CHAPTER 5

PRICING POLICY
 TOPICS
Influencing Customer
Policies For Price
1 Expectations and Purchase
Behaviors 4 Negotiation

Princing Policies and Policies for Responding

2 Price Expectation
5 To Price Objections

The Emergence of Policies for Different

3 Strategic Sourcing 6 Buyers Types
 10
Policies for Dealing with Policies for Transitioning from

7 Power Buyers
Flexible to Policy- Based
Pricing

Policies For Successfully Policies for Pricing In An

8 Managing Price Increseas

11 Economic Downturn

Policies for Leading an

12
Policies For Promotional
9 industry-Wide Increase Pricing
INFLUENCING CUSTOMER EXPEXTATION AND
PURCHASE BEHAVIORS
“There can never-and I mean • As described in the previous chapter, Price
never-be a discount on a new car
Structure and Pricing Policy are closely
coming out of the factory in
pristine condition.” related, both having the objective to align
differences in price paid with differences in
Elon Musk value neceived and cost to serve.

• Price structure involves establishing that

alignment across macro segments of
customers and applications.
• The risk is that regular
customers, who buy the
product weekly because they
think it is a good value at the
regular price, will stock up
during promotions,
undermining both revenues
and store visits in the future.
• A policy limiting the quantity
that a consumer may
purchase at the promotional
price would help to prevent
that costly change in
customer behavior.
• When purchasing large quantities for a
business, savvy purchasing agents
often split their purchases among
multiple suppliers based upon price,
giving say 60 percent to the one with
the best price, 30 percent to the one
with the second best, and 10 percent
to the one with the third best price.
• Again, a policy choice can mitigate the
incentive for such behavior. One policy
option is for the seller to require that
the buyer take any extra discount as a
rebate to be paid at year end if the
buyer's total volume of purchases
exceeds a target percentage of the
buyer's annual volume.
 Pricing Policies and Price Expectation
• The examples above illustrate an
important challenge to the principle of
value- based pricing: A customer's
willingness-to-pay an offered price is not
deter mined solely by whether that price
is fair or reasonable when compared to
economic value. If customers come to
expect that some change in their pur
chasing behavior will enable them to get
the same product or service at an even
better price, then the regular price
becomes no longer acceptable.
• Some times that change in behavior can
be a good thing for the seller (for
example.. when the customer agrees to
commit to buy more or to accept a longer
contract term in return for a better price).
• The same dynamic plays out-only more
so-when businesses sell products and
services to other business (hereafter
referred to as B-to-B sales and
purchases). Once customers recognize
this pattern, they will delay purchases
until late in a quarter and buy forward to
cover their expected needs in the
following quarter.
• Sellers often misinterpret the declining
sales at regular prices and the
increasing portion of their sales at
discounted prices as a sign that
customers have become more price
sensitive.
 Sellers should be careful about how they set and discount
their prices, as this can have a long-term impact on their
customer behavior and profitability.Frequent discounting and
price exceptions can create buyer expectations that prices
can be manipulated, leading to buyers creating purchasing
policies that disconnect price from value.

• Examples of such policies include 30-day price protection and

refusing to participate in buyers' reverse auctions.The goal of these
pricing policies is to stop rewarding customer behaviors that erode
the difference between the prices buyers pay and the value they
receive.
 THE EMERGENCE OF STRAGERTIC SOURCING
• Some companies make price exceptions
without considering the long-term impact on • In other words, buyers
customer expectations. at large organizations
• This can lead to a cycle of increasing have a significant
frequency of price exceptions, as customers advantage over their
learn to demand larger and larger discounts.
suppliers when it
• Discount approval processes are often comes to pricing
personnel policies, not pricing policies. negotiations.
• Buyers at large organizations are more
sophisticated than their supplier • This is because they
counterparts, with goals and a long-term have a more
strategy for driving down acquisition costs.
sophisticated
• Sales reps are rewarded for making the next understanding of the
sale, while purchasing professionals are
rewarded for cutting acquisition costs.
market and are better
equipped to negotiate
• Purchasing professionals have access to a for favorable pricing.
database of information about past offers
and counteroffers, while sales reps often do
not.
 PRICING FOR PRICE NEGOTIATION

Pricing policies are essential for managing price negotiation with strategic purchasers. They should be developed based on long-
term strategy and applied consistently.

• Treat every price exception request as an opportunity to create or change a policy.

• Define and consistently follow policies to reduce the need for price exceptions.

• Make pricing decisions by policy to consider the impact on the entire market and reflect the "shadow of the future."

• Pricing policies should cover more than just discounting, including passing along changes in raw materials costs and inducing
product trials.

• Policies should also deal with how to respond to love-price offers made to customers by competitors.

