are rules or habits, either explicit or cultural, that determine how a

company varies its prices when faced with factors other than value and cost that threaten its
ability to achieve its objectives.
A customer’s purchase behavior is influenced by more than just the price and the
product or service that the seller offers.
It is also influenced by the expectations that the seller has created.
– Past experience,
– a buyer’s own and that of others about which he has become aware,
– drives expectations about what conditions are necessary to get a good price,
– and those expectations n turn drive the buyer’s future purchase behavior.
Rather than simply reacting to past customer behavior, they need to look forward to
understand how a systematic change in their behavior (for example, a new policy) could
affect customers’ expectations in a way that would affect their future behavior.
Under the rubric of “strategic sourcing,” they have developed systematic and
sophisticated policies for managing suppliers’ expectations, while sellers often understand
little about how expectations are formed in the buying organization.
Buyers have goals and a long-term strategy for driving down acquisition costs,
while suppliers rarely have comparable long-term strategies for raising or at least preserving
margins.
POLICY DEVELOPMENT
The process for developing good policies involves treating each request for a price
exception as a request to create or to change a policy that could be applied repeatedly in
the future.
The more requests, the more likely it is that a policy, or the more fundamental price
structure, is in need of review.
Putting a “no exceptions” stake in the ground is a key to making pricing decisions
that are profit enhancing.
Most discount proposals, whether to reduce price to win business or to increase price
to exploit tight supply, have an immediate reward that is obvious but a corresponding cost
that is delayed, diffused over more accounts, and less transparent.
In contrast, pricing by policy forces companies to consider the impact on the entire
market when making a pricing decision.
Pricing policies cover more than just discounting. They include the company’s
pattern for passing along changes in raw materials costs (such as requiring that all long-term
contracts allow for adjustments versus adjusting only after a fixed-price contract expires) and
its pattern for inducing product trials.
• Pricing policies also deal with how a company will respond to low price offers made
to its customers by a competitor.
• Any pattern creates expectations for how the company will deal with such issues in
the future, and thus can change customers’ future buying behavior.
• Policies also influence how the sales reps sell and which ones succeed.
• Ideally, policies are transparent, are consistent, and enable companies to address
pricing challenges proactively.
• If your policies are transparent, customers need not engage in threats and
misinformation to learn the trade-offs you are willing to make.
– Airlines have transparent pricing rules that none of us like (low prices only when
purchased well in advance, charges for making changes, no transfer of tickets to
another passenger), but we accept them because we know what they are.
• Consistency communicates that it is impossible to “game the system” by contacting
multiple points in the company to find the best deal.
• Communicating policies proactively is much less contentious than telling a customer
reactively that a proposal of theirs has, after some delay for review, been rejected.
POLICIES FOR RESPONDING TO PRICE OBJECTIONS
The most common, and therefore, most important domain for policy development
falls into the arena of responding to price objections from customers with whom pricing
involves a process of negotiation.
The lack of policies for dealing with price objections is not only a challenge for
companies that sell directly.
– Consumer goods manufacturers face just as much price pressure from
powerful retailers—such as Wal-Mart, Carrefour, Home Depot, and Staples— as
they do from consumers who switch to alternatives because of price.
The Problem with Ad Hoc Negotiation
• We have seen many cases where a company lost market share at an account because it
became more flexible in negotiating price exceptions.
• Once customers learn that their price is dependent upon creating substitutes, they
qualify second and third sources for their business and solicit lower bids with
promises of a higher share.
 • Of course, they give their preferred supplier a “last look” chance to match those
lower bids to retain a larger share.
• And every time the preferred supplier matches, it reinforces the value of maintaining
competitive suppliers and minimizes the expectation that the supplier’s differentiation
has a justifiable economic value.
The Benefits of Policies for Price Negotiation
• Although your price increase is creating a problem for these buyers, it is the seed of
an opportunity to change their behavior by changing their expectations.
• The sales rep who works for a company with pricing policies can be armed with
more than just the confidence that he can lose the sale.
