Pricing Rules and Bad Behavior
As pricing people, when we make rules, we should know they are going to get pushed against. If we are not flexible, salespeople will find a way around them, often to the detriment of the company. Here is an example.
One firm that sells professional services estimated for a potential customer how much it would cost in time and materials (T&M) for a specific job. For this example let’s say they estimated $1M. However, the buying company didn’t want a T&M quote, they wanted a fixed price bid. They were negotiating hard. The salesman couldn’t get the company to move on the 20% adder, and the buying firm didn’t want to pay the adder. It looked like a standstill.
The sales guy saw this as just another hurdle he had to jump. He realized his company didn’t have a rule on a Not to Exceed (NTE) bid. He pushed this and was able to get the deal approved using a NTE of $1M.
You may already realize this, but in case you haven’t, NTE is worse for the selling company than fixed price. The chart below shows the revenue the selling firm would get in both NTE and fixed price bids for both $900K and $1.1M in T&M expenses.
If the job uses $1.1M of T&M, more than expected, the firm only receives $1M in revenue whether it was NTE or fixed bid. However, if the project uses $0.9M of T&M, less than projected, then the two result in different outcomes. The selling firm only gets the $0.9M on the NTE bid.
Back to the main lesson: We need salespeople who are aggressive and find solutions to the problems that keep them from closing business. Now the question is how do we keep from being one of those hurdles?
The answer – be flexible. We often put rules in place so we don’t have to deal with each individual situation. However, when the rules need to be bent, we need to be flexible. But how will we know when the rules need to be bent if we hide behind our inflexible rules?
This is not a trivial problem. However, the answer surely lies with helping sales people successfully close business at the highest possible price. Rigid rules rarely accomplish this.