• Ideally, policies are transparent, consistent, and proactive.

• Despite the importance of pricing policies, nearly all companies will need to negotiate prices in some cases.

Pricing policies are essential for managing price negotiation in a way that is profit-enhancing and sustainable.
 Once the door is opened for price negotiation, there are myriad oppor- tunities for savvy customers to
manipulate the process to their benefit- potentially undermining pricing and profitability across the entire market.
Following is a list of four common tactics used by professional purchasers to disconnect price from value, and
effective pricing policies that firms have suc cessfully adopted to defend against them:

1. Commoditizing the Offers:

Particularly in B-to-B markets,
Policy Prescriptions: If the
custom- ers often refuse to buyer is committed to buying
discuss what differentiates the from the lowest bidder, this is
offers of various competi tors. not necessarily a bad
Instead, they distribute "specs," situation. If you really want
short for specifications, of exactly such business, which you
what they require. They then may if it involves significant
solicit bids to meet or exceed that volume and does not
specification. In some cases, the
compete directly with your
bids are "closed," meaning that no
one knows what anyone else is
main market, look at the
bidding until they are opened. In specs carefully and think
the worst cases, competitors are about how you could reduce
invited to submit their bids your costs by cutting quality
electronically. and service levels to meet but
not exceed the specs.
 Be prepared, however, for
the customer to object to your
adherence to their own specs
after granting you the
business, especially if you
have previ ously been a
supplier to the customer and
have already established
expecta tions about how you
normally do business.
. •
For example, the customer
may not have specified order
lead times in the spec so you
set minimum lead times for this
customer equal to those that
would have been required by
other bidders serv ing the
customer from some distant,
low-cost location.
• If the customer is not
committing to buy from the
lowest bidder when nning a
bidding process, then specs
that devalue differentiating
quality and service are
simply a sham designed to
bring low-cost bidders into
the pro- cess. Do not take
the bait.
Make a policy either to
refuse to participate in sham
reverse auctions or to bid
your list prices Now the
customer must choose either
to pay list prices or abandon
the bid process and engage
in a more hon- est Give-Get
negotiation.
• Whether you win the
business upfront but then
make money by eliminat
ing unnecessary costs or
selling the upgrades, or
you force the customer
into a negotiation that
involves acknowledging
the differences that are
important to them, you
need to prepare in
advance.
• You will need to create an
unbun- dled price structure
(Chapter 4) that affixes a
monetary cost to the levels
of quality and service that
differentiate you
2. Double discounting of price
increases: Some companies have
suffered from poorly negotiated price
increases for years. They set an across-
the-board price increase, but larger
buyers often demand a discount on the
increase, arguing that they deserve it
because they already enjoy a volume
discount. This is a bogus argument that
leads to a costly mistake.
• In short: Giving larger buyers a
discount on price increases is a costly
mistake that can lead to companies
becoming reliant on and vulnerable to
those buyers.
Policy Prescription: When increasing
prices, there must be no If more
powerful buyers must have a
concession, give it without undermining
exceptions the integrity of the price
increase.
• For example, rather than discounting
the price increase by 25 percent, give
the powerful buyer a three-month
delay before it will take effect. This is
also a very useful tactic for buyers
who have been paying unjustifiably
lower prices that must be corrected.
3. Discounting for volume.
Sometimes buyers will offer a
seller incremental volume in
return for a price concession.
There is nothing in principle
wrong with accepting or, even
better, proactively proposing
such a deal. In practice,
however, sellers often get taken.
ted into the starting point for all
future negotiations.
Policy prescription: If you're going to give a
discount for volume, focus the discount on
the incremental volume and give it as a
rebate.
For example, instead of offering a 2 percent
discount on all of the volume, including what
you have already won, offer a 10 percent
rebate on the year-to-year increase in
volume. This focuses the customer on the
real value of the concession, it cre ates a
much stronger incentive for the customer to
reject a competitor's offer to try their product,
and it costs less! Making the discount into an
end-of-year rebate instead of an upfront
discount has the added advantage of
protecting you from duplicitous buyers who
promise more business to get the discount,
but never order the promised incremental
volume.
4. Discounting to compensate for
past failure. There is no situation in
which sellers are more vulnerable
than when their firm has failed to
meet its commitments. Failure to
deliver on time or to deliver the
promised quality clearly undermines
the case that your firm deserves
either a higher price or a higher
share of a customer's business.
Sophisticated purchasers will exploit
that vulnerability by demanding an
exceptional price concession to
compen sate for your prior failure.
Policy Prescription: When a
customer experiences a legitimate
failure, the company should
negotiate a fair compensation for
the cost of the failure. This
compensation should be paid as a
lump-sum payment or as a credit
that the customer can take for a
portion of each future invoice until
the agreed-upon compensation is
exhausted.
In short: Companies should have
policies in place for dealing with
customer failures. These policies
should be designed to compensate
the customer fairly without reducing
the company's established price
point.
 PRICING 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 policiesfor dealing with price
objections is not only a challenge for companies that sell directly.
Consumer goods manufacturers face just as much price
pressurefrom powerful retailers as they do from consumers who
switch to alternativesbecause of price.
 The Problem with Reactive, Ad Hoc Price Negotiation

