Sales and pricing decisions

Recently I was responding to the question about whether it is normal for sales managers to have little or no decision making power about pricing. My answer was a "Yes, but ... sales has key input regarding pricing".

It is normal for the sales manager to have little or no decision power regarding pricing. The key word here is 'decision'. Sales managers are the closest to the customers (or subeset of customers) and hence (at least) a segment of the market. As such they have the power and responsibility to bring the market and customer feedback back to the decision maker(s) - usually the Product Manager. And a good product manager should be always seeking input from the market and listening closely to the logic and your input the sales team.

Let us examine why this is so, and more importantly why should this be so - a product is a vehicle through which a company can deliver value to its customer, and in exchange for the package of benefits this product provides, capture value through price. In some cases, the pricing strategy needs to be balanced across the entire market - not just a few customers, or a market segment. And the pricing is determined based on the company's perspective on the value it is delivering to the customer.

Sales teams are motivated by volume and overall revenue, and therefore it is inherently difficult for the sales team to understand the overall implication of a price on the company's strategy. Usually sales team members are not involved in costing, overall business strategy, the R&D investment (if any), and the branding / positioning. Therefore, it would be counter-productive for the sales team to decide on pricing.

In the same vein it would be suicidal for a company and a product manager not to be taking note of input from the field coming in through the sales team - as then, it leads to a divergence of a company's own perspective of the value its products bring to the market, and the customer's perspective on the value these products have. And in the end the customer's always win.

Simple example on why sales team should not be making a decision about pricing ...

Let's say the company in question is a car maker (BMW?) and it is aiming a model at a particular high-end segment of the market. They have a great brand, and it demands a price-premium. The sales team comes back and advices that the price is too high, and that by lowering the pricing they could capture a greater segment of the market. Should the answer be yes? Obviously not without doing the proper analysis:
1. Does this downplay the company's entire brand position?
2. Does the revenue gain at least offset the margin loss?
3. Is manufacturing, operations and service groups ready for the shift?
4. Is this really aligned with the company's strategic objectives?
5. What is the trend in the market (i.e. demographics, purchasing power etc.)?
6. Who is coming back with the input (is it the sales managers from key market segments? Is it the sales manager from a small tactical ‘fleet sales’ group?)?
… and after analyzing all this inputs, chances are, the answer will be a “No”.