• He can also be empowered with pre-approved value trade-offs and discount policies
that in a policy-free company would require review by someone higher up.
• The sales rep can build credibility with the customer by offering the customer win-
win, or at least win–not lose trade-offs.
Regaining the ability to capture value in negotiated pricing requires more than
training the sales force on “SPIN selling” or any other sales program.
Value-based sales tactics need to be backed by a pricing process that is consistent
with those same principles.
Unless a company is selling a unique product to each customer, pricing should not
be driven by a series of requests for one-off price approvals from the sales force, since the
sales force then becomes little more than a conduit for strategies designed by the customers.
Changes in price should be driven by consistent policies designed to achieve the
seller’s market-level objectives.
When the policies are aligned with those objectives and clearly articulated for the
sales force, the sales reps (as well as distributors and channel partners) are empowered and
motivated to sell on value rather than on price.
Policies for Different Buyer Types
• Given the growing power of some buyers, and the increasing transparency of
pricing to all buyers, any profitable and sustainable solution for dealing with price
objections must be codified in policies.
Exhibit 3 illustrates four general types of buyers, who differ in the importance to them
of differentiation among suppliers within the product class (for example, how important
is durability or immediate availability when buying office furniture), and the cost of search
among suppliers relative to the potential savings.
Value buyers purchase a disproportionate share of sales volume in most business-to-
business markets.
• They have sophisticated purchasing departments that consolidate and buy large
volumes, and they can afford the cost to search and evaluate many alternatives before
making a purchase.
• They are trying to manage both the benefits in the purchase to get all the features
and services that are important to them, as well as to push down the price as low as
possible.
Brand buyers (also known as relationship buyers) are those for whom differentiation,
particularly of the type that is difficult to determine prior to purchase.
• Perhaps the buyer is new to the market and just lacks the experience to make a
good judgment.
• The buyer will buy a brand that is well-known for delivering a good product with
good service without considering cheaper but riskier alternatives.
• Other times, the buyer may have had positive past experience with a current supplier
and the cost to evaluate another supplier versus any potential savings is too high;
consequently, the buyer becomes “loyal” to the seller.
Price buyers are the polar opposite of brand buyers.
• They genuinely are not looking for a feature or service that exceeds some level that
they specify in advance.
• The clearest symptom of a price buyer is the “sealed bid” or “reverse auction”
purchasing process.
• The buyer commits in writing to the specification of an acceptable offer and is
distinctly unwilling to invest time in hearing about the value of an offer that exceeds
those specs.
Convenience buyers don’t compare prices; they just buy from the easiest source of supply.
• Convenience buyers are value, loyal, or price buyers in categories where they spend
more or buy more frequently, but will pay a price that is much more than the
economic value defined in the market for a relatively small or infrequent purchase.
• They expect to pay a premium for convenience so price objections from them are
rare.
Policies for Dealing with Power Buyers
 A subset of value buyers is what we call power buyers, who control so much volume
that they have the power to deliver or deny huge amounts of market share.
 They expect to get better prices than any other buyer because of that power.
MAKE POWER BUYERS COMPETE
– Many companies with strong brand preference miss a big opportunity by framing the
strategic issue poorly.
– They ask themselves whether they should continue with their traditional retail channel,
targeting customers who are less price-sensitive, or sell to power buyers with their high
volumes at lower margins.
– This misses a third option: sell to one power buyer in a segment exclusively giving it
a pull advantage over competing power buyers.
QUANTIFY THE VALUE TO THE POWER BUYER.
• There are many ways that a brand can bring differential value to a big-box retailer.
• Even if the retailer already has someone as a customer, the brand can drive store visit
frequency.
– Disposable diapers are very valuable to Wal-Mart because their bulk requires
frequent visits from a high-spending demographic group.
• A large manufacturer that is capable of serving power buyers everywhere it operates
also reduces acquisition costs for such buyers.