When a company has poorly defined

or unenforced pricing policies for
discounting, it can lead to a downward
cycle of ad hoc discounting. This can
erode price integrity and make it
difficult for the company to negotiate
better prices with customers.

This can erode market share and

customers' willingness-to-pay for
differentiation. It can also lead to
competitors pricing lower than
necessary to win sales.

In short: Companies need to have

clear and consistent pricing policies in
place to avoid the pitfalls of ad hoc
discounting.
 • When a company has clear and consistent pricing
policies, sales reps are able to negotiate prices more
effectively.

• When a sales rep knows that the company backs them

in holding firm on a price increase, they are more likely
to be successful in negotiating the increase with the
customer.

• Sales reps can also be empowered with pre-approved

value trade-offs and discount policies that can be used
to create win-win situations for both the customer and
the company.

• As buyers come to trust the process of value-based

pricing, they will become more open with information
and more willing to work with the seller to find mutually
beneficial trade-offs.

• In short: Companies need to have clear and consistent

pricing policies in place in order to negotiate prices
effectively and build trust with customers.

The Benefits of Proactive, Policy-Based Price Negotiation

 POLICIES FOR DIFFERENT BUYER
TYPES

• Value-driven buyers are a significant segment of the

business-to-business market. They are sophisticated
purchasers who demand both high value and low prices.

• To effectively deal with value-driven buyers, companies

need to develop policies that empower their sales
representatives to make trade-offs between price and other
features or services. These trade-offs should be based on a
clear understanding of the customer's needs and the
company's own value proposition.
• Brand-driven buyers are those who • Price-driven buyers are not Convenience-driven
value differentiation and good service
but are willing to pay a premium for it. looking for features or services buyers don't compare
They may be loyal to a particular beyond a certain level, and they prices; they just buy
brand due to past experience or lack are only interested in the lowest from the easiest
of desire to evaluate other options. possible price. They will often source of supply.
hold reverse auctions to get the Convenience buyers
• If a brand-driven buyer raises a price
objection, it is important to understand lowest price from their preferred are value, loyal, or
the reason for the objection. supplier. price buyers in
categories where they
• If the buyer is simply looking for a • A better strategy is to let the spend more or buy
lower price, the company needs to
price buyer know that you can more frequently, but
make sure that the buyer is aware of
the value they are getting for their deliver a higher level of quality will pay a price that is
money. and service. When the price much more than the
buyer needs a rush order or economic value
• In some cases, it may be necessary to technical support because the defined in the market
offer a price concession to a brand-
low-priced bidder failed to for a relatively small or
driven buyer.
deliver, you should have a policy infrequent purchase.
• However, the company should never of filling the order, but only at the
let the price premium for a relationship highest list or spot price. This will They expect to pay a
buyer exceed the value that the buyer teach the price buyer the cost of premium for
is receiving.
not dealing with a higher-quality convenience, so price
supplier. objections from them
are rare.
 POLICIES FOR DEALING POWER BUYERS

• Power buyers are large buyers who have the power to demand better prices from
suppliers. They are often able to do this because they control a large amount of
volume. Dealing with power buyers reactively is risky, as it can lead to a decline in
profitability.

• To deal with power buyers proactively, sellers need to be realistic about the effect of
power buyers on the value of their brands. They should also consider whether they
can grow without power buyers. For brands with strong customer recognition and
preference, it may be possible to avoid power buyers altogether. However, for brands
without broad customer recognition, dealing with power buyers may be necessary for
profitable growth.

• By following these strategies, sellers can deal with power buyers and still preserve
their profitability.

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 retail power buyers at lower margins to
win high volumes.
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 Walmart because their bulk
requires frequent visits from a high-spending
demographic group, new parents. Diapers are
placed strategically in the back of the store so
that each visit takes the new parents past other
items that they might be tempted to buy.

