October 22nd 2010

Your Company culture often works to resist raising prices. Pricing part 4

7 S Scheme from McKinsey

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Company culture works to resist raising prices. Pricing part 4.

Your company culture and how you have trained your customers work the most against raising prices and thus increasing profits.  Culture in action time. Look at two sales people, Tom and Sam at the end of the year bonus time.   Tom blows through his volume targets and makes 150% of quota , but he had to reduce prices, so that his net profit margin dropped 25% .  Sam exactly made  110% of quota plus she got a 10% premium for the product.  The CFO knows that Sam dropped much more dollar profit to the bottom line than Tom. So why does Tom get the Porche and Sam the steak knives?   It was true in Glengarry Glen Ross and still true now, volume trumps profit.   Until the company culture understands that value selling is the only route to long term growth and profitability, the best intentioned sale force will be rewarded for exactly the wrong behavior. Since if sell on value, you can afford lots of drop in volume before you get a drop in profits. Yet in the market today, value selling results in growth of revenues ( profit and volume).

The other piece of culture that just is wrong on every level is not setting out the discount policy well  before the big bids come in. Instead the table talk is what price will we have to go with to win this one?  What number will get us through the door?  This speaks to lazy management practices and people who are unwilling or unaware of the work that needs to be done to set out pricing policies ahead of time. Perhaps we could call this “just in time” management.You know that if this is a common mispractise, there are other things that are also eroding the profit margins.

This is very fixable and perhaps the company is unaware that there is a better way. McKinsey tells us that a raise of the selling price  of 1% can immediately drop over 10% to the bottom line.   We see this result and more  all the time and it is pretty exciting stuff.

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