ELIMINATE UNNECESSARY COSTS
• The most difficult challenge to manage is trying to serve both high-volume power
buyers who are unwilling to pay for your pull marketing efforts, and non-power
buyers who value your brand because you support its marketing.
• One option is to specialize in serving only power buyers, enabling the company to
eliminate costs of marketing and distribution.
SEGMENT THE PRODUCT OFFERING
• There is no need to offer exactly the same product through a power buyer and
through traditional channels where there is a conflict.
– In the case of some packaged goods, only large sizes are available though
Wal-Mart, Target, and other big-box retailers.
– These steps obviously do not entirely prevent the potential cannibalization, but
they do reduce it.
RESIST “DIVIDE AND CONQUER” TACTICS.
• The key to power buyers’ success is to structure the discussion as being about the
pricing of each of the manufacturer’s products individually.
• As a result, they maximize the competition for each product line and minimize any
negotiating benefit that the supplier gets from offering a full line.
• Perhaps the most important thing to remember in dealing with power buyers is to be
emotionally prepared for them to be bullies who have seen intimidation tactics
succeed.
• If you are confident of the value you offer and you are willing to unbundle
differentiation that you know the customer values, be prepared for the fact that
someone high up in purchasing may become furious.
If and when that happens, remember that power buyers who do not need you do not
get mad; they can easily get others to supply them. They get mad because they are
frustrated that they are not going to get the lop-sided deal that they expected.
POLICIES FOR MANAGING PRICE INCREASES
Policies for Leading an Industry-Wide Increase
• First, before announce the increase, let it be known publicly why the increase is
necessary for the industry as a whole based upon costs that the industry is incurring
or demands on capacity.
• Second, announce the size and effective date of the increase, stating exactly which
product lines are increasing by how much.
– Explain the cause and effect relationship (for example, energy accounts
directly or indirectly for X percent of costs and that translates into Y percent
price increases).
• Third, if customers are fearful that their competitors will not have to take the increase
or will not take it as quickly, empower them to give your most important customers a
transition guarantee.
– All of these will help create the impression that the cost increase problem is
one that you are willing to solve together in a way that recognizes their
legitimate business needs as well as yours.
Policies for Transitioning from Low One-Off Pricing
• The first policies should focus on managing the outliers: “outlaws” who now enjoy
prices much lower than other customers for the same products, service levels, and
 commitments, and the “at-risks” who are paying more than can be justified relative
to the average.
• The firm may create a policy authorizing a period of transition to a legitimate pricing
level in steps.
POLICIES FOR DEALING WITH AN ECONOMIC DOWNTURN
• Pricing policies are most likely to be abandoned when the market enters a recession
and sales turn down.
• But unmanaged price-cutting in a recession not only undermines price levels that
you will want to sustain in the later recovery, it can trigger a price war that makes all
competitors worse off while still in the downturn.
• Fortunately, if a company thoughtfully manages pricing by policy though the
downturn, it can minimize the damage in both the short and long run.
• Enforce a firm policy not to use price to take market share from close competitors
during the downturn since they can easily respond with price cuts of their own.
• In business markets, the value that some products can justify is tied to the health of
their customer’s markets.
• The point in all these cases is that these price discounting options can be designed to
expire when they are no longer needed and do not directly threaten competitors.
POLICIES FOR PROMOTIONAL PRICING
• A discount to induce product trial is a legitimate means to gain sales, but poorly
managed can have the effect of depressing margins.
• For search goods, the discount is the incentive for the customer to investigate the
supplier’s offer.
• For experience goods, it is the incentive to take the risk of what could turn out to be a
disappointing purchase.
• For consumer products, promotional pricing is one of the most important issues for
which a company needs pricing policies and a process for reviewing their
effectiveness.
• Consequently, a policy of limiting the availability of promotional discounts and
targeting them to prospective buyers is often advisable.
• Good policies cannot magically make pricing of your product or service profitable,
but poor ones can certainly undermine your ability to capture prices justified by
the value of what you offer.