For example, the retailer Target has been willing to

do deals at the margins expected by famous
designers of jew elry, women's accessories, and
home goods in return for exclusive designs that
attract customers who might not otherwise be
willing to drive to a "big-box" retailer.
• 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. Power buyers can
pose a challenge to sellers,
as they often demand better
prices and threaten to reduce
or eliminate their purchases
altogether. However, there
are a number of ways to deal
with power buyers and still
preserve profitability.
• One way is to sell different
products or packages
through different channels,
such as selling a high-
volume, entry-level product to
power buyers and a higher-
end product to traditional
retailers. This can help to
reduce cannibalization and
maintain profitability.
Power buyers often use "divide and conquer" tactics,
which involve negotiating the pricing of each product
line individually in order to maximize their negotiating
advantage. Sellers can counter these tactics by
proactively setting their own policies and refusing to
negotiate on a product-by-product basis.
 One of the most difficult discussions to have with a customer involves
telling them that you will increase their prices. One of our clients in the New
York metro area actually had a customer in the habit of throwing things
particularly shoes at sales reps who proposed pricing that he did not like.
Other customers would quietly ignore the increase when placing an order
but, when paying bills, adjust them to reflect the old prices and return the
invoice with a check marked "paid in full." As a result of being cowed by
such antics, this company typically realized on average less than half the
amount of the increases, with customers who already paid the lowest
prices being the ones who avoided paying more. There are two very
different occasions that call for increases, andwell-designed policies can
help to make all of them more successful.

POLICIES FOR SUCCESSFULLY

MANAGING PRICE INCREASES
 POLICIES FOR LEADING AN INDUSTRY-WIDE INCREASE

When implementing a price increase due to rising costs or industry-wide shortages, it's crucial to manage
customer expectations effectively. To achieve this, suppliers should:

1. Publicly announce the reasons for the increase, emphasizing the industry-wide impact.

2. Clearly communicate the size and effective date of the increase, explaining the underlying cost factors.

3. Offer transition guarantees to customers who fear being at a competitive disadvantage.

4. Avoid backtracking on the full increase for resistant customers, as this rewards resistance and penalizes
loyal customers.

5. Roll back the increase temporarily if a major competitor fails to initiate a similar one.

6. Consider concessions for good customers, but only regarding the timing, not the fact, of the increase.

By following these strategies, suppliers can implement price increases while minimizing customer backlash and
preserving valuable relationships.
 POLICIES FOR TRANSITIONING FROM FLEXIBLE TO POLICY-
BASED PRICING

When transitioning from a poor pricing policy to a good one, it's important to start by identifying and
managing outlier accounts, such as those that enjoy much lower prices than other customers for the same
products or services. These accounts can be identified using a technique called price banding.

Once the outliers have been identified, they need to be contacted by someone above the sales rep level to
communicate that their current pricing is unfair to other customers and unhealthy for the supplier. The
customer may be willing to accept a price increase in exchange for concessions from the seller, such as an
exclusive supply contract or minimum "must take" volumes under a long-term contract.

Here are some key takeaways from the text:

• It takes time to transition from a poor pricing policy to a good one.

• Start by identifying and managing outlier accounts.
• Be prepared to walk away from customers who are not willing to accept the new pricing.
• Communicate the new pricing policy to all customers and be prepared to answer questions about it.
POLICIES FOR PRICING IN AN ECONOMIC DOWTURN
• During a recession, companies should avoid using price cuts to gain market share from close competitors.
• In business markets where the value of a product is tied to the health of the customer's market, companies
can consider indexing pricing to conditions in the customer's market.
• Companies can unbundle elements of their product or service that customers may no longer be able to
afford.
• Companies can attract new, more price-sensitive customers without cutting prices to existing customers.
• Companies can pursue a policy of one-off pricing to fill excess capacity in markets where they hope to gain
incremental business in the short term.

For example, one high-end chain of hotels in Europe, which would never consider serving tour groups in good
times, approached tour companies catering to small groups of high-income travelers with some very good deals
They brought in both incremental revenue and introduced their chain to a market segment of people they would
want to have as nightly guests, while still enabling themselves to exit the tour segment in better times. Our
commer cial printer client approached direct mail advertisers accustomed to accepting poor quality from printers
who use inferior presses. For mail circulars and newspaper inserts only, they offered better quality that nearly
matched what advertisers were paying already. The low-end competitors could not match the offer, and the
company won some incremental contribution that kept its press operators employed during some lean months.
POLICIES FOR PROMOTIONAL PRICING
• Companies should carefully manage their discounting strategies to avoid depressing
margins and educating customers to wait for discounts.
• Companies should consider offering liberal returns policies, money-back
guarantees, and performance-based rebates to induce product trial without cutting
prices.
• Companies should limit the availability of promotional discounts and target them to
prospective buyers.
• Companies should avoid using discounts on service prices to induce trial and
instead offer free gifts or other incentives that maintain the integrity of the price.
THANK
YOU